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 There already are physical IDs.  Digital IDs do not solve any problem that physical IDs do not... but open the door for many nasty things 
 Online actions. For instance, online voting. Or access to private information.
Bank identification.

We can say: Let's all use Monero. But gov are not going to adopt a system that they can't tax.

I wish we can go all in with a libertarian gov. That is not going to happen. What we can do is push gov and society towards liberty. For that you need an alternative to bad ideas. 
 I don't think that Libertarians and conservatives should support online voting.  It should be using physical ID cards that already exist in-person.  They don't even do ID for voting now, and the physical cards exist.

For bank identification, when you register a bank account, you already have to show physical ID.  Why do you need it every time you login, if you already showed it to set it up?  If you're talking about security, there's already yubikeys and 2FA.  There is no logical reason government digital ID is more secure than yubikeys, but the risk to freedom is massive 
 You are not wrong.

Still there is always the question, why at this digital age do we need to do things physically?

Using that question socialists will push a digital id.

You (and I) might not like non in person voting but right now the US is stubbornly allowing Mail voting. When the criticizers will point out to how unsecure that is, the socialists will pull out digital IDs.

The best way to go, is to prevent digital IDs. The second best is to offer a privacy respecting alternative.