WHITE PAPER TO THE GOVERNMENT OF GHANA ON BLOCKCHAIN TECHNOLOGY AND LOCAL GOVERNMENT APPLICATIONS

WHITE PAPER TO THE GOVERNMENT ON BLOCKCHAIN TECHNOLOGY AND  LOCAL GOVERNMENT APPLICATIONS 

This paper explains the potential applications of blockchain technology for local government use as well as the risks and challenges associated with its implementation, as indicated in certain case studies performed to date. Blockchain technology has the potential to improve local government processes by enhancing transparency, efficiency, integrity, and data management. While blockchain case studies are in their infant stages, major corporations, nonprofit organizations, and governments spanning the globe are exploring and implementing blockchain solutions. However, we do not yet have substantial data to show verifiable impacts of this technology. Further complicating matters, there is no universally accepted definition of “blockchain,” and there is widespread disagreement over which attributes qualify a system as “blockchain.”

Management consulting firm McKinsey & Company defines blockchain as an encoded digital ledger that is stored on multiple computers in a public or private network comprised of data records or blocks.1 Once the blocks are collected in a chain, they cannot be changed or deleted by a single actor; instead, they are verified and managed using automation and shared governance protocols.2 Gimmicks and snake oil salesmen abound in the world of blockchain. Scam artists have taken advantage of the popularity of bitcoin and the complexity of blockchain, selling false promises and outright fraudulent ideas to unsuspecting people looking to get in early on what many consider to be the future of digital transactions. Some multinational corporations have created their own blockchain systems and market them as the new Internet. However, as there are few case studies about blockchain in the context of government use, local government officials should view most claims regarding blockchain with great skepticism. 

They may have other challenges to overcome, such as legacy systems or policies. Blockchain technology is not a magic solution: information must be organized and digitized for blockchain to work. If a local government system is not organized and digitized, blockchain will not improve that system. If a public agency is overflowing with disorganized physical documents scattered across various rooms, blockchain is not going to organize and remedy that situation without human intervention. But when a local government has already improved efficiency and organization through digitization, incorporating a blockchain network into its systems could add transparency and trust.

The bottom line is that innovative blockchain solutions should be approached with an open mind and a healthy dose of skepticism. As stated in the Cook County, Illinois Blockchain Pilot Project Report (hereinafter referred to as “Cook County Report”), blockchain is not an all-or-nothing approach; aspects of the component technology can be implemented individually or selectively to improve recordkeeping outcomes.

Blockchain Basics

Blockchain is a system of storing and communicating information, similar to the Internet. Depending on who you talk to, the concept of blockchain has existed for approximately a decade, gaining mainstream attention in 2017. According to many sources, the idea for blockchain originated in a white paper by “Satoshi Nakamoto”4 that introduced bitcoin (hereinafter referred to as the “Bitcoin White Paper”), a peer-topeer version of electronic cash that allows users to send online payments from one party to another without going through a financial institution.5 The Bitcoin White Paper provided the blueprint for Nakamoto’s solution to the problems of distrust and double spending in a decentralized electronic cash system. The network would use proof of work to record a public history of transactions to ensure validity and consensus by requiring the expenditure of actual resources to solve complex cryptographic puzzles.

 The goal was to eliminate the middleman from financial transactions, while ensuring that participants could not misrepresent how much bitcoin they had, or double spend that bitcoin. Proof of work is accomplished through “mining,” meaning cryptographers compete to verify and validate a transaction, and the first person to do so is rewarded with bitcoin. Upon completion of the verification, a permanent block is created in the chain containing a timestamp of the transaction. Each block contains the “hash” of the previous block, and each subsequent block is linked to the previous block, making a chain. According to the Bitcoin White Paper, it becomes computationally impractical for an attacker to change the record of transactions in this system if honest participants control a majority of central processing unit (CPU) power.7 Perhaps a more pragmatic metaphor for the use of blockchain technology as a protectionist network comes from the country of Estonia, which claims to have started testing blockchain technology in 2008—before the Bitcoin White Paper was published. Estonians referred to the technology as “hash-linked time-stamping” and described blockchain as a “digital defense dust” that covers all data and smart devices that need to be protected from corruption and misuse.

 This ethereal metaphor for blockchain is intended to create a more practical understanding of its protectionist qualities: that every change in data can be instantly detected based on traces left in the pattern of the “digital defense dust” that covers the data. Blocks of “digital defense dust” are connected to each other and make up a chain that is distributed in millions of computers all over the world, making it impossible to change data without leaving a “footprint,” as the chain instantly reflects all changes that mismatch the mathematical code in the chain. While the idea of eliminating a middleman and empowering the masses appeals to many, a public blockchain network like bitcoin is slow (compared to a private blockchain network), requires a surprising amount of electricity, and is vulnerable to attack if a majority of participants are not honest actors.

 In a public blockchain network like bitcoin, if a bad actor amasses more than 51 percent of CPU power, that bad actor could alter the “immutable” records in the blockchain.11 In a nutshell, a CPU is the brain of a computer, and it takes instructions from a program or application and performs a calculation.12 (A comprehensive explanation of CPU power and the technical aspects of bitcoin mining are beyond the scope of my expertise and this paper.) The Bitcoin Whitepaper explains that “[i]f a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.”

The Cook County Report conceptualizes mining bitcoin as turning electricity into currency. The amount of electricity needed to mine just one bitcoin is approximately 5,500 kilowatt hours, which is half the annual consumption of an average U.S. household.Twelveand-a-half bitcoin are created through mining roughly every ten minutes.

 A widespread transition by large industry sectors to the proof-of-work validation structure associated with a public blockchain might save enough money in other costs to make the increased energy consumption a wash, but the environmental impact cannot be ignored.16 Because of these significant energy costs and the absence of consolidated control, private companies, governments, and nonprofits have been exploring ways to take advantage of blockchain technology without having to use a proof-of-work consensus or a publicly controlled network.

Public Versus Private Blockchain

Rather than using “mining” or proof of work to validate transactions, private or enterprise applications of blockchain utilize a permissioned network and selective endorsement to instill trust in participants. This means a middleman like a bank or government will play a role in controlling or verifying the transaction. A private blockchain network is collectively owned and operated by a group of identifiable and verifiable institutions, such as a business, university, or local government.

The participants in a private blockchain are known to each other, unlike a public blockchain network that has no identifiable ownership structure and is operated by a community of participants that may or may not be identifiable. Those characteristics make bitcoin’s consensus model poorly suited to business and local government uses of blockchain. Trust in a private blockchain network is instilled through the use of selective endorsement, which enables participants to control who verifies transactions. 

If a user transfers money to a third party, then that user’s bank, the recipient’s bank, and possibly a payment provider would verify the transaction. This differs from a public network like bitcoin, where the entire network works to verify transactions. In an enterprise or private blockchain, an access control layer is built into the blockchain nodes (individual computers connected to the network) so that the participants of the network can restrict access regarding who can validate blocks on transactions. Multinational corporations including IBM, Accenture, and Siemens have been exploring the use of “enterprise” blockchain. An enterprise system eliminates the risks associated with needing a majority of honest participants, but introduces the problem of the middleman once again. Instead of having a decentralized power structure, the power remains with a bank, government, or other authorized overseer to verify transactions. Presumably, blocks of information in an enterprise network cannot be altered by that middleman without creating a record of the alterations. If they could, then this system would not be “immutable” or “unhackable,” or any more trustworthy than existing non-blockchain systems.

On a public blockchain, anyone can join the network and validate transactions. Such a system makes it difficult for any one person or agency to tamper with or forge transactions, unless they are able to amass  percent of CPU power in the network. On a permissioned blockchain, a central authority decides who can participate. A permissioned system can process transactions faster and more cheaply, but since one party has control over who joins its network, it also has the power to rewrite transaction histories.21 In terms of applications of private or “enterprise” blockchain for governments, multiple case studies are under way, including land registry management, microgrids for energy, municipal bond issuances, and business regulation.

Smart Contracts

Blockchain technology can also be used for “smart contracts,” which are self-executing contracts whose terms are written into code. Once the terms of the contract have been satisfied, or upon a defined triggering event, the contract would execute itself according to the coded terms.The terms of an agreement need to be negotiated and written down first, and then translated into code for a smart contract. Lawyers will need to work closely with coders to ensure that the agreed upon terms are accurately reflected in the coded contract. In the context of real estate, a smart contract could effectively serve as an automated and immutable escrow officer. The purpose of a modern escrow company is to serve as a trusted holding place for money while certain conditions to a contract are pending fulfilment. The escrow officer releases funds upon the occurrence of certain conditions according to previously agreed upon instructions. A smart contract functions the same way, without the need for human intervention or exorbitant fees. Once the parties agree to the conditions and turn those conditions into code in the blockchain, the satisfaction of those conditions would automatically trigger release of funds and transfer of the deed. Eliminating the middlemen in transactions like this would increase efficiency and accuracy and reduce fees to consumers.

Cryptocurrency Needs Blockchain, but Blockchain Does not Need Cryptocurrency

The most commonly known applications of blockchain include bitcoin and Ethereum, which are cryptocurrencies built on blockchain technology. The application of blockchain technology, however, is not limited to cryptocurrency. There are innumerable potential applications of blockchain aside from digital currencies, including assuring data integrity, maintaining auditable records, and creating self-executing smart contracts. In the context of local government, use of distributed ledgers can reduce transaction costs in the delivery of local services, while also providing greater transparency and opportunity for participation by citizens. 

None of these potential uses of blockchain technology require the use of cryptocurrency. Potential blockchain solutions for local government should not be muddied by the often misleading and heavily speculative cryptocurrency craze, which exists in a legal gray area. “Initial coin offerings” (“ICOs”) have recently become a popular tool for companies to raise capital. Typically, ICOs involve investors exchanging U.S. dollars or cryptocurrencies in return for a digital asset labeled as a coin or token.23 Those digital assets would then be bought and sold on a secondary exchange.

 The U.S. Securities and Exchange Commission (SEC) warned that tokens or digital assets used in a fundraising process are securities subject to registration requirements, and that as of December of 2017, no initial coin offerings had been registered with the SEC.24 Since 2013, the SEC has filed nineteen enforcement actions against companies involved in digital currency and initial coin offerings, and has stepped up enforcement in 2018.25

There is substantial risk associated with including an ICO or cryptocurrency in any local government application of blockchain. Unless and until there is further clarification from regulatory agencies regarding the treatment of tokens and cryptocurrencies, their use should be avoided by local governments exploring blockchain solutions.

. Improving Local Government Services and Empowering Communities with Blockchain

At the local government level, blockchain technology has the potential to improve efficiency, transparency, communication, and data integrity in a variety of ways.

Transparency

 If blockchain functions as intended, then records are immutable, meaning they are permanent and cannot be altered. Government records in a private network would reside on a blockchain visible to all authorized participants. Any revisions to records would be noted on the blockchain. The transparency associated with an immutable public ledger should enhance public confidence in the veracity of information provided by local governments. Some contend this kind of public confidence and trust only works in a public blockchain, where everyone can see all transactions, and that a private network still poses a risk of data manipulation by whomever is in control of the network.26 This sort of auditability and immutability means that, where local government actions are recorded on the blockchain, citizens would have increased access to public records and actions, which, in turn, would increase the accountability of elected officials and public agency staff to their citizens. Presumably, a permanent and publicly available record would be made of all government work. However, there will always be privileged and private information that must be protected from public disclosure. Protection of that information must be a consideration when implementing any local government blockchain solution.

 Efficiency 

Blockchain technology can reduce the time and cost associated with data management, permit processing, and enforcing regulatory compliance, among other things. Self-executing smart contracts with automatic triggers can streamline multiple government functions. For example, through the use of blockchain, public records pertaining to a particular property could be viewable by the local government; the property owner; and permissioned lenders, contractors, or anyone else that the property owner desires to authorize.

 The process of tracking down all historical records pertaining to a property (e.g., permits, deeds) would be simplified and consolidated so that any interested and authorized party could see all relevant information in one place at the click of a button. The data would be secure and trustworthy, because any alteration or attempt at alteration would be tracked in the blockchain. The distributed ledger would be automatically updated for all participants, making regulatory compliance easier for the property owner, and making enforcement of regulatory compliance easier for the government. IBM is testing its own enterprise blockchain solution with various multinational corporations, including Walmart. Walmart utilized IBM’s blockchain technology to manage the supply chain of mangoes from tree to consumer, and it reduced the time required to trace a mango’s origin from six days to two seconds.27 In the world of produce, such a revolutionary change could save lives when detecting the source of contamination or disease in consumer products. In the world of local government, such a change could be instrumental in increasing the efficiency of public employees when assisting citizens. 

Utilization of self-executing smart contracts could also streamline and automate the managing and monitoring of contracts while reducing the cost of doing so. The performance or nonperformance of government contractors could be recorded in the blockchain and made visible to the public and local officials, making it easier to hold such contractors accountable.

Minimize Risk of Loss of Vital Records 

The distributed nature of a blockchain means that the records are not kept in one location, but across the ledger in multiple locations. This is greatly important in the event of natural disaster, war, or other force majeure. If vital government records are maintained on an immutable distributed ledger accessible from many locations, then their risk of loss is greatly reduced. A cloud data storage system does essentially the same thing, but a blockchain distributed ledger adds permanence and immutability, along with “digital defense dust” to show any changes to or attempts to change the data. The Cook County Report recommends that any custom-built blockchain used by a governmental office should be distributed or shared, so that full copies of each individual office’s land records are stored by every office in the network, thereby automatically creating backups in multiple locations.

Government records have been lost in fires and database failures, and many offices do not have the resources to have redundant backups.29 Many offices do not even have electronic records and may depend on a physical means of storage like paper or microfilm.30 Of course, the digitization of such records would be a threshold step to implementing the blockchain systems described herein. The Cook County Report opines that a distributed system, as opposed to a centralized server, would make loss of records virtually impossible.

Putting Power in the Hands of the Community

 The idea behind the bitcoin blockchain was to give power to the people and remove the need for intermediaries like banks or governments. The pure public blockchain contemplated in the Bitcoin White Paper does this, but the enterprise or private blockchain does not. The Brooklyn microgrid and the Berkeley municipal bond projects discussed below are examples of potential applications of the public bitcoin-type blockchain that would give control back to the community. Instead of having an energy utility or a bond-issuing intermediary, the public blockchain in these case studies enables people to deal directly with each other in transactions validated by the public. However, neither the Berkeley project nor the Brooklyn microgrid currently seem feasible in their “pure” public blockchain form for myriad reasons, including cost and government regulation, as further set forth below. 

Applications of Blockchain in Local Government – Case Studies

Application of Blockchain Technology in Land Administration in Ghana 

Application of Blockchain Technology in Land Administration in Ghana

Samuel Agbesi (Aalborg University, Copenhagen, Denmark) and Fati Tahiru (Ho Technical University, Ghana)

Source Title: Cross-Industry Use of Blockchain Technology and Opportunities for the Future

Copyright: © 2020 |Pages: 14

DOI: 10.4018/978-1-7998-3632-2.ch006  Read More

About Author

Augustine Agangya Nyaaba is  a Fullstack Engineer. Strong in design and integration with intuitive problem-solving skills. Proficient in React, Blockchain and JavaScript. Passionate about implementing and launching new projects. Ability to translate business requirements into technical solutions. He has 10+ years in the Tech industry.

Visit his portfolio at  https://augustine-nyaaba.netlify.app nyaaba.netlify.app/