Why the Public Sector should care about Blockchain now

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With 13 years of experience working as a lawyer in the Public Sector, I know how it ticks pretty well. People blame the administration often for being slow and not following the new trends of technology. While this perception might sometimes carry a grain of truth in it, the people working in the Public Sector are often just focused. They are focused on making our state work smoothly. They concentrate on getting the job done that is in front of them for the common good. That’s why they can’t follow just any trends. If they jump into „AI“ now, they will neglect more essential tasks. Yes, most administration in Germany and Europe is behind on digitalization – but not for not caring about technology as such, but because of more critical issues that needed attention.

So why should the Public Sector in Germany, in Europe or worldwide care about blockchain now – a technology that many don’t understand fully, that seems in its early development, without any significant adoption yet?

The answer is simple: Because blockchain technology may be a game changer in „getting the job done“ and solving issues the Public Sector had been dealing with for years.

A short overview

Many think the blockchain is only a booking system for internet currency. That’s the old „Blockchain equals Bitcoin“ misunderstanding. While Bitcoin is very important (and I’m a huge supporter of cryptocurrencies), it’s only one small aspect of the many possibilities the Blockchain has to offer for the Public Secotr.

Unnoticed by many, technology reverses our lives. So far, lengthy pleadings and control bodies such as banks or authorities have established trust between contractors. Now the blockchain creates security. It intervenes in many areas of life: logistics chains such as pharmaceutical transports can always be viewed without any gaps. Keeping the user’s information anonymous, the blockchain validates and maintains a permanent public record of all transactions.

The sharing economy is there and can be handled directly through the blockchain. Directly from A to B. This development also opens up new possibilities for cryptocurrencies. Entire industries will benefit from the security and incorruptibility of the blockchain and thus question the existing order. We are talking about the transformation of our centralized society towards a decentralized structure from which not only cryptocurrencies but also almost all areas of our lives can profit. Any form of mediator between producer and consumer, be it music publishers, agencies or electricity providers, banks. could become superfluous.

Examples exhibit how a land transaction platform eliminates the need for notaries and land registers. Startups continue to promote the technology and make it usable for government activities or e-voting. Blockchain might be part of the „Govtech“ movement.

There are already numerous concepts that could decisively influence the life of tomorrow. It is foreseeable that this trend will stop not least in front of the public administration because the Blockchain provides a framework for the simplification of work processes, which are still characterized by high administrative overhead. If technology establishes as expected, it is likely to have a positive impact on the labor market. However, wherever jobs disappear, on the one hand, new ones are created on the other. Even today, the big portals are searching feverishly for blockchain developers and experts.

This essay shows which ideas exist and in which way they have already been implemented or are to be implemented soon for the public sector and industry and commerce.

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What is Blockchain Technology? How does it work?

Picture a spreadsheet that is duplicated thousands of times across a network of computers. Information held on a Blockchain exists as a shared and continually reconciled database. It is a way of using the system that has obvious benefits. The Blockchain database isn’t stored in any single location, meaning the records it keeps are genuinely public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet. The reasons why the Blockchain Technology has gained so much admiration are the three pillars of this revolutionary technology: decentralization, transparency, and immutability.

Decentralization

In the past the processes were centralized. One of the most famous examples of a centralized system is banks. They store all the money, and the only way that account owner can pay someone is by going through the bank. Centralized systems have treated for many years. However, they have several vulnerabilities and points that have to be developed. They are centralized, and, therefore, all the data is stored in one spot. It makes centralized systems easy target spots for potential hackers. In a decentralized system, the information is not stored by one single entity or by one single user. Every user of this network owns the complete data and has access to this network without the third party in the process.

Transparency

One of the most exciting and maybe “mystic” concepts in the Blockchain Technology is transparency. A user’s identity is hidden via complex cryptography and represented only by their public address. While the user’s real identity is secure, it is still possible to see all the transactions that were done by their public address. This level of transparency has never existed before this revolutionary technology, also within a financial system. Blockchain Technology adds that extra level of accountability.

Immutability

In the context of the Blockchain immutability means that once something has been entered into the blockchain, it can’t be tampered with. The reason why the blockchain gets this property is also that of the cryptographic hash function.

A peer-to-peer network maintains the blockchain. The system is a collection of nodes which are interconnected to one another. Nodes are individual computers which take in input and performs a function on them and gives an output. The blockchain uses a special kind of network called “peer-to-peer network” which partitions its entire workload between participants, who are all equally privileged, called “peers”. There is no longer one central server, and now there are several distributed and decentralized peers.

Application in the Public Sector

The areas of use for the Blockchain Technology in the Public Sector and especially in the administration are nearly universal. In the future, the life of a child born in 2025 could be entirely stored and „managed“ in the blockchain. What sounds like a strange 1984-Vision at first, offers many benefits, which eliminates the hassle of bureaucratic procedures and can dramatically simplify life, but, of course, the data protection process has to be guaranteed.

Identity management

There is a definite need for better identity management on the web, also for the Public Sector. The ability to verify your identity is the lynchpin of financial transactions that happen online. However, remedies for the security risks that come with web commerce are imperfect at best. Distributed ledgers offer enhanced methods for proving the person’s identity, along with the possibility to digitize personal documents. Having a secure identity will also be important for online interactions for instance, in the sharing economy. A good reputation, after all, is an essential condition for conducting transactions online.

If the technology accompanies the whole life, is has simultaneously to start with the birth of a child. With the birth of the child, a new entry in the civil status register could be created by the parents, which now exists within the blockchain. The hospital, the midwife or other third parties could testify to the birth and thus prove the existence. The child is currently listed as an entry in the blockchain. From the moment of existence within the Blockchain, no visits to authorities would be necessary, for example also the appointment to have the birth certificate authenticated. The accessor would give any party access to his entry.

That’s not fiction. It already happens, but unfortunately not in Germany. For example, Illinois Blockchain Initiative announced its partnership with self-sovereign identity solutions leader Evernym, leveraging distributed ledger technology to provide secure digital identity solutions. In the proposed framework, government agencies will verify birth registration information and then cryptographically sign identity attributes such as legal name, date of birth, sex or blood type, creating what are called “verifiable claims” or attributes. Permission to view or share each of these government-verified claims is stored on the tamper-proof distributed ledger protocol in the form of a decentralized identifier. The identifier guarantees each attribute is cryptographically sealed and only accessible with the explicit consent of the identity holder or in the case of a newborn child, his or her legal guardian.

Businesses and governments will be able to verify and authenticate citizens by requesting encrypted access to these valid claims. It minimizes the need for entities to establish, maintain and rely upon their proprietary databases of identity information.

Education services

The child of the future could graduate from school and university within the Blockchain. Today, Woolf University is the first blockchain-based university. After the presentation of the founders, a „borderless academic community“ should be created. Woolf should be in the field of universities, which is Uber in local traffic and Airbnb for overnight stays. Renowned scientists will use this platform to offer their expertise on an app. Students book the courses as needed. The lessons are via Skype available. Besides, the University of Nicosia is experimenting with blockchain-based systems.

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Smart contracts; get married on the Blockchain

Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met. Today the blockchain offers its users a clear and straightforward way to perform contractual verification. A smart contract is a digital agreement between two or more persons that can be accessed by scanning the blockchain at any point in the future. Smart contracts have already found widespread use in trade finance because they can settle transactions without the need of a third party for verification. If the blockchain is forever, then etching marriage contracts into its fabric is a cheap and innovative way to access the nascent ecosystem of cryptographic technologies. The first couple to get married on the blockchain was David Mondrus and Joyce Bayo in 2014. With famed Austrian school economist Jeffrey Tucker presiding over the wedding, the couple engraved their nuptials on the Bitcoin blockchain. Speaking to Tucker after the wedding, Mondrus was blunt: Why should the government have anything to say about who I marry or how?”.

Is such a blockchain-marriage by the applicable German law possible? For the beginning, it is at least questionable. Primarily according to §§ 11 ff. EheG (German marriage act), marriages have to be closed personally, in front of a state registry service and the presence of the two witnesses. However, considering the ease of use and the certainty of the blockchain, the question arises as to the future meaning of a state registry service, especially in the context that the citizens themselves could also administer birth and death certificates.

While this might sound like science-fiction, it could be a dramatic game changer. The administration of today struggles to find employees — and the demographic changes will not help in that development. If blockchain technology and smart contracts could handle much work for citizens and the administration automatically and secure, life will be much easier on both ends.

Governance and the digital country

By making the results fully transparent and publicly accessible, distributed database technology could bring full transparency to elections or any other kind of poll taking. Transparency is a big demand by today’s generation, putting administration often under heavy pressure of delivering data they don’t have or have to assemble. What if all that data is not only assembled by the blockchain, but also automatically made transparent under conditions set by the government? A lot of hard work and frustration could be swiped away.

In the EU Estonia started to realize the digital government services. The program created by the Estonian government and BitNation offers anyone, anywhere, a digital identity issued by the Estonian government and the possibility to start and operate a business online under Estonian regulations. The foreigners who become e-residents of Estonia are not automatically entitled to physical residency in the small Baltic state, but they can base their online financial life there.

Also, the capital of the Swiss “Crypto-Valley” city Zug offers since 2017 a blockchain-based digital identity for the inhabitants of the town. The development process in Switzerland is fast; the Swiss government presented its plans for the introduction of a national E-ID.

Application in industry and commerce

Not only the public sector can benefit from Blockchain technology, but also this technology can shape the relationship between state and business. To understand the potential of Blockchain for companies, it must recognize the fundamental challenges of modern data management.

File storage

Decentralizing file storage on the internet brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost.

In our Internet-driven society, it’s common to share data with friends and colleagues through a few clicks. E-mail can be used to send a document to a person in a matter of seconds. Both people now have the document, so it has been duplicated. This process can be repeated at will, which means that the duplication of a document theoretically knows no end. It leads to the following problem: the longer the chain of distribution becomes, the less the origin can be traced. This situation increases the risk of an element of the chain making changes to the document, spreading false information. The exponential duplication of data on the Internet will inevitably lead to the question of which of the documents is the right one. Which document represents “the truth”?

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Evidential value of Blockchain

The Blockchain solves this problem. It does not allow the author to release his information by sending an email, but to restrict access using an entry in the blockchain to selected persons whom the author allows reading the info. Since data is not entered anonymously in the blockchain, the recipients can easily assign the document to the author.

The possibility of legal transactions to be able to attribute information with an almost certain probability to a specific person is ensured in the analog world using signature and identity card. The recognition value of the signature in a document and on the ID card leads to a precise classification of which person made a declaration.

The Blockchain maintains this level of evidential value and leads it into the future. The identifier clarifies to legal transactions who is behind the concrete information. Thus, the author can combine the advantages of the rapid dissemination of information by the Internet with the high evidential value of the Blockchain and at the same time stop the (unlimited) distribution of its data or its counterfeiting.

Because of this simple possibility of identification, in the everyday communication between private individuals, many fields of application between the state and the economy are conceivable. If the entrepreneur can identify himself using the Blockchain on the Internet, why should he have to carry out annoying appointments with authorities?

Taxes and fees

Global transactions characterize the modern economic relations. This development leads to the need for companies to stay in line with the applicable VAT laws of the countries. At the same time, national fiscal authorities complain about the lack of effective monitoring of tax compliance. How should an authority keep an overview of the different tax laws in all 28 EU members? It is therefore hardly surprising, that, according to a study published by the EU in 2018, the value of unpaid VAT in the European Economic Area is estimated at 147 billion Euros.

As a result, international tax experts assume that the EU will be among the first to implement Blockchain in its VAT law.

All parties involved in the supply chain could be obliged to document their transactions within a Blockchain System, which provides billing data, shipping information, description of goods, costs, prices, VAT calculation, etc.

This information could be placed in the cloud-based blockchain, with secure access for all players (the companies and the European tax authorities) in the supply chain. The European tax authorities could use analysis software – also in a cloud – to calculate the taxes and identify possible cases of deceit early. On the side of entrepreneurs, VAT could be paid off as soon as the transaction is carried out using blockchain-based solutions, such as those already offered by Vertex. This would save all parties a considerable administrative burden.

In the area of the payment of municipal fees, there are already proven solutions. In the Swiss city, Zug bills in the amount of up to 200 Swiss francs can be paid in the cryptocurrencies Bitcoin and Ether to the city administration. It led the 30,000-inhabitant village within the blockchain community to the name „Crypto-Valley“. This was the subject of my past essay.

Customs

The system of VAT collection can also apply to customs, as the following example by Capgemini illustrates.

A Chinese cargo ship carrying a cargo of smartphones reaches the European Union at an Italian port. The Italian customs authority registers the shipment in a European customs blockchain. The contents of the entry are the responsible customs office, type, quantity and value of the goods as well as an identification number and a digital signature of the customs office. Should the products be transferred to Germany after registration by truck, the involved customs authorities of Austria and Germany could quickly determine over which border crossing and in which order the goods came to the EU and whether customs duties were already charged. An illegal import could be identified early. The recipient at the destination would be given the opportunity to know if and when the goods were properly imported into the EU and how long they were traveling. This can be particularly substantial for perishable goods.

Tracking of goods

Even outside of customs, the monitoring of drugs, chemical or toxic substances or resources obtained under questionable conditions, such as diamonds, could increase the trust in the asset. Global economic players and governments could potentially monitor every commodity from creation, across stages of transportation to the sale.

Energy sector

The energy production of the present and the future will be decentralized, as the Federal Association of Energy and Water Management has already stated.

More and more consumers will also become producers of electricity from photovoltaic systems and biomass. The Internet will control the trade of generated electricity.

For this reason, the energy industry expects solutions through blockchain-based intelligent energy networks, which should facilitate the calculation of the smallest amounts of energy in the energy grid at the lowest transaction costs.

Business registration

In Dubai, the business registration and the application for any licenses have already been wholly transferred to the blockchain. The city’s blockchain strategy provides the paperless handling of private and public transactions by 2020. According to the official announcement, this strategy will save 114 million tons of CO2 emissions and up to 25.1 million work hours.

Notary and Land Register

Because of the technological progress, even the partial digitization of the notary does not seem unrealistic. The primary function of a notary is the recording of legal transactions to establish a binding relationship between the parties. This concerns in addition to certifications of wills the real estate law.

As Publicly-accessible ledgers, blockchains can make all kinds of record-keeping more efficient. Property titles are a case in point. They tend to be susceptible to fraud, as well as costly and labor intensive to administer. Some countries are undertaking blockchain-based land registry projects. Honduras was the first government to announce such an initiative in 2015, although the current status of that project is unclear. The Republic of Georgia cemented a deal with the Bitfury Group to develop a blockchain system for property titles. Reportedly, Hernando de Soto, the high-profile economist, and property rights advocate will be advising on the project.

Most recently, Sweden announced it was experimenting with a blockchain application for property titles.

Protection of intellectual property

As is well known, digital information can be infinitely reproduced and distributed widely thanks to the internet. This has given web users globally a goldmine of free content. However, copyright holders have not been so lucky, losing control over their intellectual property and suffering financially as a consequence. For example Mycelia uses the blockchain to create a peer-to-peer music distribution system. Founded by the UK singer-songwriter Imogen Heap, Mycelia enables musicians to sell songs directly to audiences, as well as license samples to producers and divvy up royalties to songwriters and musicians – all of these functions being automated by smart contracts. The capacity of blockchains to issue payments in fractional cryptocurrency amounts (micropayments) suggests this use case for the blockchain has a strong chance of success.

Conclusion

Undoubtedly, the blockchain offers incredible potential to change our lives on all levels. However, new opportunities are accompanied by many new challenges. Especially the data protection stands in a tension related to the latest technology. In this regard, we should not prematurely abandon a technology that has the potential to change our lives in a (positive) way, as the Internet has done recently. Regardless of the possible regulation of blockchain systems, countless programmers work on privacy-oriented solutions. Examples like Monero, ZCash and Verge are to be mentioned here. The goal is to anonymize payment systems within the blockchain. Similar developments are to be expected for the numerous other uses of Blockchain.

Attorney and Partner @KPMG with focus on public sector | #blockchain enthusiast #catowner Articles own

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