Crypto Identity – The Next Big Thing in Blockchain

Industry experts are arguing that the internet is giving rise to “crypto identity,” a network-native form of identity often described as Web3 identity, decentralized identity, or self-sovereign identity.

In Balaji Srinivasan’s recent keynote, he presented wallets, public-private keys, and cryptographic proofs as the basic tools of a portable digital identity that can authenticate, transact, and coordinate across applications without depending on a single platform or a country-based registry.

You’d be forgiven for not keeping up – it’s a lot to take in. This article explains what crypto identity is in plain terms, outlines the core building blocks (wallet login, decentralized identifiers, verifiable credentials), and shows how these technologies already intersect with crypto payments, KYC/AML compliance, and real-world onboarding.

What Is “Crypto Identity,” in Plain English

“Crypto identity” (also called Web3 identity, decentralized identity, or self-sovereign identity) is a user-controlled identity layer made of three pieces: a cryptographic account (your wallet), an identifier that isn’t owned by a central registry, and portable credentials you can present across the internet.

First comes the wallet. Your wallet holds a public–private key pair. You prove “it’s me” by signing messages or transactions with the private key; others verify the signature with the public key, without seeing your secrets. On Ethereum, for example, accounts are built from key pairs and signatures rather than passwords.

On top of the account sits a decentralized identifier (DID). A DID is a globally unique identifier defined by the W3C that can be created and resolved without a single issuing authority, often using blockchains or other decentralized networks. The value here is portability: your identifier can move with you between apps and contexts instead of being locked to one platform.

Finally, there are Verifiable Credentials (VCs): digitally signed claims such as “over 18,” “employee at X,” or “KYB verified.” The W3C’s Verifiable Credentials Data Model 2.0 standardizes how these claims are issued, verified, and exchanged so different systems can interoperate.

Many deployments add selective disclosure and zero-knowledge proofs, letting you prove an attribute (e.g., age threshold) without exposing the underlying document.

What It Enables for Users and Communities

When passwords give way to keys, login becomes portable. A wallet signature can authenticate you across multiple applications without creating new usernames or sharing an email address.

Because Sign-In with Ethereum (EIP-4361) standardizes the signed message and verification flow, both traditional web backends and Web3 toolkits can implement the same passwordless login. The user experience is simpler, and the security model shifts from password databases to cryptographic proofs.

Identity also carries what you’ve done, not just who can sign. Attestations let communities encode proofs of contribution, trust, or status that travel with your account. Using shared schemas, the Ethereum Attestation Service (EAS) makes these statements legible to other apps. In practice, credentials like “grants contributor,” “past attendee,” or “KYC-verified” can be issued by different parties and later presented wherever they’re relevant, forming portable, on-chain reputation.

This improves coordination at scale. Projects that want to reduce bot activity can set minimum proofs for voting, allowlists, or airdrops without forcing every participant to disclose personal data.

Gitcoin Passport (now Human Passport) popularized the approach by aggregating “stamps” from multiple sources and increasingly anchoring them on EAS so that reputation is verifiable across ecosystems. Forums and governance spaces use similar gates to raise Sybil resistance while keeping access open to real users.

More broadly, crypto identity underpins “internet-first” communities – groups that form online and then act in the physical world. Portable accounts, verifiable credentials, and attestations let organizers authenticate members, assign rights, and coordinate activity before geography enters the picture.

Where It Meets Payments and Compliance

For payments teams, the core promise of crypto identity is reusable KYC/KYB. Instead of uploading documents to every platform, a user or business can verify once with a trusted issuer and then present a Verifiable Credential at onboarding, checkout, or periodic review.

This lands on two distinct tracks. First, W3C’s Verifiable Credentials Data Model 2.0 (Recommendation, May 15, 2025) underpins crypto-native identity: decentralized identifiers, cryptographic proofs, and reusable KYC/KYB without re-uploading documents.

Second, the EU’s EUDI Wallet reflects traditional, centrally issued identity under eIDAS 2.0 – high-assurance credentials governed by public authorities and an acceptance network.

Speaking at Warsaw Finance Week by Future Finance Poland during “eID as a Foundation for Digital Societies: Enabling Trust in Public and Private Services” panel, Visa’s Igor Zacharjasz emphasized that fast adoption depends on solving real consumer problems and building trust, supported by a solid legal framework and cooperation across all parties.

Of course, compliance obligations don’t disappear. However, they do become easier to fulfill and audit. In the EU, the updated Transfer of Funds Regulation (Regulation (EU) 2023/1113) extends “Travel Rule” requirements to crypto-asset transfers, meaning originator and beneficiary information must accompany transactions.

The European Banking Authority (EBA) has issued binding Guidelines on information requirements for both funds and crypto-asset transfers, covering how CASPs should detect missing data and handle non-compliant transfers.

Using verifiable credentials and structured attestations to package this data helps reduce manual checks and limits unnecessary data exposure. Globally, FATF continues to tighten alignment on the Travel Rule, including 2025 updates to Recommendation 16 and a targeted progress review across jurisdictions.

Privacy-preserving verification is the other hinge. Zero-knowledge credential stacks (such as Privado ID) let users prove attributes like “over 18,” “resident in X,” or “KYC passed” without disclosing the underlying documents. Selective disclosure lowers data-retention risk for providers while meeting the same policy goals: only eligible users transact.

Finally, payment operations benefit from portable attestations that move with accounts. Processors, exchanges, and merchants can share signed statements (chargeback history, fraud flags, or “trusted merchant” status) without relying on a single centralized blacklist. The Ethereum Attestation Service (EAS) provides open contracts, a schema registry, and tooling so any counterparty can verify these signals, improving onboarding speed, reducing false positives, and strengthening audit trails.

Traditional Identity vs. Crypto Identity

What’s Next for Crypto Identity?

The roadmap is about making reusable, privacy-preserving KYC/KYB practical at scale. We may see:

• Production VC flows: more issuers (exchanges, KYC providers) mint verifiable credentials; wallets support selective disclosure, revocation checks, and freshness.
• ZK proofs in the wild: prove “over 18,” “resident in X,” or “KYC passed” without exposing raw documents; anti-sybil “one-per-human” moves from pilots to controlled launches.
• Attestation networks for risk signals: portable, signed statements (e.g., fraud flags, chargeback history, “trusted merchant”) reduce re-checks and speed onboarding.
• Better UX & recovery: account-abstraction-style features (social/multi-factor recovery, session keys) make credential use safer for non-experts.
• Compliance integration: standardized schemas so Travel-Rule/AML data can ride inside credentials with minimal data exposure and clear audit trails.

Also, we can see upcoming changes for traditional eIDs, in relation to the EUDI Wallet – a centrally issued, eIDAS-governed model rolling out across the EU. It may interoperate at the data/format level (e.g., with VCs), but its adoption and governance are distinct from crypto-native identity. Progress on one does not guarantee success for the other.

Quick Start

• Use a modern wallet with recovery options (social recovery, passkeys, or other AA features) and practice a recovery drill.
• Try passwordless logins where offered (e.g., Sign-In with Ethereum) to cut password reuse.
• Request portable credentials from trusted issuers (age/KYC) and use selective disclosure instead of sending full IDs.
• Build portable reputation by accepting/issuing attestations for things you’ve actually done (event attendance, contributions), and favor privacy-preserving “proof-of-human” methods over biometrics.

FAQ: Crypto Identity

1) What is “crypto identity” (Web3 identity) in simple terms?

Crypto identity – also called decentralized or self-sovereign identity – is a user-controlled identity layer built on wallets (public-private keys), decentralized identifiers (DIDs), and verifiable credentials (VCs). It lets you authenticate, prove attributes, and build reputation across apps without relying on a single platform or government registry.

2) How is crypto identity different from traditional logins?

Traditional logins rely on passwords and centralized accounts; crypto identity uses wallet signatures (e.g., Sign-In with Ethereum, EIP-4361) for passwordless authentication. Instead of repeatedly uploading documents, you present portable proofs (VCs or zero-knowledge [ZK] attestations) so only the necessary facts are shared.

3) What are DIDs and Verifiable Credentials?

A DID is a decentralized identifier that isn’t tied to one issuer or database. Verifiable Credentials are digitally signed claims (e.g., age, residency, KYC/KYB) that you store and selectively disclose; VC 2.0 standardizes issuance and verification so they work across wallets and services.

4) Where does crypto identity meet KYC/AML and the Travel Rule?

Reusable KYC/KYB via VCs can satisfy compliance while limiting raw PII exposure. For the Travel Rule, standardized credentials and attestations help transmit required originator/beneficiary information between CASPs and wallets in a verifiable, audit-friendly way.

5) Is crypto identity private and recoverable?

Privacy improves through selective disclosure and ZK proofs that confirm facts (like “over 18” or uniqueness) without revealing documents. Recoverability is addressed by smart-wallet patterns and account abstraction (ERC-4337), which enable social recovery, session keys, and multi-factor signing.

6) How do I start using crypto identity today?

Use a modern Web3 wallet and enable passwordless login where available (e.g., Sign-In With Ethereum). Request portable credentials from trusted issuers, and use attestations to build your on-chain reputation.

Prefer apps that support Verifiable Credentials (VC 2.0) and Zero-Knowledge proofs for privacy and interoperability. While EUDI Wallets are part of a government-led digital identity framework, choosing EUDI-compatible or standards-aligned formats helps ensure future interoperability between Web3 identity systems and regulated digital ID ecosystems.