E-Residency: Online Gimmick or a Smart-ID for the Future?

As Estonia unveiled the world’s first e-residency in December 2014, the first steps were taken to creating a regulated and organised identification process purely for Internet users. The scheme, designed to provide willing participants with an online identity that is recognised by the Estonian state and embedded in a physical chipped card, does not give participants any actual legal citizenship. However, the e-residency can act like a legitimate proof of identity online, thereby potentially streamlining legal, bureaucratic and financial procedures. With the Internet economy becoming a vast pool of resources and information, there is certainly demand to bring greater regulation and personification to online interactions. However, there are also valid concerns if additional online checks would encroach on the freedom of the Internet as well as expose consumers to additional avenues of digital fraud.

Internet Use and Mobile Internet Penetration in Estonia and Eastern Europe: 2008-2014

Internet Penetration in Eastern Europe

Source: Euromonitor International from International Telecommunications Union/OECD/national statistics/trade sources

Note:  2014 figures are forecast


Estonian initiative opens doors to new business-friendly personification procedures

The fact that e-residency was introduced by Estonia is characteristic of the country’s digital footprint. The Baltic state has become an enclave of tech innovation, introducing to the world the VoIP service Skype and a revolutionary programme of national identification for its citizens. Unsurprisingly, Estonia had Eastern Europe’s highest Internet penetration (80.0% of the population) and the second highest mobile Internet penetration (48.5% of mobile subscriptions) in 2013.

Although e-residency at present is a niche project launched in a small economy, there is potential for it to become more than just a marketing stunt. It could become a template for global business online, impacting a number of segments:

  • The rapidly expanding global e-commerce market often demands forms of identification pre-purchase, particularly for adult content (proof of age), cross-border purchases (proof of nationality for taxation), or highly regulated goods such as military hardware (proof of identity). At present, digitalised passports or bank cards are used to resolve such demands, but these are often lacking in emerging economies. A relatively affordable and simple e-residency card would bypass these documents, helping to drive the global US$840 billion Internet retailing industry (as of 2014) forward;
  • Social media has suffered from allegations of abuse since its very inception, with numerous cases of cyber bullying or harassment through platforms such as Facebook and Twitter. By ensuring that users register through an e-residency (which is less intrusive and sensitive than a passport or financial document), social interactions online would have far more responsibility and accountability;
  • Low-level financial transactions, such as mobile payments and international money transfers, can benefit from the additional security offered by a digital signature that an e-residency provides. It offers a cost-efficient soft identity check that can streamline security procedures for businesses and consumers. Global remittance inflows reached almost US$550 billion in 2013.

E-residency can stem Internet freedom and enable cyber fraud

Despite all the positives potentially offered by an e-residency, there are also drawbacks. For a start, the inception of the Internet promised a landscape free from state regulation, where anonymity offered a voice to the unheard, the repressed and the vulnerable. An enforced online ID process could be easily used as a tool of censorship in repressive states. With two-thirds of the world’s Internet users located in emerging economies in 2013, this could be a particular pressing issue in developing states.

An additional concern is cyber fraud, with the e-residency possibly just providing another channel for hackers and online criminals to steal identities and commit crimes via the web. The more opportunities a smart online identification system offers to businesses and consumers, the deeper the threat level of cyber-attacks on these same businesses and consumers.

As with Estonia’s other digital initiatives, the country will be the testing ground for showcasing both the opportunities and the risks offered by an e-residency. Should it succeed, Internet users will eventually become legitimate online citizens.