The Obama administration urged the private sector on Friday to develop methods that consumers can use instead of passwords to identify themselves online and, in some cases, in brick and mortar stores.

The Internet has transformed how we communicate and do business, said President Barack Obama in a statement accompanying release of a national strategy to safeguard identity on the Internet.

But it has also led to new challenges, like online fraud and identity theft, that harm consumers and cost billions of dollars each year, the president said.

As part of the strategy, the Commerce Department is asking the private sector to create a system or systems that can identify Internet users in a way that safeguards their privacy, is secure, is interoperable and is cost-effective.

Participation would be voluntary.

Consumers who want to participate will be able to obtain a single credential -- such as a unique piece of software on a smart phone, a smart card, or a token that generates a one-time digital password, the Commerce Department said in a statement.

Millions of people are victims each year of identity theft, which costs victims an average of $631 and 130 hours to recover from, the Commerce Department said.

Earlier this month, a long list of hotels, financial institutions, retailers and others revealed that customer names and email addresses had been stolen by hackers, giving the criminals useful information to be used in identity theft.

The strategy is a way to eliminate passwords -- which are unwieldy for users and ineffective in many cases -- to have them go the way of the dodo.

But the Commerce Department is also keenly aware that any attempt by the federal government to create a national identity card would be extremely controversial.

Companies at a Chamber of Commerce event to kick off the effort included Google, Symantec, eBay subsidiary PayPal, Microsoft and Northrop Grumman Corp.

(Reporting by Diane Bartz; Editing by Steve Orlofsky)

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