Coinbase Acquisition Reveals the Exchange’s Interest in Providing Digital Identity Services

A new report published today by WIRED reveals that leading cryptocurrency exchange Coinbase has acquired a San Francisco-based blockchain startup in an effort to bolster the platform’s digital identity features. The five-person company, called Digital Systems, will reportedly be integrated into Coinbase’s Identity team. According to WIRED, Coinbase “says the new arrivals will help the company explore ways to integrate decentralized identity across its services.”

Coinbase’s Goals for Digital Identity

Digital identity and data protection have quickly emerged as some of the most important issues in the modern world. Coinbase hopes that by investing in digital identity systems, they can provide their customers with increased security and flexibility while online, particularly while interacting with decentralized applications (Dapps).

More specifically, digital identity systems could allow users to verify their identity online with a single trusted third party (e.g. a government agency) and then use that verification across the internet without having to re-enter their sensitive personal information. WIRED gives the example of verifying one’s Social Security number with the Social Security Administration and then storing that verification on a decentralized blockchain. A user could then give that verification to companies or applications instead of re-entering their Social Security number.

In theory, it sounds like an exciting new way for individuals to manage their data online; putting it into practice, however, has proven to be difficult. Perhaps the biggest obstacle that needs to be overcome with digital identity is that it requires individuals to manage and protect the private key for their encrypted personal data—a task that has proven difficult for many cryptocurrency users.

As a result, Ari Juels, a Cornell University professor and former chief scientist at RSA, believes that many people would prefer to outsource key management to centralized services, rather than managing it themselves:

“Empowering users is a great rallying cry, but what will ultimately happen is users will end up punting these problems to centralized services … Where do people store their bitcoin today? In Coinbase. Coinbase handles key management for you; it handles storage for you. If users want to make their experience relatively easy, they’ll likely recentralize it.”

The other major problem that Coinbase needs to solve is providing clear use cases for the technology.

“We’re further ahead on the tech than on the utility,” says B Byrne, a product manager on the Coinbase Identity team. “Where we’re more behind is, how does this help someone solve a problem in their life today?”

It’s an unusual situation in which a company is sitting on technology in need of a purpose. While the potential use cases for digital identity are exciting—or at the very least intriguing—it remains to be seen whether the team at Coinbase will succeed in producing features with meaningful real world applications.

Suggested Reading: See what we think about Coinbase in our Coinbase Review.

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