Will Blockchain Disrupt Government Corruption?

Will blockchain technology be the next disrupting technology to revolutionize government? Probably not. Can it be a game changer in the global fight against corruption? Possibly so. New technologies are disrupting our lives and transforming government. Governments around the world are going digital, embracing digital innovations to modernize their bureaucracies and recast their relations with citizens. Technology is changing how governments are expected to meet the rising expectations of citizens in terms of quality, speed, and integrity. Digital citizens are expecting more from their governments, demanding better services and greater accountability. Governments struggle to catch up.

Technology has become the greatest ally of transparency, as it allows one to leverage the insights that can be gleaned from the exponential growth of data. Digitally savvy citizens are far less tolerant about corruption and have more means to uncover it. There are heightened and even inflated expectations about the potential of blockchain to improve the delivery of public services and strengthen integrity in government. Pilots and proofs of concept are mushrooming, driven by a myriad of technology-driven start-ups in a wide variety of industries. This enthusiasm is generating intense debate, and an “expectations bubble” is building up rapidly.

Given the hype, it is important to assess both the promises and the pitfalls of blockchain, thinking through what it can and cannot do, based on hard evidence. Initiatives such as blockchan.ge by New York University’s Governance Lab are starting to look closer at whether and how blockchain technologies can be used for social change. Blockchain has emerged first in the financial industry, building on cryptocurrencies such as Bitcoin. The requirements and implications of blockchain in the public sector, however, are yet to be fully understood. Key issues include being clearer about the problems it is expected to address, its advantages compared to alternative digital solutions, its fitness-for-purpose in different institutional contexts, and, ultimately, the value it could add to existing institutions.

Unblocking a Promising Potential

The reason why blockchain is generating so much hype is because of the potential it holds to transform the way government works and to overcome the need for legacy institutions whose primary function is to create trust between parties. While many of the early blockchain solutions are still being tested, its disruptive potential cannot be overstated. For all its current uncertainties and risks, blockchain has the potential to alter the backbone of government, and key functions such as the verification of identity, the registry of assets, and the certification of transactions.

At its core, the problem blockchain seeks to address is to ensure the security and integrity of information at a time when there is increasing concerns about data privacy and declining trust in government. It is a technology that allows one to record assets, transfer value, and track transactions in a decentralized manner, ensuring the transparency, integrity, and traceability of data without a central authority to authenticate the information. It is essentially a system to encrypt information and a shared database. It is based on a consensus mechanism amongst trusted parties to certify the information and validate transactions.  

Blockchain has two distinctive features that make it a potent tool against corruption. First, it provides an unprecedented level of security of the information and the integrity of records it manages, guaranteeing their authenticity. It eliminates opportunities for falsification and the risks associated with having a single point of failure in the management of data. It also helps overcome the data silos in traditional bureaucracies in which public entities are reluctant to share information among themselves.

Second, blockchain provides a transparent and decentralised system to record a sequence of transactions, or “blocks.” As Zach Church of MIT explains, “transactions are recorded chronologically, forming an immutable chain, and can be more or less private or anonymous depending on how the technology is implemented.” Blockchain creates an immutable trail of transactions, allowing for the full traceability of every transaction. For New America, a think tank, “a public blockchain provides regulators and law enforcement with a roadmap to identify illicit activity or malfeasance by leaving enough digital clues to identify bad actors.”

Blockchain is particularly suited to fight corruption in the registry of assets and the tracking of transactions such as procurement processes. By leveraging a shared and distributed database of ledgers, it eliminates the need for intermediaries, cutting red-tape and reducing discretionality. Governments around the world have started pilot testing a variety of blockchain-based applications to strengthen public integrity.

Testing Integrity Solutions

There are three important value propositions, or applications, for blockchain in combatting government corruption: verifying identity, registering assets, and tracking transactions. “Blockchain’s decentralized nature and the immutability of its records make it a powerful tool in the fight against the worst crimes, such as illicit trades, human trafficking and money laundering,” says Mariana Dahan, founder of the World Identity Network, which launched a pilot that uses blockchain to help prevent child trafficking in Moldova.

Verifying Identity | A first group of applications are related to the verification of identity and the fight against identity theft. A universal and secure legal identity provides the foundation to fight money laundering by allowing one to authenticate the identity of individuals and corporations. The absence of a simple way to prove identity feeds bribery, contributes to fraud, and creates barriers to financial inclusion. According to Michael Mainelli, “blockchain will help prove our identities in the digital world.”

Jamaica, for example, is establishing a national identity system which will also be instrumental in countering money laundering by improving identity verification and the application of “know your customer” regulations. India is providing a single digital identity to its citizens, using biometric technology, as part of the Aadhaar. And Estonia is operating a national digital identity scheme, where personal information is stored on a distributed ledger that individuals control. Interestingly, each of these three systems encrypt identity information but not (yet) through blockchain technology.

Registering Assets | A second set of promising applications concerns the registration of assets and the chain of custody, in particular property registry and land titling. Building immutable title systems on blockchain could help stamp out fraud, but also encourage people to record unregistered land and banks to lend against land. Sweden is testing a blockchain-powered land registry to make the details of real estate transactions visible to all interested parties. Georgia has started registering land titles using blockchain, and Ukraine is looking into blockchain to reform its land registry process. Ghana, where an estimated 78 percent of land is unregistered, is also considering using blockchain. Honduras, however, sought, but failed to create a decentralized database of land titles using blockchain.

Blockchain is also being tested to create tamper-proof company registries, making it a potentially powerful tool to ascertain a company’s beneficial owners. These blockchain-based company registries can make “know-your-customer” regulations easier to comply with and provide reliable information on the ultimate beneficial ownership of companies. They also allow for more effective oversight by financial regulators, law enforcement, and tax administrations. In the United States, Delaware launched an initiative in 2016 that will enable corporations to utilize blockchain for the registration and transfer of ownership of stock.

Some countries are moving forward aggressively to use blockchain as a fundamental tool in public administration. Dubai has created an ambitious Dubai Blockchain Strategy, led by the Smart Dubai Office and the Dubai Future Foundation. This strategy seeks gains in government efficiency, cutting paper costs, and eliminating red-tape by putting all city transactions on blockchain. “We want to make Dubai the first blockchain-powered government in the world by 2020,” says Aisha Bin Bishr, director general of Smart Dubai.

An important lesson from these early experiments is that initial conditions matter and that the strength of legacy institutions is a critical condition for making blockchain solutions work. In other words, blockchain will not replace, but strengthen existing institutions. New America’s Michael Graglia points out that the main reason why Georgia is making progress is because blockchain is added onto an existing land registry system that is already relatively efficient, bringing additional security and reliability. In other words, “blockchain does not replace a property registry; it enhances it,” says Graglia. This finding suggests that the value of introducing blockchain in a weak land registry system is questionable and therefore resources would be better spent fixing the legacy institutions.

Early experiments also suggest that blockchain-based solutions will not work in all institutional contexts and that there are a number of prerequisites that ought to be met. These include, according to Graglia, that the existing data must be accurate, registries must be digitalized, and the digital identity system should be reliable. There also needs to exist sufficient connectivity, a tech-aware population, and existing tech support services. This is not the typical situation in many developing countries, where they often should focus on “getting the basics right first.” This is why, to paraphrase Allen Schick, “most developing countries should not try New Zealand’s reforms” straight away, leap-frogging critical stages of institutional development.

Tracking Transactions | A third set of blockchain experiments to combat government corruption focus on automating and tracking high-risk transactions, such as public contracts, cash transfers, and aid funds. There has been less experimentation in this area, however. Each year, according to the OECD, an estimated $9.5 trillion dollars is spent on public sector contracts and large public investment projects. It is estimated that corruption adds up to 10 percent of the total cost of doing business globally and up to 25 percent of the costs of procurement contracts in developing countries. The World Bank estimates businesses and individuals pay $1.5 trillion in bribes every year, which corresponds to 2 percent of global GDP.

While public contracting processes have become increasingly transparent and digitalized through open e-procurement platforms, blockchain-based solutions have yet to be fully tested. Technology-driven solutions now provide end-to-end transparency in public contracting, allowing one to detect red flags, bid rigging, phantom vendors, and price fixing using advanced analytics. Blockchain could add critical value to public contracting up to the delivery of the goods and services, by locking in critical information at every step of the procurement chain that can be monitored, tracked, and audited. In addition, “smart contracts,” which are still at the experimental stage, would allow the automatic exchange of real assets to be programmed into an inalterable blockchain, that would execute itself autonomously based on programmed conditions. This will reduce the opportunities for fiddling with the process and increase the speed of transactions.

Government payment systems and cash transfers are particularly vulnerable to corruption. They have multiple points of human discretion that make them vulnerable to fraud and falsification and create opportunities for bribery. Limiting the physical interaction between citizens and officials will reduce opportunities for rent-seeking. Moreover, too many governments distribute benefits without appropriate controls or verification mechanisms, and often recipients falsify claims. An example are conditional cash transfers and aid flows. In Jordan, the UN World Food Program recently conducted a pilot project using blockchain to manage cash-based transfers to Syrian refugees so as to increase transparency, eliminate leakages, and reduce transfer costs.

Hope Beyond the Hype

Potentially, blockchain technology can make a critical contribution to fighting corruption and anchoring integrity in the public sector; but we must be mindful of its requirements and limitations. Before deploying blockchain, it is important that governments are clear about what problems they want to address, the feasibility of blockchain-based solutions, and the value these can add.

Regulatory uncertainty is an important consideration when deciding whether to use blockchain. The governance of blockchains—in terms of rule design and responsibility over eventual failures—remain to be worked out. As a decentralised system, blockchain is supposed to be self-governing. But Michael Pisa and Matt Juden warn that governments opting for a public, permission-less blockchain would have to accept “that it will have virtually no control over how that system is governed.”

There are two main types of blockchains, those that are completely open (or permission-less) and those that are private (or permissioned) with a central entity acting as a gatekeeper to certify that the information that is uploaded onto a blockchain is accurate. Because of this, Don Tapscott expects that in the public sector blockchain platforms will mostly be permissioned and private, overseen by a set of trusted validators and distributed in a controlled fashion, where a single government agency controls the master ledger and data entry. The governing system of any blockchain in the public sector will require rules, regulations, and oversight.

Lastly, the reliability of records, especially for first entries, is critical for the successful implementation of blockchain in government. There will always be the need for a gatekeeper to ensure the veracity of the information entered into individual blockchains. After all, as Pisa and Juden point out, like any other database, “blockchain is a ‘garbage-in-garbage-out’ system. This means that the reliability of records stored on it depends entirely on how they are originated.” If these conditions are not met, it is more important to fix them first before considering a blockchain. This is why governments deploying blockchain to protect public data and registrars should first address the weaknesses of underlying institutions.

Blockchain itself does not preclude the need to strengthen underlying systems. In fact, the case of land registries shows that blockchain works best in places where the existing systems for recording land titles is already strong, such as in Sweden and Georgia. According to the 2018 Doing Business index of the World Bank, after several decades of arduous reforms, Georgia has the fourth best system for registering property. Hence, and quite paradoxically, countries which have the most to gain from blockchain-based solutions to fix broken legacy systems will also have the hardest time using it effectively.

Last, there is the challenge of the costs and scalability of blockchain. Applications of blockchain-based solutions in the public sector have remained limited in scope, and their scalability remains an open question, considering their governance requirements and the amount of energy they consume. The question then becomes whether the potential benefits outweigh the costs, which will be particularly high for governments that have not yet digitalised their records.

In a world scarred by recurrent corruption scandals, the potential of blockchain is enormous and the promise it holds to eliminate fraud is simply too great to ignore. Blockchain can make a critical contribution by strengthening public integrity and restoring trust in government. For all its uncertainties and risks, blockchain could add a layer of security to records and transactions that are particularly exposed to corruption. The time to experiment is now.

Blockchain technology is not the panacea, however. It is still in its early days and governance models are still under development. It will take several years to go from pilot programs to broader, government-wide applications. It is, nevertheless, important to manage inflated expectations and be clear about what value it can add. Blockchain is no magic wand. It will not replace the need for stronger institutions and, in fact, it can be most effective when strengthening them.  

Read more stories by Carlos Santiso.