Advantages and challenges in the usage of blockchain in digital services provided by governments: Overview with a close look at Brazil.
In a recent trend survey made by DMEXCO and presented at an event in Cologne, Germany, it was determined that although the world is currently suffering economically, the digital economy may greatly benefit after the COVID-19 pandemic. According to the survey, the COVID-19 crisis will accelerate the rhythm of digital transformation.
One of the benefits of an advancing digital transformation is that it can lead to new solutions, unlocking inconceivable possibilities.
This is especially true in digital services provided by governments, as the potential for innovation within the sector is vast.
Through the decree, the Brazilian government set guidelines for the transformation of digital services, the unification of digital channels, and the development of interoperability between systems.
Primary goals for Brazil’s digital government strategy:
- Offering intuitive and straightforward public digital services, consolidated in a single platform.
- Promoting the integration and interoperability of governmental databases.
- Implementing the General Data law.
- Making digital citizen identification available.
- Optimizing information technology infrastructures.
The set goals fit perfectly in a blockchain structures context. Therefore, in the Annex to the Decree 10332 from April 28, the Brazilian government pointed to the use of blockchain as one of its goals for achieving the expansion of digital government services in Brazil.
“Initiative 8.3. Make, at least, nine datasets available in federal public administration via blockchain solution, until 2022.
Initiative 8.4. Implement resources for the creation of an interoperable Federal Government blockchain network, with the use of accurate identification and safe algorithms.”
In light of this development, this article will touch upon the exclusive functionalities of blockchain structures not found in other technologies that may benefit digital services provided by the government. Also, it will analyze why the use of blockchain adds value to public administration, the key benefits for citizens in the government’s use of blockchain, and the risks associated with the use of blockchain in the public sector.
Moreover, this work will evaluate the areas of government that can benefit the most from the use of blockchain considering the current state of the technology, the controls that public managers should adopt when selecting a consensus algorithm, and whether the governments must opt to the use of permissioned, not-permissioned or hybrid blockchains.
In the end, we will analyze the controls best suited for public managers when utilizing oracle services in blockchain, the regulatory aspects that must be considered by public managers, and the main barriers that governments face when choosing decentralized and distributed solutions.
Exclusive advantages of blockchain/DLT structures not present in other technologies
Blockchain structures solve the “double spending” issue, which refers to the fact that one can copy digital information using the internet. If, for example, a person transfers a digital asset through a representative document of car ownership to someone else, there is the risk of the sender delivering this document via the internet while still maintaining the original document of ownership.
Traditionally, this double-spending issue is lessened by third parties or trusted administrators, such as organizations, corporations and financial institutions, which act as a centralized authority for validating trust, controlling every transaction.
As blockchain architecture has emerged, the responsibility of validating the real transfer of an asset to an entire network no longer falls on traditional trust validators or a centralized authority. So, the burden of confirming the actual shipment of an asset to the whole network has moved to carefully designed mathematical algorithms, also called consensus protocols.
This process virtually eliminates, or at least considerably reduces, the need for centralized trust validators and other intermediaries.
On blockchains, a value transfer is verified by the network via a consensus protocol that allows users of a peer-to-peer network to validate transactions and update the ledger in the entire network. The consensus protocol is tasked with establishing trust by ensuring that the value transfers made in the blockchain network are authentic and precise, unlike the traditionally established system where an intermediary or administrator in a centralized network is necessary.
It’s essential to note that there is no clear consensus in the definition of distributed ledger technology and blockchain technology, as I clarified in Chapter 1, Part 2 of Blockchain: Everything You Need to Know.
How does blockchain add value to the public sector?
Blockchain can add value to the public administration sector on account of its immutable, transparent, trackable, trustworthy and operational resilience properties.
At the most basic level, its benefits include improved public services in ledger and information exchange processes.
Blockchain structures are an essential tool for reducing bureaucracy and corruption, protecting information, stopping fraudulent activities, promoting higher automation and trust from both civilians and companies in the governmental processes, as well as reducing costs for verification and network upkeep.
Verification costs comprise all the necessary fees to verify the attributes of a specific transaction without recurring additional expenses or performing an additional and expensive audit.
Network costs comprise all the workforce costs and capital necessary to guarantee that transactions happen in a traditional infrastructure.
Only public blockchains reduce network costs. Because of that, blockchain structures can reduce a large part of administrative tasks that the public administration performs in society today. With a blockchain protocol in place, a public administration may not have to provide storage and information exchange to facilitate its community’s economic activities. Instead, the administration can maintain the role of supervision concerning the transactions that happen in this infrastructure.
Blockchains provide more efficient public services by improving business processes for government actors at any level and fostering the creation of fast, cheap and — most importantly — safe public ledgers.
Finally, it’s worth observing that blockchains are a general-purpose technology. That is, a nuclear technology whose amplitude of benefits cannot be measured in the current stage of its evolution.
Breakthrough technology such as the internet, blockchain, artificial intelligence, electric energy and others create benefits that perpetuate over time, impacting the global economy, industry, governments, corporations and the relationship between all of these and citizens. Electric energy, for example, is still finding new applications to this day.
Key benefits for citizens from the government’s use of blockchain
There are no benefits for citizens to be had when service providers and consumers have strongly differing levels of information on the same operation or transaction. This process wastes resources and discourages future contact.
Think of a situation where, when acquiring a product or service, you paid a much higher price than is customary in the market, or you didn’t have much information on the hired organization, which resulted in a different service than what you had sought.
It is unlikely that you’ll return to buy from the same store or hire the same professional, because the higher the level of information asymmetry between organizations/companies and consumers, the less efficient the market is.
For a given market to thrive, service providers and users need to be able to trust the available information to decide if, how and when to make a transaction. It is here where citizens may benefit from the use of blockchain structures by the government.
Blockchains reduce the information asymmetry between service providers and consumers, facilitating beneficial deals.
As blockchain infrastructures reduce transaction costs, they can make markets safer and more efficient while expanding the type of interactions and deals in which consumers are willing to participate.
Blockchain can improve the efficiency of markets by reducing verification costs and, in the case of public blockchains, network costs, as mentioned above.
The main risks related to the use of blockchain structures in the public sector
When it comes to risks, we can list the most important ones:
1) Immature standards
Because blockchain infrastructure is still maturing, the current lack of international standards poses risks for juridical, organizational and technological interoperability.
There must be guidelines regarding which technological standards to use for specific functions, and a certification body for blockchain infrastructures. There are international efforts in progress in these areas, including the Technical Committee ISO 307 on blockchain and distributed ledger technologies as well as work on the standardization sector of ITU ITU-T.
2) Protection of personal and sensitive data
The storage of consumers’ and users’ personal and sensitive data must occur outside of the blockchain network to harmonize the protection of its immutable and transparent data.
3) Dependency on complex algorithms
Are smart contracts and complex algorithms the new intermediary? If so, doesn’t the architecture for online platforms ultimately depend on specific choices made by their designers? If so, how much can we predict or even orchestrate the effects of these complex algorithms, and is doing so necessary to monitor the ethics and conduct of software code developers? Each of these questions — all still without an answer — is a challenge to overcome.
4) The oracles problem
Before smart contracts can do something beneficial, they need a trusted way of connecting to events in the real world. This has proven difficult so far. That is called “the oracles problem.”
Oracles are real-time data feeds that provide meteorological data, exchange rates, flight information and sporting stats to smart contracts.
The idea is that by oracles and smart contracts working together, both systems can allow for a blockchain-based service to interact with events in the real world with a broader level of confidence than is possible using today’s services. For instance, if your flight has been canceled but you bought flight insurance, a smart contract can be paid instantaneously after receiving an update from a trusted source.
The problem is that the oracles introduced so far conflict with the purpose of using a blockchain. Some oracles are too centralized — that is, they represent single points of failure that make them targets of cyber attacks.
This means that smart contracts cannot have trusted access to real-world data. This point will be returned to a little later, when we touch upon the controls that public managers need to adopt when utilizing oracle services in blockchain.
5) Reputation systems
In a decentralized network, it would be necessary to have sound reputation systems to decentralize decisions. This still is being developed.
Areas of government that can benefit the most from the use of blockchain
The management of government funds is an area where blockchain solutions can help minimize fraud and increase both transparency and accountability of involved entities.
Blockchain is perfect for trusted and traceable information auditing as well as simplifying the creation of platforms to be traced, when and where data was inserted, its use, who accessed it and so on.
This record-keeping quality of the tech dramatically improves transparency in terms of processing data and processes — essential in a regulatory environment — and hampers the improper use or falsification of information.
Considering the resources currently being spent on the verification and reconciliation of data collected by public administrations, the substantial savings in cost and time that can be achieved through blockchain is very compelling.
For example, we there is the United Kingdom’s Office of Science, which proposed many use cases of blockchain:
- Protecting critical infrastructures.
- Establishing new systems of payment for working benefits and pensions.
- Reinforcing international aid operations.
- Authentication of documents and smart contracts.
- Handling the European value-added tax.
Of those listed, blockchain’s use case for the authentication of documents such as certificates, licenses, intellectual ownership and patents, among others, is the most interesting in terms of short-term realization, considering the current stage of the technology.
In many countries, where corruption is a threat to the most common means of making profit — especially in the government — inviolable systems like blockchain architecture can bring significant benefits. For example, the government of Honduras recently began to collaborate with blockchain company Factom to use this technology for transmission of ownership titles in an effort to hinder corruption.
This example, among others, shows that blockchain technology — even though it has not yet reached its full maturity — is becoming increasingly comfortable to use. The open and global nature of public blockchains allows the tech’s structure to be available and accessible to every person, company and government, and the only requirement is a mobile network connection or internet access.
Some agencies and government bodies have realized the usefulness of blockchain for various types of transactions in which the government is involved, including how the government makes transactions and interacts with citizens and companies, particularly in complex environments with many stakeholders and high-volume transactions.
How, where and how much value an adopted blockchain generates will depend on choices made by the government.
Digital transformation demands choices and strategic decisions that must be made in a programmed and planned fashion. Countries such as Singapore, China, Estonia, South Korea and others are already leading the way in this regard.
I see that Brazil needs to seize value with digital transformation, and blockchain can add that value. This breakthrough tech has the capacity to generate more efficient, transparent results and considerably reduce both fraud and costs. However, for that, the government must make a strategic choice as regards public policy, complete with medium- and long-term planning.
Controls that public managers should adopt when selecting a consensus algorithm
The consensus protocol is one of the leading technologies that make up blockchain architecture, along with cryptography and a peer-to-peer network.
It is not recommended to choose a consensus protocol without considering the scope of the project. That is, not considering the intent behind using blockchain as a solution for a given problem or the set of all the other technologies that make up a blockchain.
When it comes to selecting a consensus protocol, a public manager must seek one that provides the following characteristics: agreement, collaboration, inclusion, participation, cooperation and equality.
The controls that a public manager must adopt when selecting the most recommended consensus algorithm to a given project will depend case by case. Analyses will need to be run to answer questions like, “Does our data storage require extra measures to protect personal information?” and, “Are there expectations in the project about speed?” It is advisable to consult with a blockchain strategy expert to define the selection of blockchain architecture better suited for the project. We will come back to this topic later with an analysis of which types of blockchains are best adopted by governments — permissioned, public or hybrid.
Which types of blockchains should governments adopt — permissioned or public? What about hybrid blockchains?
Many governments will opt for hybrid blockchains, which benefit from combining both public and private (permissioned) blockchains.
Authoritarian governments such as China’s will prefer to use private blockchains.
Those looking to apply blockchain for innovation and significantly improve the lives of citizens will generally be democratic governments, countries where the use of blockchain is already advanced, and countries that have already adopted public blockchains, permissioned blockchains and hybrid blockchains.
In other words, the choice of a specific platform or infrastructure has been made by countries based on use case and initiative requirements.
Example of a public blockchain used by a government: The Republic of Georgia’s National Agency of Public Registry entered a partnership with Bitfury to provide its citizens with real estate records through a solution based on the Bitcoin protocol (a public blockchain).
Example of a private blockchain used by a government: The Swedish Mapping Cadastral and Land Registration Authority, Landshypotek Bank, SBAB, Telia, Chromaway and Kairos Future initiated a project in 2016 to redefine real estate transactions and mortgage actions. The goal is to approach problematic points in the current transaction system. The blockchain system is based on a private configuration.
Example of a hybrid blockchain used by a government: The Ministry of Education and Employment of Malta decided to use the open standard Blockcerts for the management of academic credentials. Blockcerts consists of libraries of public code, tools and mobile applications to create, store, share and verify personal, academic certificates. The private blockchain network is composed exclusively of certified institutions that are part of the ledger of academic documents using the Blockcerts solution. The standard also utilizes a public blockchain, as it anchors hashes from certificates in the Bitcoin blockchain.
It is essential to develop resilience in the networks so that the platforms and blockchain solutions can receive data, information and critical services. However, it is also crucial to count on professionals to design the blockchain project so it better meets objectives before making a choice as well as evaluating the project’s level of risk.
Finally, the question is not whether the potential of the technology is limited by the choice for a permissioned blockchain or not, because knowing which blockchain solution to adopt is necessary to answer questions like: “How restricted should reading access to transmitted network data be?” and, “Will there be automated processes between different entities?” and, “Is it necessary to program payment functionality?” and “Will the data storage require additional measures for protecting personal information?” and so on.
It is essential to discover which type of adopted blockchain will genuinely meet the project or business model goals (not forgetting that private blockchains do not reduce network cost, only verification).
Which controls should a public manager adopt when utilizing oracle services in blockchain/DLT
Oracles are third-party services that are not part of a blockchain’s consensus mechanism.
The main challenge concerning oracles is that a public manager has to trust these sources of information. Be it a website or a sensor, the source of information must be believed.
Different trusted computing techniques can be used as a way of solving these problems.
Involving multiple sources of truth is an alternative and is likely safer, but also more expensive.
There is no single solution for everything, so the manager will need to search for and adopt applications with a risk-based approach to decide how many sources are necessary for different applications.
For instance, the temperature in London can be retransmitted by a single oracle (like API) if it is used for a smartphone application, for which approximate precision is tolerated. But if the informed temperature is used to liquidate an insurance contract worth $10 million, it would be more judicious to involve multiple oracles: satellite data, local sensor data and so on.
The conclusion here is that a single, unaudited source is a weak link that could compromise the entire system that depends on it.
There are no foolproof systems, but public managers can apply the same concept of multiple barriers to decentralized oracles as mechanisms of trust minimization.
Increasing the number of oracles lowers the probability of malicious conduct, thereby further securing the system. However, the risk of every oracle transmitting incorrect information, whether due to malicious activity or not (i.e., if the sources themselves are compromised), still exists.
Regulatory aspects that public managers need to consider when utilizing blockchain-based applications
Public managers must consider the following regulatory aspects in the utilization of applications based on blockchain/DLT:
- Finalization of liquidation and resolution of disputes, protecting consumers from risk.
- Responsibility for safety risks and associated losses, pushed by the introduction of new technological infrastructure.
- Protection against the risk of attack or dominance by a few “players,” as this can discourage potential users from linking assets outside the chain as well as regulations and antitrust implications.
- Conduct (priority in transaction verifications).
- Regulation and legal classification of assets, location and data flux, and how existing regulations apply.
- The implementation of data protection legislation, observing that many of these rules work extraterritorially, like the European law of data protection.
The main barriers to adoption of decentralized and distributed solutions for public administration
Blockchain and other decentralized solutions generally face technical barriers such as scalability as well as other barriers that are legal or cultural in nature.
As an example of a legal barrier, Singapore carried out a proof-of-concept of a blockchain solution last year to combat money laundering with several banks. However, to be effective, the Know Your Customer and Anti-Money Laundering blockchain-based ledgers needed ubiquitous requirements and regulatory norms in member states. Unifying criteria and regulations on KYC and AML is something that regulators in Mercosur, for example, will have to solve.
For an architecture like blockchain, whose main objective is the transfer of value, questions of data protection are among the most relevant.
As for cultural barriers, the total transparency enabled by blockchain networks can raise concerns. Many participants in the market who are not used to this level of transparency may not feel comfortable with it at first. If “honest” market participants adopt this transparency (as it can drastically reduce its conformity costs), malicious actors may find themselves left with fewer places to hide. Because of that, the implementation of blockchain for governmental services will probably require the elimination of political and bureaucratic impediments.
Government structures, in which decisions can be affected by a change of politics and complicated rules of acquisition, represent additional obstacles. Aside from budgets for government projects generally being tight, government agencies are not immune to falling in step with administrators who are resistant to change or new mentalities, like in any large company.
Proof verification and pilot projects have both high and rising costs. It is often an expensive investment whose innovation many decision-makers in the public sector are not willing to pay for. I consider this a barrier relating to processing costs.
Moreover, the costs for replacing existing, legacy infrastructure in any governmental organization with a new blockchain investment are very high. To add to this, the use of blockchain demands substantial changes in organizational procedures and responsibilities. We cannot underestimate the task of implementing blockchain. Planning, building and implementing complex IT systems is stressful in any sector.
Given the decentralized nature of blockchain, institutional barriers related to authority and governance can pose challenges to its adoption. This is primarily a management problem, at least in a fragmented and sectorial governmental structure, as costs and benefits are not intimately linked.
However, similarly to the construction of the internet, a large part of infrastructure costs must be covered centrally. At the same time, in other parts of governmental organizations and society as a whole, the benefits are palpable.
Particularly in Brazil, the small number of developers as well as the lack of digital education in the population is a challenge that increases the difficulty of transition from current systems to blockchain.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.