Welcome to Crypto Long & Short, our institutional newsletter featuring insights, news, and analysis for professional investors. This week, we delve into the issue of digital fraud and the need for a state-led approach to identity systems.
Tricia Gallagher, founder and principal of Treasury Solutions Info Tech, discusses how the current system is flawed and how a re-architecture of our digital identity framework is necessary to address the issue. The United States has lost an estimated $5 trillion to fraud and improper payments, with most policy responses focusing on detection, recovery, and enforcement rather than addressing the underlying issue of identity.
Gallagher argues that identity and control over personal data belong to the individual, not banks, technology platforms, or the government. The current model requires individuals to surrender control of their identity and personal data to participate, leading to inefficiencies, security breaches, and erosion of individual agency. Two major policy debates in Washington reflect this tension: reducing fraud and improper payments, and control of consumer financial data.
However, policymakers are responding within the constraints of the current system, focusing on incremental privacy improvements and expanding access to sensitive government data to combat fraud. The result is continued reliance on centralized data pools, combined with limited individual control over personally identifiable information. The core challenge is enabling trusted verification and privacy while preserving individual control over access to personal data.
States have a critical role to play in leading the next phase of digital identity infrastructure, serving as the primary issuers of identity through birth records, driver's licenses, and other foundational credentials. Utah provides a clear example, introducing a Digital Identity Bill of Rights that places individuals at the center of how their identity is used and shared. The goal is to modernize how trust is expressed, shifting to privacy-preserving, user-controlled credentials that reduce fraud, improve transparency, and strengthen accountability. As federal debates continue to focus on managing data within legacy systems, 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.
Other news this week includes stablecoins being a key focus globally, with the Federal Deposit Insurance Corp. formally proposing its approach to U.S. federal rules, and crypto entering geopolitical tensions as Iran explores collecting transit fees in cryptocurrency for oil tankers passing through the Strait of Hormuz.