Digital identity is underpinning the transformation of socio-economic and political relations. At the same time, as mentioned in previous blogs of this series on digital identity, developing data governance frameworks that allow for inclusive digital identity systems and policies is one of the biggest challenges. Multistakeholder cooperation and consultation are fundamental for digital identity systems to be inclusive and unlock their value and benefits for all. This blog will venture into the potential of cross-border sandboxes for data to bring stakeholders together and design better digital identity systems and policies.
Sandboxes for data promise to bring stakeholders together to develop agile solutions to complex issues around data. As established in the Dataphere Initiative’s Sandboxes for Data Report, there are two types of sandboxes: operational – which are those where hosted data can be accessed and used –, and regulatory – where regulators and firms evaluate new technologies within a regulatory framework. Both operational and regulatory sandboxes could foster collaboration to experiment with digital identity models, data, and regulations.
A sandbox for digital identity in the UK
In the UK, the Financial Conduct Authority (FCA) has pioneered a regulatory sandbox for digital identity. Given the growth of digital transactions for financial services and markets, they identified a need to understand how individuals were being identified and verified “to ensure secure transactions and prevent financial crime activities”. Since 2016, the FCA’s Innovation Division has supported around 16 digital ID models given the rise of digital transactions and the implementation of digital ID for financial services and markets.
In partnership with the City of London, the FCA completed a pilot sandbox “which provides data access and a digital testing environment to help innovative businesses develop proof of concept”.
Within the regulatory sandbox in the country, the UK’s FCA has overseen digital ID live tests, which allowed the regulator to identify core opportunities and challenges for consumers and firms which would later use that system. Consumers, on the one hand, could potentially receive opportunities that range from better consumer experience and enhanced privacy protection to the ability to re-use a pre-verified digital ID and access greener and paperless processes. Nonetheless, they also faced challenges such as a lack of trust, and awareness of what these digital ID technologies entail, and the complexity of the process of establishing a digital ID.
On the other hand, financial institutions benefit from the sandbox by reducing human error in the systems, by improving the audit trail, lowering costs, and reducing friction points by increasing the rate of approval from the customers. The challenges faced by financial institutions range from the lack of interoperability standards for digital ID systems, concerns about liability when complying with anti-money laundering (AML) obligations, and insufficient management buy-in to implement infrastructure for digital ID systems.
The FCA sandbox is still working towards asserting inclusion in digital identity systems and ensuring that this is an ongoing conversation within the sandbox. While digital IDs evolve from excluding certain types of populations – either because they do not have the skills or the infrastructure to access them, or because they are “invisible” to the technology – the FCA has found that maintaining traditional IDs will be key.
“The Regulatory Sandbox at the FCA has been, and continues to be, supportive of genuine innovation to promote competition for the interest of consumers. Digital ID propositions tested in the sandbox have demonstrated how they have placed consumers at the heart of innovation. The knowledge and experience gained from overseeing digital ID tests in the sandbox and engaging with the wider digital ID ecosystem have helped the FCA keep abreast of the market trends and play a key role in enabling change for the public interest.” said Joyce Zeng, Team Leader of the Regulatory Sandbox at the FCA’s Innovation Division.
Leveraging the power of sandboxes
Overall, the complexity of digital identity has pointed towards the relevance of bringing stakeholders together to develop better digital ID systems. The UK experience has shed light on the potential of sandboxes for data to ensure multistakeholder cooperation and bring consumers and firms together. Through the FCA sandbox, participants were able to identify the opportunities and challenges of digital identity for various communities. This has provided the FCA with a roadmap on how to move forward with these systems and the sandboxes.
As digital identities are on the rise, sandboxes could be key to foster interoperability, share good practices, and ensure that no one is left behind. Sandboxes could support the process of building agile and inclusive data governance frameworks that support better digital IDs. Bringing stakeholders together in a safe place to collaboratively experiment with data and regulation is fundamental to design digital identity systems and policies that unlock their value for all.
Join the Datasphere Initiative in its efforts to develop cross-border sandboxes for data and develop more inclusive digital identity systems and policies.
Reach out to us at info@thedatasphere.org.
