Beyond Digital Currencies: Blockchain in the Public Sector

(Disponible en français : Au-delà des monnaies numériques : la chaîne de blocs dans le secteur public)

This HillNote is the third of three on the topic of digital currencies. Part 1 of the series dealt with the taxation and regulation of digital currencies. Part 2 dealt with issues and concerns related to digital currencies.

Governments around the world are recognizing that blockchain, one of the underlying technologies of digital currencies such as Bitcoin, could provide significant benefits for the public sector as it establishes itself as a promising innovation separate from digital currency.

Blockchain is one type of distributed ledger technology. Since 2009, over 600 public and private distributed ledger platforms have been developed, with the Bitcoin and Ethereum platforms being the largest and most well-known open distributed ledgers.

Distributed ledgers are shared across multiple users in a network. Any changes to the ledger are recorded, approved and synchronized in real time.

Distributed ledgers are often categorized as open/permissionless or private/permissioned. Open distributed ledgers are accessible by the public and users can remain anonymous. In contrast, access to private distributed ledgers is usually restricted to known users and only certain users can make changes to the ledger.

There are three types of digital ledgers: a centralized ledger, a public distributed ledger and a private distributed ledger. A centralized ledger is accessed by authorized users through a trusted central party, who can make any necessary changes to the ledger. Users cannot interact directly with each other. Examples include a bank chequing account and a government land title registry. With public and private distributed ledgers, there is no trusted central party and instead all users have a real-time copy of the entire ledger. Users can interact directly with each other. A public distributed ledger is open to the public and any user on the ledger's network can make changes to the ledger. Examples include Bitcoin and Ethereum. A private distributed ledger is restricted to authorized users and only certain users on the ledger's network can make changes to the ledger. A private distributed ledger could be used by a government organization to replace a centralized ledger.

Advantages of distributed ledger technologies

There are several advantages in using distributed ledgers, including:

Transparency
Errors and fraud should be reduced because all users of a network have an exact copy of the ledger and any changes require validation by the users.

Lower costs and faster transactions
Direct transfers between users of a network remove the need for an intermediary to oversee transactions.

Security
Blockchain is considered more secure than a traditional ledger because it uses cryptography to safeguard the ledger. Any changes to the distributed ledger must be validated by the network’s users through “consensus” and the ledger’s data structure makes it almost impossible to be retroactively altered.

Automation
Distributed ledger technology has also been developed for “smart contracts,” where the terms are written in software code and saved on the ledger. Once certain contractual conditions are met – such as a transaction occurs, or a price is reached – the computers on the network automatically execute the terms of contract, which could involve making a payment or transferring ownership of an asset. The Ethereum platform was developed specifically for smart contract applications.

Limitations of using distributed ledgers

Distributed ledgers are not always a suitable replacement for a centralized ledger. Some limitations include:

Difficult to edit or update
Using a ledger that cannot be altered would not be useful for transactions that might need to be removed or regularly updated. This may be a significant concern when considering a consumer’s “right-to-be-forgotten,” which is set out in the European Union (EU)’s General Data Protection Regulation. This right requires an organization to remove personal data from its internal servers upon request, which might be impossible with a distributed ledger.

Storage limitations
Unlike a centralized ledger, information that is saved on a distributed ledger is broken into smaller files that are encrypted and saved across multiple users in the network, which is referred to as “sharding.” Sharding makes it challenging for any single user to access all of the original content and thus the information is more secure; however, this process also makes it difficult to store large amounts of data on distributed ledger.

Energy consumption
Due to the computing power required in the validation process of blockchain, high energy consumption has been highlighted as a potential deterrent. However, it has been noted that other types of distributed ledgers likely use less energy.

Scalability of blockchain
The validation rate for transactions in a blockchain is approximately seven transactions per second, which is slow compared to traditional payment methods. As such, blockchain may not be useful for a network with a large number of users making transactions.

Distributed ledgers in the financial sector

In Canada, the financial sector was first in recognizing the value of these technologies. The Bank of Canada has been exploring potential uses of digital currencies and blockchain in the financial sector since 2014.

In 2016, the Bank of Canada, Payments Canada, the R3 consortium and several Canadian financial institutions launched a research initiative to determine whether distributed ledgers could have a role in interbank payments in Canada. Referred to as Project Jasper, the initiative looked at whether distributed ledgers could improve the processing and reconciliation of payments and reduce related errors and disputes. It also examined whether it could provide a clear record of payments and thus improve transparency for regulators and central banks.

Phases One and Two focused on interbank payments using two different distributed ledger platforms, while Phase Three examined the use of these technologies in foreign exchange and securities. It was concluded that a distributed ledger platform could potentially be used for a securities settlement system, but it would likely not be as efficient as the current system for interbank payments.

Currently, the Bank of Canada is working on Phase 4 with the Bank of England and the Monetary Authority of Singapore to assess the use of distributed ledger technologies in cross-border payments and settlements.

Distributed ledgers and other government services

According to the Organisation for Economic Cooperation and Development (OECD), over 45 countries are examining whether distributed ledger technologies can improve government services, particularly those involving registries, tracking assets and the automation of transactions. Some examples of the uses cited by the OECD include:

Registries
The United Kingdom and British Columbia are two examples of jurisdictions that are looking into recording land titles on a distributed ledger and using smart contracts to automate the real estate transfer process. Estonia, considered a leader in providing electronic government services, has adopted blockchain to secure many of its government registries from cyber attacks, including those used in health care, legislation, voting and identity management.

Election voting
In the 2018 United States midterm elections, West Virginia allowed mobile phone voting for troops stationed overseas using a smartphone application. A total of 144 votes from soldiers stationed in 31 countries were anonymized and recorded on a blockchain.

Government transactions
By 2020, the city of Dubai in the United Arab Emirates plans to use distributed ledger technology to eliminate paper transactions involved in all visa applications, bill payments and license renewals.

Author: Adriane Yong, Library of Parliament