Central Idea

Moody’s Investor Service released a report titled ‘Decentralised Finance and Digital Assets,’ advocating for decentralized digital identity systems over centralised biometric systems like India’s Aadhaar.
The report raises concerns about security and privacy vulnerabilities associated with Aadhaar (being managed by Govt of India) and questions its effectiveness.

India’s Response to Moody’s Report

In response to Moody’s report, the Indian government strongly defended Aadhaar, asserting that it is “the most trusted digital ID in the world.”
The government highlighted Aadhaar’s integration with the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) database, emphasizing that workers can receive payments without biometric authentication.

Unique Identification: Aadhaar is a unique identification number provided to all Indian residents by the Unique Identification Authority of India (UIDAI). It collects demographic details, biometric fingerprints, and iris scans during enrolment, aiming to create a unique identity for residents.
Fighting Corruption: Aadhaar’s primary objectives include curbing corruption in accessing welfare programs by eliminating “ghost” and “fake” individuals who fraudulently claim benefits.

Ration Distribution: Aadhaar is used to authenticate individuals accessing rations under the Public Distribution System, ensuring that beneficiaries receive their entitled portions.
Government-to-Citizen Transfers: The government employs Aadhaar for various cash transfer programs, claiming substantial savings by eliminating fraudulent beneficiaries.

Authentication Process: To enable payments through Aadhaar for MGNREGA, three steps are involved: linking Aadhaar to job cards, linking Aadhaar to bank accounts, and linking Aadhaar correctly with the National Payments Corporation of India for payment processing.
AePS Platform: Aadhaar-enabled Payment System (AePS) allows individuals to withdraw money from Aadhaar-linked bank accounts using biometric authentication.

Quantity Fraud: Critics argue that Aadhaar fails to address issues like quantity fraud, where beneficiaries receive less than their entitled share. This type of corruption remains prevalent, with Aadhaar unable to detect or prevent it.
Authentication Challenges: Rural areas face authentication challenges due to unreliable internet, fading fingerprints, and inadequate phone connectivity for OTPs. Vulnerable groups, such as older women and people with disabilities, face exclusion.
Lack of Data Transparency: Information regarding authentication attempts and failures is not publicly available, hindering transparency.
Payment Failures: Errors at any stage of Aadhaar-based payments can lead to payment failures. Mismatches in data between job cards and Aadhaar databases can result in authentication failures.
Misdirection of Payments: Misdirected payments through Aadhaar are difficult to detect and resolve, creating issues when Aadhaar numbers are linked to the wrong bank accounts.
Financial Exclusion: Critics argue that Aadhaar-based authentication requirements can lead to financial exclusion for certain groups.

AePS Accountability: Banking correspondents using AePS operate without accountability frameworks, leading to potential misuse and unauthorized access to bank accounts.
Multiple Authentications: Some banking correspondents ask individuals to authenticate multiple times, providing them access to individuals’ bank accounts without consent.
Fraud and Scams: Several reports highlight instances of money withdrawal and enrollment in government programs without individuals’ knowledge through AePS.

Resistance to Mandatory Aadhaar: The government’s efforts to make Aadhaar-based payments mandatory in MGNREGA have faced resistance from workers and field officials.
Deletion of Job Cards: Reports indicate that the job cards of active rural workers have been deleted on grounds of being “ghosts,” raising concerns about data accuracy.
Apprehensions: Critics express apprehensions based on their experience with Aadhaar in welfare programs, emphasizing the need for pilots and evidence-based decision-making.

The debate between centralized biometric systems like Aadhaar and decentralized digital identity solutions remains ongoing, with concerns regarding security, inclusivity, and transparency at the forefront of discussions.