Request a demo
Man riding in taxi looking at his phone

Blog

Digital IDs and the EU Digital ID Wallet

The increased digitization of many services across different industries has created an urgent need for secure, efficient, and user-friendly methods of verifying identities.

Traditional identification methods used in know your customer (KYC) processes, such as physical passports or driver’s licenses, can be cumbersome and vulnerable to fraud, and they are not well suited to the digital age.

As a response, governments and organizations worldwide have begun exploring digital ID systems that could transform how KYC occurs, how services are accessed, and how individuals prove who they are.

    What is a digital ID?

    An electronic ID (eID) or digital ID is an electronic representation of personal information that can be used to verify identity online or in person. It is a secure mobile application that stores multiple verified credentials in one place. These credentials could include identity documents such as passports or national IDs, health records such as vaccination certificates. They can even contain financial details such as bank account information.

    Unlike traditional IDs, which can lead to an individual sharing more of their personal data than the context requires – for example someone is asked to verify their data of birth, so a passport is shown, which includes the date of birth, but also where someone was born, their passport ID number, and more.

    Digital IDs can allow users to share the specific data required for a particular context or transaction. For example, instead of someone displaying their full date of birth to prove they are over 18, a digital ID could confirm they meet the age requirement without needing to disclose any additional information.

    A digital ID wallet allows users to manage their personal data and share it selectively with organizations or service providers on an as-needed basis.

      European Union Digital ID Wallets

      One of the most ambitious initiatives is the EU’s proposed Digital ID Wallet, which aims to provide EU citizens with a single platform to manage their digital identities. The EU Digital ID Wallet is a key component of the European Union’s eIDAS 2.0 regulation (Electronic Identification, Authentication and Trust Services), which seeks to establish a unified framework for electronic identification across Member States. The EU's eIDAS 2.0 regulation entered into force in May 2024 and requires Member States provide EU Digital Identity Wallets to citizens within 24 months of adopting the implemented acts. The first act was published in December last year, which sets the deadline for the wallets to be available by December 2026.

      The EU Digital Identity Wallet is expected to be available to citizens by the first half of 2027. Pilot programs are underway in several Member States to test the digital wallet’s functionality and identify challenges before full-scale deployment. As mentioned, the European Commission aims to make the wallet available by December 2026, with mandatory acceptance by businesses expected in 2027.

      A key feature of the EU Digital ID Wallet is selective sharing. The aim is to achieve this through advanced encryption technologies and secure authentication methods like multi-factor authentication and liveness tests.

      The EU Digital ID Wallet would allow users to sign documents electronically, authenticate themselves securely online or in person, and access public services such as tax filing or medical records.

      Another feature of the EU Wallet is its ability to support cross-border recognition within the EU. This means citizens would be able to use their wallet in their home country and across other Member States without the need for separate identification systems. For example, someone could use their digital wallet to open a bank account in a different EU country or access healthcare services while travelling abroad.

        Examples of digital ID adoption in other regions

        • Estonia: Known for its e-Residency program, Estonia's digital ID system allows citizens and residents to access government services including online voting and access to healthcare records
        • India: Aadhaar is a widely used digital ID system that provides a unique identification number to residents, supporting access to various services
        • Japan: My Number Card in Japan is a digital ID for accessing government services and other applications such as health insurance
        • Singapore: SingPass is one of the most advanced digital ID systems. It offers digital interactions between citizens and the government
        • Sweden: Sweden has implemented eID or BankID for more secure access to government and financial services

        Meanwhile, Canada is developing digital ID systems with the objective of enhancing security and efficiency in accessing services. And in the UK there are plans to introduce digital driving licenses as part of a wider strategy for developing national digital ID systems. 

          Security implications for individuals and businesses

          For individuals, a digital ID could mean greater convenience and control over personal data, so instead of carrying multiple physical documents or remembering a range of logins for different services, people can rely on a digital wallet as a single, electronic source. This could make everyday tasks like proving age when buying alcohol, signing contracts digitally without visiting an office in person, or accessing government benefits easier.

          For businesses, digital IDs are an opportunity to streamline processes related to KYC identity verification and other compliance processes. KYC is especially important in industries like banking and financial services, which are required by law to verify customer identities as part of anti-money laundering (AML) regulations.

          By integrating digital IDs in their systems, businesses have opportunities to further automate KYC and AML. For example, instead of manually reviewing physical documents submitted by customers during an onboarding process, banks would be able to use the wallet to verify credentials automatically.

          However, while digital ID wallets may offer convenience and efficiency, they come with potential downsides, particularly in terms of security. Despite encryption, digital wallets could be vulnerable to hacking, with cybercriminals able to steal payment data or gain unauthorized access through phishing scams or malware attacks. And if a device is stolen or hacked, attackers can potentially access the wallet, especially if security settings are weak, which would leave businesses and individuals vulnerable.

          A digital ID wallet could also mean that financial resources linked to one platform could become inaccessible during an outage or breach. Deepfake technology is also emerging as a significant threat to digital ID systems, contributing to the growing problem of identity theft. Combining real and fictitious information has become one of the most common fraud techniques.

            Growing global adoption of Digital IDs

            Adoption of digital ID solutions is likely to grow globally, driven by an increasing demand for seamless online experiences.

            Regulated development and adoption of digital ID wallets has the potential to streamline and accelerate the KYC process through increased efficiencies. Robust security measures, like multi-factor authentication, end-to-end encryption, and liveness detection for remote verification could help protect both citizens and organizations who are using the IDs.

            However, these measures alone can't fully protect against sophisticated fraudsters. There is a need for additional measures such as cross-check verification with third parties, AI-powered anomaly detection systems, real-time monitoring through pKYC frameworks, and analytics tools to help protect against fraud, double-down on security, and meet compliance requirements.

              Get in touch

              For more information about Moody’s automated KYC and AML solutions, please get in touch with the team any time - we would love to hear from you.