Welcome to Crypto Long & Short, our institutional newsletter featuring insights and analysis for professional investors. This week, we explore the need for a state-led digital identity framework to combat the estimated $5 trillion lost to fraud and improper payments in the United States. The current system, which relies on detection, recovery, and enforcement, is insufficient, and a new approach is necessary.

A growing movement advocates for individual control over personal data, rather than relying on banks, technology platforms, or governments. The lack of transparency and control in data sharing hinders innovation, reduces competition, and slows economic growth. The existing model, which requires individuals to surrender control of their identity and personal data, is inefficient and prone to misuse and security breaches.

Policymakers are responding, but their efforts are limited by the current system. Two major policy debates in Washington reflect this tension: reducing fraud and improper payments, and control of consumer financial data. These issues are interconnected and require a comprehensive solution.

States have a critical role to play in leading the next phase of digital identity infrastructure, as they have long served as the primary issuers of identity through birth records, driver's licenses, and other foundational credentials. Utah's Digital Identity Bill of Rights provides a clear example of how states can introduce user-controlled credentials, data minimization, and restricted surveillance. The goal is not to remove the state but to modernize how trust is expressed.

By shifting to privacy-preserving, user-controlled credentials, states can reduce fraud, improve transparency, and strengthen accountability. As federal debates continue, states have an opportunity to lead in a fundamentally different direction, one that reduces reliance on centralized data and restores individual control over identity and personal information.

The future of digital finance will depend on whether systems uphold both trust and rights, with identity serving as the bridge between the two.