Will blockchain transform the public sector? Blockchain basics for government

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Blockchain’s influence in the public sector will be mostly behind the scenes. But the technology has the potential to bring security, efficiency, and speed to a wide range of services and processes. How should government agencies look to incorporate blockchain into the way they function today?

Introduction: Value creation for all kinds of transactions

Back in 1995, Bill Gates attended a conference at which tech visionaries touted the potential of an emerging technology of which many people around the world hadn’t yet even heard: the World Wide Web. At the time, people couldn’t do much online—there was virtually no shopping, no entertainment, no news, very little traffic—but Gates returned to Microsoft headquarters and dramatically shifted the company’s strategic plan to focus on the possibilities.1 He recognized the Internet’s potential power as a platform for disrupting business—and society—as usual. Not even Gates could foresee all the ways it would be used, but he understood information technology well enough to recognize the emerging value proposition and resulting innovation that the first generation of the Internet could enable.

Blockchain technology is unlikely to capture the public imagination in the same way as the colorful initial wave of online innovation did; its impact will be largely behind the scenes. Yet the potential is enormous: Some see blockchain “bringing us the Internet of value: a new, distributed platform that can help us reshape the world of business and transform the old order of human affairs for the better.”2

Blockchain’s benefits—of security, efficiency, and speed—are readily applicable to public sector organizations, and the technology’s potential helps explain why so many government leaders are actively exploring its uses in government. Indeed, blockchain experiments in the public sector are accelerating globally. (See figure 1.)

From almost none three years ago, agencies in more than a dozen countries—including Canada, the United Kingdom, Brazil, China, and India—are running pilots, tests, and trials examining both the architecture’s broad utility as a basis for government service provision and procurement and developing individual blockchain-based applications for internal use. These applications, often unique to the particular circumstances of a country, state, or municipality, are in development around the world across an expanding range of use cases and asset classes.

In the United Arab Emirates, for example, the government is exploring a wide range of use cases, including for business registration,3 trade,4 and central bank operations.5 In Estonia, a country often cited as a leader in tech literacy and e-services, the government is piloting blockchain-based solutions for voting,6 identity management,7 and health care.8 In the United States, the state of Delaware, where many companies choose to incorporate, is piloting a blockchain-based corporate registry system in addition to exploring share issuance,9 a use affirmed by the July 2017 passage of state legislation approving the trade and maintenance of corporate stock on a blockchain.10 Elsewhere in the United States, several federal agencies—including the General Services Administration, the Department of Homeland Security, and the Health and Human Services Department—have announced blockchain programs. New York, Illinois, and Texas are among the states that are piloting and/or testing blockchain applications. In each of the above cases, blockchain has the potential to create value regardless of the type of asset or transaction involved.11

Blockchain in the public sector, as of March 2017

This proliferation of experimentation and discovery suggests that government leaders need no convincing about the need to learn about and from blockchain. This important period will likely inform the investment and longer-term strategic thinking that this new architecture demands. And the acceleration of projects noted in figure 1 suggests that agency heads will be working with blockchain-based solutions sooner rather than later—after all, commercial enterprises and venture capital firms have invested more than $1.4 billion12 in blockchain since just 2014, rivaling Internet investments in the early ’90s. At the same time, government leaders should bridge the understanding gap within their own agencies, helping them to understand what blockchain is, why it matters, and why it will likely be relevant to them. Whether blockchain is revolutionary or evolutionary, it could be transformative.

But before those transformative effects can be achieved in government, policymakers should learn the basics of this new architecture, since, frankly, even some straightforward explanations can be a little daunting. This primer is designed specifically to offer a government executive—whether a chief technology officer, chief information officer, or nontechnical leader—with key knowledge about blockchain, and a simple framework for understanding how blockchain may, or may not, bring value to an organization. To achieve that goal, we lay out the what, where, how, and—perhaps most importantly—the why of the architecture. As for the when: It’s happening now.

What is blockchain? A digital ledger with a difference

While many government leaders are actively involved with blockchain prototypes, live pilots, and active use case development, more are not yet exploring blockchain and likely have a limited—or nonexistent—understanding of what it comprises and what sorts of problems it aims to solve. They may have read a few articles about bitcoin and crypto-currency, about the long-term promise of blockchain, or a description of a potential individual use case. They may generally understand some of the features and benefits. But many doubtless remain fuzzy on key questions: What is blockchain really all about? Is it software or is it hardware? Is it an enterprise architecture, a process architecture, middleware, or something else?

When thinking about blockchain, think transactions. Organizations have traditionally recorded transactions in ledgers, kept under lock and key. Those ledgers are typically isolated to protect their accuracy and sanctity, and when conducting business, each organization maintains its own separate record, to independently verify information. Well, at its heart, blockchain is a ledger, but one with a difference: built-in trust. Blockchain is a distributed consensus ledger, at once both shared and trusted. Creating distributed trust through a collectively agreed-upon consensus protocol is potentially transformative, freeing the ledger from its isolation constraints, in much the way that the World Wide Web freed information and communications and transformed the way we do so much in business, government, and our personal lives.

Moving toward the Internet of value

Blockchain is a distributed consensus ledger that is shared, thus creating a digital ledger of trusted transactions maintained among and across participants. In place of multiple independent and isolated ledgers, there is a single shared record distributed across every party to the transaction. Early instances of blockchain created trust between online strangers for digital currency transactions, but the parties to a blockchain can be any group of stakeholders or members of a network—often in the form of consortia—who are incented to resolve an existing gap in trust or similar inefficiency in authoritative recordkeeping, value exchange, or executor/trustee for ledger-based contract execution and settlement. Each transaction—those that have taken place and those that are pending—is batched and stored in a fixed structure called a block.

When a block is verified as “true and trustworthy” via the consensus protocol, it is posted practically simultaneously to each consortium member’s copy of the distributed ledger. Each block has a unique hash key calculated based on the precise content of all the transactions in the block. If the smallest piece of data in the block is tampered with, that hash key becomes immediately invalid, making the tampering immediately evident. When the new block is posted to the ledger, it is linked to and from the preceding block using their respective hash keys. This forms a fully traceable and verifiably untampered record in a chain—hence blockchain. From any block, it is possible to access all previous or subsequent blocks linked together in the chain. So: A blockchain database retains the complete and indelible history of all transactions, assets, and instructions executed since the very first one. With this, blockchain allows participating parties—and only those parties—to share accessible, transparent, and trusted information.

What’s in a block?

The header includes metadata, such as a unique block reference number, the time the block was created, and a link back to the previous block.

The content typically includes a validated list of transactions made, their amounts, and the addresses of the parties to those transactions along with digital assets and instruction statements.

Blockchain is a distributed ledger, but if many parties have access, how do you maintain integrity? How do you trust it? Traditionally, trust across a set of independent parties has been established by a governing or intermediary institution or other arrangement to mitigate counterparty risk: a bank, an escrow account, threat of a lawsuit, the days until a check clears. Blockchain fulfills the trust-providing function of existing intermediary institutions by establishing consensus across all participants based on a collectively agreed-upon protocol that is then broadcast across the entire network of participants simultaneously and with minimal effort.

How does this occur? All of the parties on the blockchain have agreed to abide by some protocol by which new transaction blocks are vetted and validated. If a block conforms to that protocol, it’s ajudged true and is posted. The characteristics and specifics of the protocol vary based on numerous factors. For example, is access to the chain “permissionless”—that is, open to anyone so that trust in identity and intent is essentially nonexistent? Or is it a permissioned chain in which there is some pre-vetting of membership, meaning that less work must be done to trust a proposed transaction block? The more work required to assure trust, the more robust and demanding the consensus protocol must be to create consensus across participants without the need for a central authority or third-party intermediary.

Other factors that drive the design of the consensus protocol for a ledger in which a single authority does not govern transaction finality include transaction and participant authentication, integrity, privacy, and non-repudiation, as well as ledger fault-tolerance, consensus and posting performance requirements, and quorum structure for the network members.

The combination of visibility and prior consensus also helps to ensure that blocks cannot be altered after the fact—that transactions, once conducted, are immutable. In the past, parties would maintain separate records of events that would require reconciliation and that, ideally, would reconcile at the end of a predetermined examination period. Now, the transaction is the record.

Blockchain is a distributed consensus ledger, and as in the traditional leatherbound ledger from accounting class, the digital ledger records transactions—that is, transfers of value between two or more parties. The first items of value to be traded over a blockchain, the first assets, were digital currencies such as bitcoin. And more and more organizations are learning that the benefits that blockchain offers to digital currencies are far more broadly applicable, to a wide range of transaction types and asset classes.

Governments are exploring blockchain usage in land registration on every continent but Antarctica. The business events—the registration or transfer of a land deed or title—are the transactions that are recorded on the ledger, providing certainty for all stakeholders. The less complex but equally valued transaction of casting a vote is the focus of ongoing testing or completed pilots in New York, Texas, Denmark, Estonia, Ukraine, and South Korea, and planned in Australia for 2017.

Why are people so excited about blockchain?

In their pursuit of offering attractive environments for investment, many of the governments experimenting with blockchain seem to recognize the inherent advantage of being first movers in an emerging area. However, the gains will likely not just go to those who attract industry. What many public sector actors are realizing is at once profound and simple: Technology need not be revolutionary to be highly impactful. By reducing dependence on existing intermediary institutions and their accompanying layers and costs, blockchain can potentially eliminate significant resource burdens. And by accelerating transactions and simultaneously lowering their costs, blockchain can help to eliminate layers of redundancy, ease regulatory compliance burdens, introduce recordkeeping efficiency, and generally smooth government operations across a number of areas. Harnessing those advantages and applying them toward public institutions’ mission goals provides an opportunity for realizing both agency-specific and whole-of-government benefits that can foster more efficient and effective mission delivery in these challenging times.

Three key characteristics of blockchain may help to explain the depth of public sector interest in the topic and many of the pilots taking place around the world.

The three characteristics to remember

Decentralized

The decentralized nature of blockchain prevents there from being a single point of failure, thus creating an authoritative and unbroken record of events. Since all parties on a ledger share the responsibility and benefits of maintenance, deviations from the rules of the protocol can be easily and quickly recognized. Importantly, the ledger is readily accessible to blockchain members and has internal pointers that allow transaction records or individual assets to be followed reliably across time and ownership.

Immutable

The transactions conducted across this resilient record are append-only; there can be no editing after the fact. The cryptographic protocols that confirm the validity of pending transactions are permanently timestamped. Those that are confirmed create a record of transactions that is immutable. Confirmed transactions cannot be erased and become an immutable part of the record shared across the entire network—a record that serves as a constantly auditable paper trail. This combination, of trusted transactions maintained across an unbroken record, creates a powerful security dividend.

Near real-time

Finally, the transaction settlement time allowed for by stakeholders working together over a single, trusted ledger is minimal compared to traditional systems of value exchange. Blockchain offers the potential to settle and verify transactions in minutes rather than days, making it a near real-time mechanism for the transfer of value. The enhanced speed and elimination of third-party risk mitigators can mean significant real-world savings. Anyone who has purchased a home, for example, can attest to the significant costs associated with third parties ensuring clear title, handling the associated paperwork, and so on. As an added bonus, it is possible to include code that can test for specific conditions to be met and act accordingly. This enables “if X, then Y” actions to be built into the transaction in the form of smart contracts that foster automation and enforcement. The elimination of inefficiencies and market opacity lower the barriers to transaction and create a clarity that allows for automated transaction execution upon satisfaction of agreed-upon conditions between parties to the ledger.

How would blockchain work in government?

In this section, we move beyond the basics to look at how blockchain technology could transform government processes and experiences.

When is blockchain useful?

To illustrate, consider customs in international logistics, which spans a number of government operations and the commercial world and involves multiple transactions. A prominent pain point for many parties involved is the absence of effective traceability, transparency, and predictability of shipments coming in through the nation’s ports. This lack of information can add to costs and sap operational performance. As traditional supply chains become more digitized, though, the shipping process generates and captures many new data points, offering possibilities for improving the process and sharing information. Using a blockchain for transparent, end-to-end manifesting could have transformative impact throughout the supply chain. For customs agencies around the world, it could mean eliminating delays in definitively identifying shippers moving through customs, and improving inspection target compliance via greater data accessibility.

With customs agents, shipping lines, shippers, consignees, brokers, and booking agents all involved, there are any number of actors in international shipping that could defraud the others. Similarly, one or more of these actors could err in their reporting to the others, causing miscounts, slipped deadlines, and impacts throughout a supply chain. When delivering critical, sensitive goods—such as military hardware components, machinery to print money, or airport control-tower electronics—the slightest delay, error, or fraud could have catastrophic ramifications.

Utilizing a distributed, secure ledger, blockchain can improve security, data transparency, recordkeeping, inspection rates, and visibility of inbound international shipments. Between the numerous forms, licenses, and certificates often required for passage or entry, a secure ledger on a blockchain can capture all the necessary information and provide an audit trail to all participants in the blockchain, even with an increasing or variable number of participants working from different legacy systems, and even as business processes change or grow more complex. Figure 5 illustrates how this would work in practice, examining this common use case that governments around the world are exploring.

International shipping and customs

The international shipping and customs example illustrates how understanding blockchain and its potential impact is as much an exercise in thinking through transformative business models as it is about technology solutions. Challenges remain in the areas of data standardization, IT systems integration, and more, and blockchain may not be part of the solution set in all situations. Where a transaction is simple, trust is high, and few are parties involved, blockchain’s benefits may be too insignificant to warrant its use.

Where could blockchain be adopted in government?

Federal, state, and local governments are awash in data. The emergence of electronic databases, as opposed to file folders and filing cabinets, dramatically improved the efficiency and cost of managing all that information. But it took the Internet to unlock the greater value by making the data more accessible and transparent. The creation and exchange of that ocean of information take place via a tsunami of transactions each year: collections, disbursements, transfers, procurements, sales, fees, fines, certifications, approvals, and many more. Wherever those transactions involve, or could involve, a digitization of assets and decentralized exchange, there exists a potential blockchain opportunity.

Government’s responsibility—fiduciary, legal, and to the taxpayer—creates an incentive for ensuring accurate transfers of value between relevant stakeholders—within and between agencies, between the government and third parties, and between government and the citizenry. This is true at the federal, state, and local levels from congressionally allocated funds down to the road grader purchased by a small municipality. In an era of cost pressures, agencies that ensure data integrity while reducing internal cost and friction could emerge as exemplars, improving their reputations to boot. With major investments in accountable property systems already under way as a result of congressional attention, being audit-ready should be a continuous reality, not a series of individually arrived-at milestones or a source of uncertainty.

Across those many transactions and business events, numerous use cases for blockchain present themselves; for many others, there will be other enabling technologies adopted instead. Where the value provided by a blockchain approach exceeds the costs of adoption, in terms of enhanced efficiencies, greater security, and/or reduced latency, an agency should further explore adoption. The great challenge in both government and industry is rapidly identifying those use cases in which the value add is both explicit and provable, in situations where the level of trust is typically higher than between parties exchanging open-source cryptocurrencies. For the purposes of considering where blockchain could likely be adopted within and across government, three business values of blockchain—recordkeeping, value transfer, and smart contracts—provide broad cases for possible adoption. When there is the need to do one or more of these three things, blockchain may emerge as part of the solution.

Blockchain delivers business value in three primary areas—individually and in combination

The map in figure 1 displayed many of the announced areas in which public sector leaders are considering using blockchain—including, in particular, digital currencies and the payments industry. The government must wrestle with these applications simply to continue to keep pace and interact with the commercial sector, as evidenced in the SEC guidance on securities published June 2017.13 Since the general press on blockchain covers these applications comprehensively, we’ll focus more on three areas in which government’s current active interest in blockchain potentially leverages the use case characteristics and business values shown in figures 4 and 6: identity management, land registration, and voting.

Identity management.14 Digital identity is both a use case for blockchain and the enabler that allows each of the other assets discussed for blockchain integration to exist. Whether cryptocurrencies or cars, each asset needs to be rendered digitally to be transacted on a blockchain, and the owner or transactor also needs a digital identity to engage in those transactions. The magnitude of this challenge is recognized by public sector actors around the world—a world in which one-fifth of the world’s population lives without a legal or officially recognized identity.15

Existing pain points:

  • Lack of standards for establishing digital identity
  • Differing attestation processes and identity “entry points” prevent economic engagement and can hinder public sector service provision

Blockchain value proposition:

  • A secure, self-sovereign identity could enable efficient transactions across a wide variety of asset classes
  • Individual and explicit control over which identity elements are shared for which purposes

Land registration.16 Deeds and titling not only provide critical protection for homebuyers in developed nations—they serve as a basis for investment and economic growth across many developing nations. By securing a unique and non-corruptible record on a blockchain and validating changes to the status of that record across owners, a reliable property record can be created, whether for a piece of land that heretofore had no owner or as a link between stovepiped systems.

Existing pain points:

  • License and registry processes are paper-based and fragmented, making transactions costly, inefficient, and vulnerable to tampering
  • In the United States, landowners spent $800 million in 2014 and ’15 on title insurance to cover risks associated with real estate titles17

Blockchain value proposition:

  • A decentralized, standardized system for land registration records could reduce the number of intermediaries required, increase trust in identity of transacting parties, increase process efficiencies, and decrease time and cost to process
  • Recording property rights via blockchain would enable $2–4 billion in annual cost savings in the United States alone for title insurers through a tamper-proof ledger18

Voting.19 This critical and legitimacy-granting public function has been the source of much activity among those working with blockchain. Citizens can cast votes the same way they initiate other secure transactions and validate that their votes were cast—or even verify the election results. Potential solutions are currently working to blend secure digital identity management, anonymous vote-casting, individualized ballot processes (for example, a vote “token”), and ballot casting confirmation verifiable by (and only by) the voter.

Existing pain points:

  • High costs related to ballot printing, electronic voting machines, maintenance, etc.
  • Increasing threats of cyberattacks compromising election results
  • Lack of transparency due to a centralized process of election results audit
  • Voting delays or inefficiencies related to remote/absentee voting

Blockchain value proposition:

  • Potential cost savings through blockchain-enabled voting
  • Potential for enhanced security and audibility of votes
  • Potential for greater participation in elections, including remotely
  • Greater transparency meeting citizens’ needs

Conclusion: Moving forward

Analysts project that blockchain will save $15–20 billion annually in the financial services industry by 2022,20 and others have advanced similar predictions for other industries, including the insurance industry and health care. And based on the prototypes, trials, and other experimentation happening around the world, government agencies are likely to look for opportunities for the technology in the public sector. What is not yet clear, and what forward-thinking public sector leaders around the world are driving toward, is who will take the lead in applying this new, value-laden approach as part of efforts to cut government costs, improve security in an era of cyber uncertainty, and enhance mission delivery.

Again, choosing to leverage blockchain is not just a technology question—it is a decision that can transform business models and processes, and reshape the set of stakeholders and their roles. Like any emerging concept with significant potential benefits, blockchain is not a silver bullet: It is not applicable to every situation, and users and developers are still sorting out challenges both technological and managerial. On the technology side, there are questions of platform scalability, validation methods, data standardization, and systems integration. On the managerial side, the questions include business model transformation, incentive structure, and transaction scale and maturity.

But the most fundamental question for government leaders may be this: Do you want to be positioned to capture the benefits of the new, potentially transformative technology that is blockchain?