Well since you're still positing a government (which to make this work would likely also need to have some manner of projecting will so that people are forced to use this monetary system instead of a competing one) the valid identities on the block chain could be handed out and verified by a central system (a la social security numbers).
I'm not being naive; I never said social security numbers compared in quality to signed cryptographic credentials. The point it is the same basic idea (hand out an officially accepted identity).
Duplication isn't even the biggest disadvantage of the current system. I really wish we had an identity with real non-repudiation with our current government structure.
