By Ameep Pandey
Many governments hoped that blockchain would be a game changer for issues such as security and operational challenges. Indeed, this technology has the potential to help agencies make improvements in many areas, including accelerating the speed of transactions, such as for land-use registry.
However, governments implementing blockchain in their day-to-day operations have seen mixed results. Often agencies turn to blockchain for lack of another technological solution or because they have been drawn in by the surrounding hype. While blockchain can greatly improve security compared with more traditional technologies, its success hinges on applying it to a specific problem and identifying appropriate use cases.
Informed by the success of global agencies using blockchain, we have defined five use cases that illustrate how governments can unlock the technology’s full potential. Since blockchain’s utility depends on stakeholder adoption, government agencies can use economic incentives such as providing access to certain government data without paying for it or offering federal credits to reduce transaction service fees to get users on board. Agencies that successfully implement blockchain could increase citizen trust and generate value for both the government and its citizens.
Why blockchain isn’t a silver bullet
Blockchain has yet to reach widespread adoption at scale. Too often, governments skip the assessment of potential barriers, jumping right into implementation. Here are a few examples of challenges that government agencies could experience at the outset, though these are not exhaustive.
While blockchain’s pseudonymous transactions can help protect a person’s real identity from being discovered, many governments need to securely verify a user’s identity to process a transaction. Governments could integrate blockchain with digital IDs or implement private and permissioned blockchains (used in trade contracts and certain financial contracts), but these options either are too complex or could lead to privacy issues—for example, if social security benefits are tied to a digital ID, they are no longer pseudonymous. And in some cases, government agencies need full anonymity, as in the case of voters’ ballots.
Although blockchain is often touted as providing strong security guarantees, it depends on the size of the ledger: smaller ones are more susceptible to manipulation. Indeed, it is possible for an entity or hacker to gain control of a majority of the ledger’s node network (the 51 percent rule), which could create fraudulent transactions.1
Government use cases
For governments to realize the potential benefits of blockchain, they will need to define specific use cases. Five use cases illustrate how governments can apply blockchain to solve real problems.
Proof of ownership and transfers
Land transactions and proof-of-ownership requests can burden government agencies with documentation and administrative work. By using blockchain, governments can permanently store asset transactions such as land, property, and vehicles on a public ledger.
The Georgian government’s land registry department, for instance, pioneered a land registry tool to track land ownership and real estate transactions within the country’s borders. As a result, the government has greater transparency in land dealings, and interested citizens can look up a piece of land and get accurate information, as all initial and subsequent sales are recorded, time-stamped, and stored permanently. This process also greatly reduces the likelihood of corruption, since the distributed ledger is more secure.
Traditional legal-contract execution is costly to both governments and their citizens. However, smart, self-executing contracts, enabled by blockchain, can remove the need for intermediaries and potentially improve contract creation and execution. These contracts are publicly accessible and secure within the network.
For example, the Swedish land registry uses a blockchain-based solution for land-title transfers. The disintermediation and removal of notarization through smart contracts has reduced the transaction time by more than 90 percent.2 Some industries have tried to create consortiums that use smart, self-executing trade contracts over blockchain to improve the flow of goods between various countries.
Government systems that provide social benefits, such as unemployment, can be misused and infiltrated by certain individuals and groups, such as cyberattackers. Blockchain can improve record management and provide protection, though issues of privacy must be thoroughly addressed. Keeping anonymized IDs and data in employer databases while storing the encrypted hash key (a digital “fingerprint”) in the blockchain can help safeguard data. The Netherlands, for example, is using a blockchain-based infrastructure to administer its pension program, which has the added benefit of reducing management costs, as it is easier to operate.3
Validation of documents
Governments are consistently looking for centralized cloud-based solutions to validate the documents of all their citizens, and blockchain could be that solution. The technology can store hash values of citizen documents on the blockchain, allowing governments to provide an attested and permanently time-stamped electronic version of these documents anytime.
As an example, MIT created Blockcerts, an open standard where apps can be built to issue academic certificates and other documents via blockchain. The Maltese government also used this standard to implement a system whereby its Ministry for Education and Employment can verify any academic credential using blockchain.
Since blockchain can permanently time-stamp transactions at any time, companies or individuals can file patents without enduring the cumbersome submission process. While the actual patent verification might take time, the time stamp associated with the filing can help solve multiple patent-related disputes and potentially prevent costly lawsuits.
For example, a company could time-stamp a document before it undergoes the full patent application and filing; thus, if a competitor tries to register a similar patent, it is easy to prove which party had the idea first. Furthermore, patent documents are given a transaction hash, providing protection via encryption.
How should governments proceed?
As blockchain evolves, it continues to show promise as a disruptive force for governments. To optimally deploy this distributed-ledger technology, government agencies should take three steps:
- Identify the problem that is being solved and provide enough detail to define a business case, including the key performance indicators (KPIs), participant incentives, the technology compatibility, and the required investment. This process should ensure that blockchain is the simplest and best approach to solve the problem.
- Develop proofs of concept and blockchain infrastructure for the most obvious use cases (such as time-stamping and validating documents or executing peer-to-peer transactions with minimal mutual trust). Benefits might include quantitative KPIs, such as costs reduced or incentives generated, as well as qualitative KPIs, such as transparency, which can affect rankings such as the ease-of-doing-business index.
- Once the benefits are apparent, scale the existing use cases and apply the technology to other more complex use cases, such as processes involving multiple entities and data sets. Governments should build the governance required to achieve all possible benefits and help scale blockchain across the organization. To develop and manage blockchain effectively, organizations will need to hire a larger pool of employees who can successfully execute software development.
By focusing on building the right use cases and creating a scalable deployment approach, governments can harness the full potential of blockchain, reduce instances of corruption and disintermediation, and build citizen trust.
Ameep Pandey is a senior expert in McKinsey’s Dubai office.
1 The 51 percent rule refers to the percent of the blockchain that would need to be controlled by attackers in order for them to control the blockchain; see Mike Orcutt, “Once hailed as unhackable, blockchains are now getting hacked,” MIT Technology Review, February 19, 2019, technologyreview.com.
2 David Allessie, Maciej Sobolewski, and Lorenzino Vaccari, Blockchain for digital government: An assessment of pioneering implementations in public services, Francesco Pignatelli (editor), European Commission Joint Research Centre, 2019, joinup.ec.europa.eu.
3 “Dutch pension fund managers APG, PGGM test out blockchain system,” Reuters, October 16, 2017, reuters.com.