Abstract
Managing digital identity data is a growing challenge for individuals and organizations in today’s increasingly digital economy, government services, and online society. Recently, non-fungible tokens (NFTs) have emerged as a potential solution for representing and managing digital identities.
NFTs, which are stored on blockchain systems, can effectively represent identity data that’s kept in decentralized databases. Although the use of NFTs for digital identity is promising, it also brings up important concerns around data privacy and legal compliance.
This paper explores how NFTs can be used for digital identity representation and management, with a focus on potential privacy risks and strategies to address them.
Using qualitative desk research, the study reviews industry insights, academic literature, and regulatory documents to explore trends, technologies, and legal considerations. It ends with suggestions for using programmable privacy to improve digital identity systems, offering helpful insights for researchers and developers working on secure identity solutions.
1. Introduction
Digital transformation is reshaping economies, governments, and societies across the world. A digital identity is a set of data attributes—like name, photo, address, and biometrics—that are used to verify a person’s identity during online interactions. These identity assets belong to real people and may include digital documents such as passports or licenses.
Blockchain technology is being explored to improve identity management due to its decentralized, secure, and verifiable structure. Popular blockchain-based identity tools include Self-Sovereign Identity (SSI), Decentralized Identifiers (DIDs), and Verifiable Credentials.
These technologies offer users control over their identity data, but challenges still exist around system compatibility, scalability, and the need for trusted third parties to issue credentials.
NFTs, known for tracking ownership of digital assets on blockchains, offer additional benefits such as immutability, traceability, and the ability to be programmed.
These qualities make NFTs an attractive option for identity data management, particularly when handling personal or sensitive data. NFTs have already been applied to use cases like healthcare records, academic credentials, and intellectual property.
More recently, the idea of using NFTs to manage personal identities has gained traction. While NFTs can enable secure digital interactions, they also raise concerns over user privacy and how well they comply with laws such as the GDPR.
Since blockchain data is permanent and publicly visible, placing identity information in NFTs could lead to data leaks or breaches of privacy rights.
This paper first introduces a workflow for how NFTs can be used in digital identity systems. Then, it highlights the related privacy risks and concludes by suggesting programmable privacy as a technical approach to mitigate those risks.
2. NFT-Enabled Digital Identity Data Workflow
NFTs are increasingly used to represent ownership of digital items such as artwork, tweets, videos, and other media. This concept is now being explored for identity representation. The core research question is:
RQ: Can NFTs be used to represent and securely verify digital identity data during online interactions?
To answer this, we conducted qualitative research based on industry reports, product studies, and scholarly articles. The findings suggest NFTs could be programmed to act like digital ID tokens—Digital Identity Tokens (DITs)—linked to identity data either stored on-chain or off-chain. These tokens would verify identity similarly to how a concert ticket NFT proves access rights.
The process involves:
- Identity Provider (IdP): The organization that creates (or “mints”) and issues the NFT identity token.
- Identity Owner (IO): The person or entity receiving and using the NFT for identity purposes.
- Relying Party (RP): A third party that checks the NFT to confirm the identity of the holder.
The DIT can be stored:
- On-chain: Best for encrypted metadata or cryptographic proofs that don’t reveal personal data.
- Off-chain: For sensitive data (like biometrics), stored in secure systems with only hashed links on the blockchain to preserve data integrity and privacy.
During a verification request, only the token and necessary metadata are shared—not the raw personal data. This process ensures secure identity confirmation without compromising privacy.
The entire system can be powered by a marketplace managed by the IdP, where identity services are offered based on industry and regulatory needs.
2.1 Evaluation and Practical Implementation
We evaluated existing NFT-based identity systems based on their architecture, use cases, and how they handle on-chain versus off-chain storage.
Technical components include encryption methods, identity verification modules, and data linking mechanisms (summarized in Table 1). While these frameworks are promising, privacy concerns must still be tackled.
3. Privacy Considerations
Although NFTs offer several features—like uniqueness, indivisibility, and programmability—that are useful for identity data, these same features could compromise user privacy. For example, because NFTs are transferable and publicly visible, there’s a risk that private information could be linked to specific individuals.
3.1 NFT-Based Identity Data and Privacy Risks
NFTs may be permanent and transparent, so putting identity data directly on-chain can expose individuals to misuse or theft.
Technologies like Zero-Knowledge Proofs (ZKPs) allow users to prove ownership of identity data without disclosing it. However, ownership verification alone is not enough to ensure that the person claiming the NFT is its rightful owner. There is a risk of identity theft.
Privacy-preserving smart contracts can help mitigate these risks. These contracts can use:
- Ring Signatures: Allow verification without revealing which user signed the transaction.
- ZKPs: Prove identity claims without sharing personal data.
- Secure Multi-Party Computation (SMPC): Allows encrypted data to be used in computations.
- Homomorphic Encryption: Enables data processing without decrypting sensitive information.
3.2 Regulatory Compliance
Blockchain-based identity systems must meet global data regulations:
- GDPR (EU): Conflict between blockchain immutability and rights like data erasure.
- eIDAS (EU): Sets legal standards for electronic identity, which may not fully align with NFTs.
- CCPA (California): Allows users to delete their data, which is difficult in blockchain systems.
- AML/CTF (FATF, AMLD5/6): Worry about NFT anonymity and illegal transactions.
- PIPL (China): Restricts cross-border data transfers, impacting blockchain nodes.
- SEC/FINCEN (USA): May categorize NFTs as securities, applying financial regulations.
Table 3 summarizes these regulatory issues and offers best practices for compliance.
4. Programmable Contextual Privacy
To manage privacy effectively, we need more flexible frameworks. Programmable privacy enables users to control who accesses their identity data and under what conditions. Smart contracts can enforce access rules by verifying if the requester is on a pre-approved list.
If approved, the function proceeds; otherwise, it stops. This logic, stored on blockchain, protects identity data.
Additional features:
- Set expiration dates for access.
- Share only parts of identity data.
- Control who can view or use the data.
Developers can build decentralized apps or browser extensions with secure identity wallets. These tools will let users create and manage their identities, control cryptographic keys, and define who can access which data.
For future research, smart contracts should be prototyped and tested for:
- Access Control Efficiency: How fast permissions are verified.
- Scalability: Performance under high usage.
- Privacy Assurance: Verified through ZKP and formal security audits.
Legal frameworks must also evolve to support NFT identity systems. Laws should define how NFTs relate to personal data, clarify ownership rights, and address the use of pseudonymization for sensitive identity data.
5. Conclusion and Future Work
This paper explored the growing idea of using NFTs for managing digital identity. It presented a practical workflow and identified privacy and compliance risks. Though NFTs show potential, serious concerns remain regarding data exposure, identity theft, and legal issues.
The research recommends integrating programmable privacy into smart contracts to enhance user control. Future studies should build and evaluate smart contracts with programmable privacy features, using real-world simulations to test performance, security, and legal compatibility.
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