VRChat has determined Persona can be trusted with a photo of your face and government ID. Persona is a VC-backed (arguably "tech bro") San Franciscan tech startup that's only existed since 2018. They operate out of a shared space behind a bar: https://maps.app.goo.gl/t5ebyhr9oTUhupMf9
Their privacy policy says (as I read it) that they explicitly have permission to take your personal information (selfie, photo of your government ID) and store it for years, and can and will send it to "vendors, agents...companies we've hired to provide customer service support..." and to "law enforcement [and] other government agencies."
They say they'll use your personal information "to understand you and your preferences to enhance your experience and enjoyment" and for the purposes of "marketing, including to communicate with you about new services, offers, promotions, rewards, contests, upcoming events, and other information about our services and those of our selected partners..." and for "advertising, including display [sic] advertising to you..."
Their privacy policy site also uses clickjacking to prevent you from copying the text of their privacy policy: https://withpersona.com/legal/privacy-policy
These doesn't seem like the actions of a legitimate and trustworthy company, and there aren't enough guarantees that you won't be literally doxxing yourself. PII is extremely valuable and there's an entire industry of brokers that facilitate the sale and transfer of people's personal information--not to mention the risk of hacking, accidental disclosure, or a new and untrustworthy company being sloppy or reckless. These days AI can train off a photo of your face, and scams and identify fraud are extremely common.
Personally, the only times I've had to provide a photo of myself holding an ID are for once-in-a-lifetime financial transactions. Never for a video game or social media. VRChat is willing to take the chance of making this de-facto-mandatory (i.e., the community normalizes it and it results in a greatly degraded experience if you don't comply)? The ask is a severe imposition and an invasion of privacy without adequate concern that the chosen data broker is trustworthy. Even the announcement incorrectly claimed your PII would be handled in accordance to the GDPR, but the company is actually based out of California, where regulations are far less strict, and fines far less burdensome.