Impact of Blockchain Technology on Identity Management

Last updated on July 29th, 2025 at 11:25 am

Transparency and immutability are critical components of blockchain technology, which have made it appealing to various industries. The ability to view transaction history and the permanency of records on the network have made it a sought-after technology in finance, healthcare, security, and even identity management.

Identity theft is a serious issue that plagues the world, as over “49 million people were victims of identity theft in 2020. This resulted in approximately $13 billion in damages from “traditional” identity theft, i.e., people losing their information through data breaches and similar attacks.” With the importance of identity management, it is not surprising that the government has departments and agencies dedicated to reducing identity theft cases.

Companies lose when they employ the services of an individual that has falsified their records, such as education and work history. Individuals and businesses that regularly utilize or interact with identities can benefit from blockchain identity management.

This article examines how blockchain improves identity management and new technologies that have been developed to make identity management more efficient.

What Are The Problems With Traditional Identity Management Systems?

The traditional identity management system is plagued with issues that affect the government, individuals, and businesses.

Third-party Involvement

Companies often have to utilize third-party firms to verify the identities or conduct a Know Your Customer process for individuals they want to employ, which can be inefficient. For example, multiple organizations may use the same third-party agency for identity verification, making the process slow and expensive. KYC firms have to serve requests to several companies and agencies to get records of education background, work history, immigration status, and other important information, making the process expensive for the end-user.

Identity theft

People are constantly confronted by the threat of identity theft, which has become a significant concern with the introduction of digital technologies. Identity theft is the unlawful use of one’s identity to carry out specific activities. Those who take other people’s identities usually use them for unscrupulous purposes, such as taking out loans, committing crimes, defrauding others, etc.

Victims of identity theft may lose their savings, assets, and reputation and even end up with a criminal record.

It is relatively easy to steal someone’s identity under the current system, especially if the perpetrator has access to their social security number, national identity number, bank codes, email passwords, and other digitally relevant private information.

Lack of control

People’s personal information is frequently leaked as a result of cybersecurity breaches. The average person has no idea how often their records have been seen or examined by others. They have no control over who has access to their personal information or where it is stored.

Inefficient KYC process

Individuals usually undergo the KYC process to use a platform such as a DeFi protocol or enroll with a company such as a bank. Most of the time, the KYC process often repeats what has been done in previous institutions. It is practically impossible for corporate organizations to share the results of their KYC process with their counterparts, even when the client grants permission.

For instance, signing up on a centralized exchange like Binance can be difficult. Users must undergo a KYC process, which involves uploading their documents and carrying out several activities. When the same user decides to sign up on another exchange, let’s say Coinbase, they have to do similar activities, which may not be efficient. This process is repeated when signing up on another crypto exchange or blockchain platform.

The Benefits of a Blockchain Identity Management System?

Those who interact with blockchain-based identity management systems benefit from certain advantages.

Efficiency

With the likes of Soulbound Tokens or SBTs, users do not have to undergo multiple KYC processes before accessing the platform’s features. It acts as a unique ID for anyone that wants it, and all they need to do is register on the blockchain identity management system, and they are given a unique NFT that can’t be sold. This NFT is bound to them, though they can revoke it after creation.

Another implementation of blockchain identity management is in the form of a unique identification number that contains an encrypted copy of the owner’s personal information. They can send their unique ID number whenever their identity needs to be verified.

Affordable

Companies spend a lot of money on third-party KYC companies that verify the identities of individuals and institutions. An identity technology like an SBT eliminates the need to spend a lot on third parties to verify the identity and history of an individual.

This is because the company can easily confirm if the individual’s record is genuine on the blockchain. A similar thing occurs with other types of identity management tools.

Security

Based on the SBT concept, a social recovery mechanism will be designed to prevent occurrences of identity theft.

Individuals’ personal identification documents will be held on a decentralized network rather than a centralized database in existing forms of blockchain identity management infrastructures, reducing the likelihood of data breaches.

Because of its decentralized nature, the risk of data being compromised, altered, or wiped entirely is reduced to a bare minimum.

What Are Soulbound Tokens?

Soulbound Tokens (SBTs) are a token that serves as a resume for their holders. This type of token was developed by one of the co-founders of Ethereum, Vitalik Buterin. He discussed this in a whitepaper he released called “Decentralized Society: Finding Web3’s Soul”. In the whitepaper, the authors spoke at length about a new society, which they called the Decentralized Society, that worked based on the concept of Soulbound Tokens (SBTs).

SBTs are similar to NFTs, except that the owner can’t sell them to others. This type of NFT contains all the lifetime achievements of its holders, detailing various important aspects of an individual. An SBT will comprise information from an individual’s resume, such as education, employment history, and much more.

Users can utilize SBTs to verify their identity and share their accomplishments with others. When applying for a job position, they can use their SBT to provide potential employers with information about their employment and education history.

When someone needs to verify their identity before utilizing a platform, they can use their SBT to speed up the procedure. This is possible because SBTs, like most NFTs, are immutable, which means they cannot be altered. This feature makes it nearly impossible to falsify credentials and achievements, reducing the number of cases of identity fraud.

This type of NFT is still in its early stages of development as an identity management technology. Buterin’s explanation of the concept has piqued the interest of several blockchain platforms, and several iterations are expected to emerge in the near future.

SBTs may be NFTs, but they differ from the average NFT because they can’t be transferred or sold to others. Users can list their SBTs for sale on NFT marketplaces or transfer them to others. Individuals have the option to revoke ownership of their SBTs.

Concerns about SBT thefts have spread throughout the community as a result of previous occurrences of NFT theft.

The Ethereum co-founder believes that a social recovery model can be integrated into the process, preventing unscrupulous individuals from stealing and utilizing SBTs.

In this situation, if the wallet containing the SBT is compromised, the affected person can appoint other community members known as guardians to access and modify the compromised wallet’s private keys. A community-oriented approach has a higher potential to reduce or outrightly prevent cases of SBT theft.

In Conclusion,

Transparency and immutability are critical components of blockchain technology, which have made it appealing to various industries such as identity management.
Companies often have to utilize third-party agencies to verify the identity or conduct a Know Your Customer (KYC) process for those they wish to employ, which can be inefficient.
To use a platform such as a DeFi protocol or enroll with a company like a bank, individuals must undergo the KYC process, which is traditionally inefficient.
Individuals have to deal with identity theft, which can be a serious issue. Identity theft is the unlawful use of one’s identity to carry out specific activities.
Soulbound Tokens (SBTs) are tokens designed to act as a resume for their holders.
SBTs will function similarly to NFTs, except that the owner can’t sell them to others.
SBTs are a new feature in the blockchain identity management industry. Holders of SBTs can use them to verify their identity because they contain information such as educational background, work history, and much more.

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