The Next Big Technology to Transform Government

It's called blockchain. Some say it will have a bigger impact than the internet.
by | September 2017
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Imagine this: Homeowners no longer need to buy title insurance. The chronology of ownership and claims for every piece of property in a jurisdiction are on an unhackable, constantly updated, always current ledger.

Or this: Governments, companies and individuals can transfer funds from their banks to another bank or party instantly -- without any administrative holding period or fee.

If these sound like future projects, they’re not. They’re both here-and-now developments using an underlying technology called blockchain. Cook County, Ill., is using it to build a land records ledger. Seven of Europe’s largest banks are buying into a blockchain that IBM is putting together for financial institutions. Beyond that, in the wake of questions about the security of voting systems during the 2016 presidential election, many believe blockchain technology will be the answer to securing future elections, allowing them to be audited in real time.

Blockchain has been on a stealth course in government circles in recent months. At the 2016 conference of the National Association of State Chief Information Officers, nobody had blockchain on their priority list. This year, a NASCIO survey found that a majority of CIOs had begun investigating blockchain through informal discussions. In May, the group released a report calling it the “next big transformational technology” in government. “This is a very big deal. It’s so much more dramatic than [when the internet was launched],” says Eric Sweden, NASCIO’s program director for enterprise architecture and governance. “It’s going to have a huge impact on how we do business, accounting, auditing -- anything that has a data lineage to it.”

Blockchain is a type of distributed ledger technology (although many people now use the terms interchangeably). DLT has the ability to allow users to record data and transactions instantaneously in a way that is unhackable. A key to understanding blockchain is that each distributed ledger isn’t maintained or stored by any one entity, but is accessed and cultivated by a number of users. Everyone’s changes appear instantly on each user’s copy of the ledger and are encrypted in a way so that they can’t be changed or deleted. Thus, each new block is permanently linked onto an unbreakable chain.

DLT is what was used to build the cryptocurrency bitcoin. The digital payment system quickly gained worldwide notoriety for its popularity among black market website users who were attracted to the anonymous nature of bitcoin transactions and the lack of central control. But in addition to opening up a new avenue of investigations for the FBI’s cyber division, bitcoin gave us something else: It introduced blockchain as a way of conducting business. Now, the private sector and a number of governments have been experimenting with DLT in relation to smart contracts, which help two parties directly exchange money, property, shares, or anything of value in a transparent way.

In looking at the possible advantages of the technology to governments, Jennifer O’Rourke, business liaison for the Illinois Blockchain Initiative, notes that many folks in both business and government spend a lot of time making sure that every copy of a document in users’ hands is identical. “It’s really important that both our pieces of paper say exactly the same thing,” she says. “So how do we try to make sure that audit effort is immediate and efficient? This technology provides that solution.”

Early enthusiasts see blockchain as a way to improve a variety of record-keeping ventures, from business transactions to health records to voting rolls. So far, exploration has been limited to a few areas. In the private sector, banking institutions are looking at the technology as a way to get rid of administrative hurdles, hence the IBM blockchain for such banks as Deutsche Bank and HSBC. In the public sector, governments in Asia and Europe have jumped at the notion of consolidating and linking their records. Among the former Soviet bloc countries, Estonia has long used blockchain-like technologies to secure health records, while Georgia’s National Agency of Public Registry recently moved its land registry onto the blockchain. Sweden is similarly testing a blockchain-based land registry, and Dubai plans to run its entire government on distributed ledger technology by 2020.

China’s approach to the technology has been to fertilize entrepreneurs with forward-looking ideas and then step out of the way. It has actively invested in consortiums and so-called blockchain parks that are designed to attract the best startups. Meanwhile, China has allowed Initial Coin Offerings, the capital-raising process favored by new cryptocurrency ventures, to operate in the country. In the cryptocurrency model, financial backers, instead of putting up seed money in exchange for shares in the company, are paid a percentage of the cryptocurrency that’s created -- a currency that will, presumably, increase in value down the road. In the U.S., the Securities and Exchange Commission has not provided a regulatory framework for Initial Coin Offerings. Some blockchain advocates say this creates a major roadblock here that is stalling the technology’s development.

At the state and local level, there has been some movement. A few places are eyeing targeted pilot programs. But Illinois most closely mirrors the approach seen abroad by aggressively cultivating and investigating the technology’s use in government.

 

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Illinois officials are acutely aware that they are exploring unchartered territory. The upside, says Michael Wons, the state’s chief technology officer, is an opportunity to transact business seamlessly and for less money. A government license filing that costs $500 and takes months to process, for instance, could instead take a day and cost a fraction of that amount -- “could” being the operative word. “There are gaps,” Wons acknowledges. “That’s why we want to attract entrepreneurs to help us work through the holes.”

That’s what the Illinois Blockchain Initiative is all about. It’s a first-of-its-kind effort that kicked off late last year and counts six state and local agencies among its founding members: the Illinois Pollution Control Board; state departments of Commerce and Economic Opportunity, Innovation and Technology, Financial and Professional Regulation, and Insurance; and the Cook County Recorder of Deeds. The main goals are threefold: ensure thoughtful and light-touch governance as it applies to the technology; support building out the blockchain ecosystem from an economic development perspective; and promote government integration of the technology itself.

When it comes to implementing the initiative’s first two goals, Wons sums up the approach succinctly: “Incubate, don’t overregulate.” For example, the initiative considered how the state should approach cryptocurrency in relation to its Transmitters of Money Act, a law that affects any institution that moves money. It looked at how other states, such as Washington, have regulated online currency exchanges. New legislation there that requires currency exchanges operating in the state to maintain a surety bond has prompted several cryptocurrency startups to pack up and leave. Illinois sees that approach as working against its goal of attracting companies and supporting the development of blockchain technology. Its state regulators decided that the existing laws regarding transmitting money could be applied to cryptocurrencies and issued extensive regulatory guidance to make that case.

In terms of attracting talent, the initiative recently launched the Blockchain Center in Chicago. The center is charged with not only fostering development and collaboration between startups but also recruiting and training some of the state university system’s top computer science talent.

When it comes to the third prong -- government adoption of blockchain technology -- the initiative has already gained some insights. Before joining the project last year, the Cook County Recorder of Deeds’ office had already begun its own blockchain pilot program. It put roughly 2,000 vacant Chicago properties on the blockchain so that the system could prevent scammers from illegally selling houses they don’t own.
Scammers have been taking advantage of the fact that information about properties that had been seized by the city for nonpayment of back taxes are scattered among five government offices and therefore vulnerable to misuse. The scammers advertise the properties as fixer-uppers, obtain a copy of the property deed and use it in a sale to an unsuspecting homebuyer. Once the homebuyer hands over payment for the house -- five, ten or twenty thousand in cash or money order -- the scammers disappear. Unfortunately, a lot of unsuspecting homebuyers were forking over cash and putting additional money into repairs, reports John Mirkovic, the county’s deputy recorder of deeds.  “Then,” he says, “they find out they can’t record the deed because the person [from whom they bought the house] never owned it in the first place.”

The pilot program, though, ultimately raised more questions  than answers. Building a blockchain for just 2,000 properties was complicated enough. To scale up to a statewide level would require counties to unify the way they enter property information. But doing so would ultimately save homebuyers and homeowners millions of dollars as there would no longer be a need for them to buy title insurance. On a blockchain, the chronology of ownership and claims on the land are all there for anyone to see. “This is an opportunity,” Mirkovic says, “to make public records better and more educational for people.”

The Illinois initiative is kicking off four other government pilot programs. These focus on putting academic credentials, birth records, health provider registries and an energy credit marketplace on a blockchain.

And while Illinois’ initiative stands out, it’s not the only state that recognizes the role government can play in fostering the technology. This year, Nevada took steps to encourage use of the technology by banning blockchain taxes. Arizona passed a law legally recognizing signatures recorded on a blockchain and smart contracts. Delaware, where two-thirds of Fortune 500 companies are incorporated, passed a law allowing companies to use blockchain technology to store and transfer securities and communicate with shareholders. The move is expected to increase transparency in the shareholder voting process and automate the annual report and franchise tax filings in Delaware.

Like Illinois, Delaware’s forward movement was born from a desire to be out in front of other states. “I was talking to a lawyer in New York who said, ‘I have a client who wants to issue shares on a blockchain, but they’re concerned about a lawsuit,’” says Andrea Tinianow, Delaware’s director of corporate and international development. “That’s what got the ball rolling.”

The flurry of activity this year is likely just the start of it. NASCIO’s Sweden predicts that in a decade blockchain in government will be routine. Still, he preaches a go-slow approach. For starters, blockchain technology doesn’t make an organization bulletproof. Twice over the past year, for example, the Ethereum Project, where members trade a type of cryptocurrency, reported data breaches that affected tens of thousands of users and resulted in the loss of tens of millions of dollars. In both cases, hackers tricked users into sending money and passwords to the wrong address, showing that while blockchain technology itself may be “unhackable,” it’s not altogether impenetrable.

There’s also a possible workforce concern: Making records seamless has the potential to eliminate jobs. Land title insurers, for instance, would have some objections to being made obsolete in Illinois by blockchain. And elsewhere, there’s been much discussion in the financial services industry about the processing and verification jobs the technology would kill. Similar back-office jobs in government, such as data entry work, could be rendered obsolete. But Mirkovic says the technology creates a larger opportunity to offer high-level jobs -- and more of them. “There’s a way to organize this to give taxpayers a higher level of service,” he says. “If we got rid of 10 data entry people, we could hire 20 paralegals and still save taxpayers money.”

Finally, there are costs. Governments don’t have a lot of money to invest in experiments that might not work. A more practical role is to enable entrepreneurship and wait for private industry to develop best practices. In other words, it’s OK to be a little behind the first wave. “If I were to look at it in the typical hype cycle of tech,” says Illinois’ Wons, “we’re in the throes of enlightenment right now. It’s, hold on—let’s give it a whirl first.”