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What's Blockchain Technology, and Why Are States Hesitant to Adopt It?

At a time when most government agencies are only vaguely aware of the technology, Colorado could become an early adopter.

Blockchain database concept illustrated.
Anyone who’s ever undertaken a digitizing project knows that the worst part of it is the sheer time and patience it requires. The reward is never having to do it again -- and, of course, the untold hours saved on future searches and organizing.

The thought of a government converting its databases to blockchain, the digital ledger technology underpinning the cryptocurrency bitcoin, is like that -- but about a million times more overwhelming.

That’s what makes a proposed state Senate bill in Colorado so unusual. It aims to make the state an early blockchain adopter at a time when most government agencies are only vaguely aware of the technology.

The legislation would require state entities to, among other things, annually assess the benefits and costs of implementing blockchain technology and consider secure encryption methods to improve data security.

Distributed ledger technology like blockchain allows users to record data and transactions instantaneously in a way that is unhackable. Each distributed ledger is accessed and stored by a number of users, and everyone’s changes appear instantly. Think Google Docs, except that all changes are encrypted in a way that they can’t be changed or deleted. Thus, each new “block” is permanently linked onto an unbreakable “chain.”

The Colorado proposal doesn’t actually mandate adoption. It simply requires the state to look into distributed ledger technologies and the benefits they can offer. That such a move has to be legislated speaks to the inertia that a fast-moving technology like blockchain faces when up against the often slow pace of government.

Case in point: The Governing Institute and consultant KPMG recently conducted a survey of state officials about automation technology (of which blockchain is a type). Despite most respondents being able to list several major benefits, like increased quality and efficiency, just 8 percent said they had a “very high” interest in implementing intelligent automation technologies. Seven in 10 indicated low interest or indifference, and 22 percent said they didn’t even know what their interest level was. 

Those results aren’t too surprising, says Mark Calem, KPMG’s Health and Human Services lead.

He said one of the most common barriers to even considering automation, according to the survey, is time and money. Ironically, agencies are spread so thin that most don’t have the bandwidth to invest in something that could ultimately help with that problem.

“There’s a reality on the ground, unfortunately, of ‘I can only do what I can do,’” says Calem. “States have funding challenges, and agencies have to focus on getting their core mission done. So while automation can help … they just don’t have the wherewithal to do that.”

Even in places where there is (or was) support for early blockchain adoption, implementation has proven tricky.

Illinois is perhaps the furthest along, and it hasn’t yet made the jump from pilot program to statewide implementation. Meanwhile, Delaware is pumping the brakes on plans to allow companies to use blockchain technology to transfer securities and communicate with shareholders, largely thanks to a change in administration.

Colorado's legislation, which was introduced in January, focuses on exploring how the technology could reduce fraud, improve risk management and protect personal information. The bill says Colorado’s existing practices -- like paper-only records and isolated data repositories between agencies -- are ripe for improvement. It also estimates that 6 to 8 million attempted breaches of the government’s digital information occur every day and says that a blockchain-like technology could better secure data because there’s no central database to hack.

Supporters of blockchain are watching Colorado closely. Eric Jackson, CEO of the online data management firm CapLinked, says he hopes “Colorado will start a national trend of states seeking to use distributed ledgers for securely storing data.”

Still, while blockchain has a lot of upsides, many caution against viewing it as a cure-all.

“It could lead to great solutions and advances for government,” says Geoff Buswick, an analyst who studies state and local government cybersecurity for S&P Global Ratings. “But it is virtually impossible to head off all risks. I’d encourage anyone moving with a blockchain-like solution to consider: What are those risks?”

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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