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Digital identities - how and why we are where we are, what it's proposed we do about it and whether it will work.

The fintech world is at last waking up to the biggest problem facing real-world businesses: how to perform KYC on customers you will never physically meet and who live lives which do not intersect with your own except for one specific purpose - the provision of a service. Of course, being tech-driven, fintechs are looking for a tech solution and they've even got a name for it - Digital Identities. The world is full of "White Papers" but there are no practical applications nearing real-world testing, so far as we can ascertain. It appears that, as in so many cases, people are starting with the tech and trying to make the problem fit it, rather than looking at the problem and trying to build tech around reality, says Nigel Morris-Cotterill.

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**This article has been updated for spelling, grammar and one or two additions or amendments performed to improve clarity.** 11 November 2019.

An e-mail address is, for all the reasons I set out in my 1999 paper, a pointless identifier in a world where anyone can set up an email account in a false name on any one of hundreds of service providers around the world with Google, Microsoft, Yahoo and Yandex still being the favourites and that's before we consider the domains that criminals set up (current favourites from our records being .xyz and .top TLDs) and create valid e-mail addresses for fictitious people.

But the underlying concepts are not entirely unsound. What Allen refers to as "decentralised trust management" is suspiciously close to what are now being called "trustless" environments. To understand this particular piece of linguistic idiocy, it's essential to understand that there has long been the thorny question of how to avoid fraud in internet transactions: it was solved with the adoption of the age-old principle of stakeholders - a person who effectively takes possession of both the goods and the payment and then sends them on to the relevant parties so everyone is safe. In the USA, the principle has long been adopted in conveyancing transactions where even though both parties have lawyers, the money is held by an "escrow agent" until the transfer documents are signed. In this system, there is in theory no need for "trust" because everyone is in the same room when, as the Americans say, they "close." But the escrow agent does in fact receive the money to establish that it's there and in doing so holds it "in trust."

In England, when I first started work in a law firm there would be a meeting at which the purchaser's solicitor (or his clerk i.e. me) would receive a bundle of documents which I had to check against the copies provided earlier and approved by the conveyancer. When satisfied, I would hand over a banker's draft for the full amount due, collect the keys and off we'd all go: our client would, at some time, come to collect the keys. We were at the time when it was common for people not to have telephones (although that was changing quickly) and there were no such things as mobile phones. Many people did not have cars. Am I talking pre-history? No, it's the mid-1970s when I was working in a solicitors' office during my school holidays. So telephone tag kept people busy trying to make sure that the vendors had moved out, delivered the keys to their solicitors, that we had ordered the bank draft, that the money had come in from the lender and any balance from the client, that someone from the accounts department had gone to the bank to collect the draft (there were bank branches in all towns at that time), that I had it secure in my pocket and that I knew which office I was to go to and who to meet for the completion. It was incredibly inefficient and fraught for people who might be sitting outside their new home, unable to get in, with the removal men saying "if we don't start in the next five minutes we're going to have to come back tomorrow and we'll want time and a half because it's Saturday." How do I know? My parents moved often and on one occasion, in winter, we were that family having driven 200 miles through bad weather only to find out that there was some kind of delay on the vendor's part that no one could tell us about until we got there.

With the advent of standardised titles and "telegraphic transfers" the system was much simplified and the vendor's solicitor gives to the purchaser's solicitor an undertaking (promise enforceable as a professional obligation) to receive and hold onto the moneys until he has the executed transfer documents in his possession and to despatch them to the purchaser's solicitors that day and if he doesn't have the documents before, say, 3pm, to send the money back. Although the precise legal and professional details are different, it's still a form of escrow. An "escrow," in this context, is a form of trust account. They all rely on everyone being able to trust everyone else. So the term "trust" is used in two different ways - the trust that one person has in another and the legal arrangement which is called "a trust."

If we look at banks, we can find something closer to the system that became the trusted third party - in principle it's identical. It's one of the oldest financial instruments in existence - the letter of credit or L/C. The letter of credit is, at its simplest, a notice from a bank to the seller of goods that, when certain conditions are met, the bank will credit the seller's account with the agreed amount. For our present purposes, the conditions don't matter so for the sake of simplicity let's take an example where the goods must be delivered to a dock and loaded onto a ship specified in the L/C. The loader's certificate is the proof that the conditions have been satisfied. That's sent to the bank and the bank pays out the money. The goods arrive in the usual course of transport. In the 1990s, several internet companies set themselves up as escrow agents for internet transactions, referring to themselves as trusted third parties or TTPs. When eBay was first launched, it was a pure on-line auction platform. Fraud was rife. eBay created its own TTP scheme and today there are dozens of internet platforms allowing, say, drop-shipping in which the platform provider collects the money, is notified of delivery and releases the payment if the customer does not make a complaint within, say, five days of delivery and, even then, provides clawbacks.

You are saying "if all of these rely on trust, even if that trust is in an independent third party." And you are right. How, then, do we get to so-called "trustless." That all comes about because of so-called "smart contracts."

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