Blockchain Technology -Window to National Probity and Wealth
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.
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.
The reason why blockchain is generating so much hype is because of the potential it has to transform the way government machinery 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 oveemphasised. Despite all its current uncertainties and risks, blockchain has the potential to change the backbone of government, and key functions such as the verification of identity, the registry of assets, and the certification of transactions. All these taken care if, will assuredly lead to probity and improved commonwealth distribution and balance.
Technological advances have made it possible to dramatically increase the accountability and transparency of public financing to reduce corruption. For example, if a government decides to construct a road, it can now track how each dollar is being spent, identify all the users of the funds, and ensure that only those authorized to spend money do so on originally intended expenses within the permitted time. Fraud and corruption investigations that now take on average 15 months could be performed at the touch of a button and at a fraction of the cost. More importantly, this type of financial tracking would be a deterrent for bribes in the public sector, which amount to between $1.5 trillion and $2 trillion annually, roughly 2 percent of global GDP. This in turn would increase development impact. All it would take is adopting a cryptocurrency and using blockchain software.
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. In other words, any nation which decides to take fight against corruption serious, should not look any further than embracing blockchain technology in her affairs.
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., with an impressive positive results being recorded.
Unarguably, 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. 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. Likewise, 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. 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 programmed.
Second, 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.
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.
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; a vision bound to set a pace in recent times.
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. He concludes, “blockchain does not replace a property registry; it enhances it.” 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.
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.
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. It is 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.
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 and usher nations into an era of probity and wealth for all their citizens.