Understanding Blockchain in Government

How governments can use blockchain and distributed ledger technology to streamline civil services while enhancing AML and CFT capabilities

In nations around the world, the ability of civil servants to do their job is falling behind the problems that must now be faced.

A technologically accelerating and globalized world means government agencies must tackle increasingly complex issues from economic volatility and pandemics to mass migration, money laundering, and terrorism.

In developing nations, an emerging middle-class demand for government services and high population growth have placed acute pressures on civil service.

Outdated and disparate governance systems, widespread corruption and budgetary constraints have led governments to be unable to deliver essential services like healthcare and education to large swathes of the population.

Inadequate record keeping systems have caused citizenry to lack official identification and property rights and resulted in vast informal economies and poverty.

“For he that gets hurt
Will be he who has stalled
There’s a battle outside and it is ragin’
It’ll soon shake your windows and rattle your walls
For the times they are a-changin’” – Bob Dylan 

In developed nations, demographic stresses and aging populations are intensifying pressures on government budgets, forcing civil services to do more with less.

Siloed record keeping systems that lack basic levels of interoperability and transparency have left civil services with a lack of actionable data available for economic, behavioral and infrastructure purposes.

With little meaningful data, governments remain unable to see the bigger picture and make informed decisions that can improve the lives of their citizens.

Antiquated administrative systems at the national and regional levels are also eating away at the ability of governments to react effectively to crisis’ and fight against money laundering, corruption, organized crime, terrorist financing, and other destabilizing forces.

To overcome the complex and diverse impediments to social and economic progress will necessitate governments rearm themselves with new capabilities.

Nations that redesign their governance systems based on blockchain and distributed ledger technologies will be rewarded with a resilient and antifragile digital infrastructure that enables the implementation of more potent government policies which meet the evolving demands of their citizens and deliver stability in a rapidly changing world.

Many problems, one root cause

In developed nations, an aging population presents a real challenge for governments that must find ways to provide an expanded level of services at lower costs.

According to a 2015 report by the United Nations, [1]

  • Between 2015 & 2030, those aged over 60 years will grow by 56%
  • In 2015, one in eight people worldwide aged 60 or over. By 2030, seniors are projected to account for one in six people globally.
  • The aging process is most advanced in Europe & Northern America, where more than one in five people are aged 60 or over as of 2015.
  • By 2030, the elderly are expected to account for more than 25% of the populations in Europe and Northern America, 20% in Oceania, 17% in Asia and Latin America and the Caribbean, and 6% in Africa.

In the developing world, challenges center on population increases and economic factors rather than aging. High population growth coupled with a trickle down of innovations is driving a growing middle-class.

Over the next two decades, the world’s middle class will expand by another three billion, with growth coming almost exclusively from emerging nations.[2]

Delivering efficient, sustainable and affordable government services to the world’s aging population and emerging middle class will become increasingly difficult without profound and substantive changes to current systems.

Although the challenges faced by governments are complex and widespread, the vast majority of problems trace back to a single, yet corrosive, root cause.

Fragmented, siloed record keeping systems that lack interoperability have resulted in mismanagement, corruption, waste and a severe lack of advanced data available for economic, behavioral and infrastructure analysis.

Governments today are running blind, unable to meaningfully assess the effectiveness of their services or deal with the changing demands of their citizens.

“Up until now, data in government has been held in isolated line of business applications and used for internal reports. This has created data silos across government leaving valuable data left unused and wasting away in proprietary applications, personal network drives, spreadsheets, databases and emails.”[3]

A supercharged civil service ready to tackle the challenges of today and tomorrow

Blockchain technology can create the resilient digital infrastructure necessary to enable the mass transformation of government administration to occur.

The technology’s decentralized, open & cryptographic nature makes it easier for governments to share data between government institutions and use sovereign data securely.

Real-time analysis of pseudonymous data in transport, security, city planning, health, crime and future proofing give civil service the ability to utilize resources in areas that will have a profound impact on society.

Blockchain technology can also transform civil services by enabling the direct and automatic transfer of payments and other assets between government agencies and citizens for services rendered.[4]

By eliminating excessive intermediary costs and redundancies, government services become more efficient.

Entire government departments could potentially be replaced by blockchain based registries saving billions of dollars of taxpayer funds.

The government land titles office, for example, has the potential to become far more efficient, as new blockchain powered registries immutably record property transactions, ownership, and track provenance.

Overall, by improving the capacity to analyze sovereign data and conduct instant digital asset transfers, blockchain technology can deliver game-changing improvements for governments and their citizenry.

As governing becomes more challenging and public servants are placed under greater public scrutiny, the transformation of civil services must be a top priority for all nations.

With enhanced capabilities, governments raise their nation’s attractiveness and amplify their competitiveness in the new digital economy where human capital and industry are vital to success.

Delivering more scalable public services and unlocking unprecedented wealth

The inability of governments to administer, manage and store official identity records in many developing nations has led to approximately 2.4 billion people today lacking an official identity.[5]

The absence of government-issued identities has, in turn, led to mass poverty, stagnant wealth creation and vast unregulated informal economies.[6]

“The ability to prove your identity is critical to ensure access to educational opportunities, financial services, health and social welfare benefits, economic development, and the right to vote.”[7]

In developed nations, the problems faced by citizens are far less acute. With population-wide documentation and recording of identity from birth, the administering of official identities is not an issue.

Rather it is the fragmented, siloed and disparate identity systems utilized by governments that have led to inefficient public services and unsecured data.

“Local, regional, and national agencies are charged with maintaining records that include, for instance, birth and death dates or information about marital status, business licensing, property transfers, or criminal activity. Managing and using these data can be complicated, even for advanced governments.”

“Some records exist only in paper form, and if changes need to be made in official registries, citizens often must appear in person to do so. Individual agencies tend to build their own silos of data and information-management protocols, which preclude other parts of the government from using them. And, of course, these data must be protected against unauthorized access or manipulation, with no room for error.”[8]

Identity verification has become the central challenge in recent years as governments attempt to digitize public services.

Limitations in digital identity verification have made transacting and interfacing with government services frustrating for citizens who are demanding seamless online experiences.[9]

For example.

Individuals in many first world countries can apply for a new passport online. However, identity verification difficulties result in citizens still being required to print off an application form and return it to the passport office with supporting documents.

The same applies when trying to change a residential address on a driving license.

Data breaches and identity theft is an additional area of concern for governments as the centralized record keeping servers which have been utilized for decades struggle to defend against sophisticated cyber attacks.

“lack of an interoperable and secure identity infrastructure is creating serious friction and in some cases harmful economic and legal distortions that are inhibiting the evolution toward a networked world.”[10]

Yes.

The challenges faced by developed countries are substantially different to those encountered in developing nations.

But the solution to these problems is the same.[11]

Old world record keeping systems used by governments need replacing.

Utilizing distributed ledger technologies like a blockchain can create a cost-effective, decentralized, transparent and incorruptible digital identity ledger that can solve most of the problems faced nations today.[12]

The technology’s permanent and incorruptible nature can eliminate government corruption and mismanagement which have long afflicted much of the developing world.

The rapid verification of licenses, permits, transactions, and identities can be achieved with far greater accuracy, enabling the complete digitization of services and unprecedented efficiencies.

With a blockchain based identity registry, governments have the opportunity to issue e-identities to the population, making the frictionless digital use of a variety of national and municipal services a reality.[13]

Digital ID’s that act as a digital watermark to every transaction will help government agencies check identities in real-time, reducing the rate of fraud and other criminal activities and decreasing the costs associated with the provision of many public services.

Ultimately, the technology’s ability to simplify the management of trusted information and make it easier for government to access and use public sector data while ensuring high levels of security hold profound benefits for civil services. [14]

Perhaps most importantly, with increased levels of data integrity, the relationship between citizens and their governments regarding transparency and trust could be redefined.

Smart contracts introduce game-changing efficiencies in compliance and enforcement

Despite unprecedented regulations and enforcement efforts over the past decade, governments are struggling in their fight against a growing and evolving tide of illicit activities.

Money laundering and terrorist financing are having a corrosive and corrupting impact on society as a whole and now pose a significant threat to the economic stability and security of almost every country in the world. [15]

According to the United Nations, Office on Drugs and Crime (UNODC), Global money laundering transactions estimate at 2 to 5% of global GDP or roughly $1 to 2 trillion annually. [16] Less than 1% of the global proceeds from these criminal activities are seized and frozen. [17]

The reasons for government’s inability to curb money laundering and terrorist financing is two-fold.

New technologies like online casinos and digital currencies are providing alternative pathways for criminals to launder their illegal profits and giving terrorists cover to fund their global activities. [18]

At the same time, authorities don’t have the tools, time or resources needed to identify, investigate and prove complex syndicate activities that can often span several geographic locations and parties.

A failed strategy

Governments of past and present have mistakenly believed that increasing regulations and imposing higher penalties are the keys to winning the battle against crimes that take place in the corridors of the global economy.

The harsh reality is that the regulatory-driven approach used by governments has failed to work in the past and will continue to fail in the future.

This strategy is not only ineffective in fighting crimes like money laundering and terrorist financing, but it is becoming a significant drain on government resources and economic growth.

As the world becomes more globalized and technologically advanced, authorities must ultimately equip themselves with enhanced capabilities or face a worsening state of criminality and instability.

While regulations and harsher penalties do have a role to play, they will only have a limited impact when used on their own.

Effective regulatory compliance and enforcement ultimately require greater transparency, collaboration, and information-sharing which can only be achieved with a new set of supercharged capabilities.

Bringing a tank to a knife fight

Economic volatility, demographic stresses, pandemics, digitization, money laundering and terrorism threaten the stability and future prosperity of all nations.

It’s time for governments to recognize the threats at large and begin investing in the tools necessary to fight the challenges ahead. Small fixes and band-aid solutions will be ineffective and lead to an even more turbulent future.

Blockchain enabled smart contracts can help governments and industry deliver more efficient services, but it can also supercharge government and industry in their fight against money laundering and terrorist financing.

By providing governments and industry with a pseudonymously transparent, unchangeable and tamper-proof platform to store and record all transactions, blockchain technology creates an audit trail that regulators and industry alike can view and act upon in real time. [19]

With immediate access to a system-wide view of transactions, regulators will find it easier to identify suspicious patterns and transactional behaviors.

But that’s not all.

Regulators and industry have the opportunity to become far more potent by capitalizing on the technology’s ability to deliver greater accuracy and timeliness of monitoring activities.

Rules set out by regulators could be hard-coded into a smart contract ensuring automatic compliance with specific AML & CFT regulations and triggering alerts for any predefined suspicious activity. [20]

Compliance officers are also relieved of having to aggregate customer data and painstakingly report their activities on a regular basis. [21]

With hyper-efficiency brought about by smart contract automation in concert with greater accuracy and security, governments gain the agility and robustness needed to overcome an array of serious threats.

The success of nations in the new digital economy depends on a streamlined civil service with supercharged capabilities

 

Despite significant leaps in technology, the fundamental transformation of civil services has not yet happened.

Government management and administrative systems at the national and regional levels remain relatively untouched by technology and stand ill-equipped to serve the current and future needs of their target populations.

They are eating away at the ability of governments to react to crisis’, fight against money laundering and terrorist financing and deliver cost-effective programs to their citizens.

And so, we have a situation where the very systems designed to assist civil servants to do their job have now become the biggest impediment to their success.

But there is little excuse for inaction. We know the challenges are complicated, however, there is now a promising solution that can tackle these complexities and transform civil services forever.

Governments that embrace blockchain and distributed ledger technologies to reform civil services will get rewarded with a robust and agile digital infrastructure that enables the cultivation of productive ecosystems, better public services, lower costs, and improves sustainable outcomes for all.

Ultimately, a nation’s successful transition into the digital economy and its future competitiveness will depend on a streamlined civil service with renewed and supercharged capabilities.


Find out how blockchain technology can transform global supply chains, insurance, compliance, and national healthcare systems


Anthony is the head of content and research at Intrepid Ventures. He has spent the past several years researching and analyzing technologies and working with a diverse mix of blockchain companies to help them gain insight and develop authoritative content.

Realizing the revolutionary nature of blockchain technology and the existence of a significant knowledge gap among entrepreneurs, industry, and government, Anthony now concentrates his time on creating educational content, researching potential use cases and analyzing the impact of the technology on global industries.

 


Also published on Medium.