Trends and Policy Recommendations

In this report, we have attempted to provide an accurate picture of the current state of implementation of blockchain by governments and public sector bodies around the world. Through our research process, we have identified key factors that either drive change or hold back the various jurisdictions observed. Based on these trends, we have set out 5 key policy recommendations, which we hope will contribute to the continuous dialogue in promoting successful and rational blockchain adoption.

Carry out a cost/benefit analysis of upgrading public sector IT Systems using blockchain/DLT

Trend: Blockchain can be understood as a more efficient way of recording and transferring data. Any application that involves exchanging data could thus theoretically make use of the technology. It therefore has the potential to be as ubiquitous as the internet, underpinning virtually all transactions. Therein lies a major challenge for Governments across the world. Blockchain functions best when all parties in the transaction take part, whether this is everyone on a supply chain, a benefit scheme, food traceability, and more. Even for the sophisticated and technologically advanced jurisdictions, this is a daunting task. The public sector is infamous for being slow at updating legacy systems. Whereas private businesses embrace innovation, governments are understandably more risk averse, constrained by major responsibilities. Perhaps unsurprisingly, it was observed that smaller jurisdictions found it easier to upgrade their existing infrastructure than their larger peers. Thus, while Estonia, Bahrain and Gibraltar have shown great flexibility in accommodating blockchain applications, whether that is via regulatory changes or use cases, larger countries such as China and the U.S. are taking longer to shift. Interestingly, it is often at the state or provincial level that developments first occur, such as in the Chinese Districts of Chongqing Yuzhong and Hangzhou or in the U.S. state of Wyoming.

Recommendation: Governments should look to the successes at the local level, learn from the experiences gained and carry out a cost/benefit analysis of upgrading public sector digital systems nationwide using Blockchain/DLT.

Promote international and cross-border cooperation

Trend: Due to being decentralised and distributed, blockchain is cross-border by nature. The most popular applications, such as Bitcoin and Ethereum, enjoy users from across the globe, who are subject to drastically different regulatory frameworks. These differences hamper growth and result in uncertainty for developers and users alike. It also leads to regulatory arbitrage, making it difficult for authorities to clamp down on illicit activity such as money laundering and terrorist financing via cryptocurrencies.

Recommendation: Some of the jurisdictions observed, such as the EU, UK, and Australia, suggest agreeing to a set of international rules and standards, further enhancing cross-border cooperation. This would allow blockchain projects to scale. Public policy should also focus on closer cooperation between national authorities, namely competition authorities, financial regulators and data protection authorities, in order to mitigate criminal activity.

Establish Sandboxes and Innovation Hubs

Trend: Blockchain still suffers from an image problem, as the media continues to report numerous cases of fraud, financial loss, and money laundering (ML) and terrorist financing (TF) in the use of cryptocurrencies. As a result, many Governments have in the past taken a prohibitive approach to the technology. However, as their understanding of blockchain’s potential becomes clearer, some jurisdictions are looking at ways to promote domestic innovations. From Indonesia’s Batam Island, to Bahrain’s FinTech Bay and the EU’s Blockchain Observatory & Forum, regulatory sandboxes and innovation hubs are at the heart of this strategy.

Recommendation: In order to mitigate regulatory uncertainty and promote innovation, Governments should continue to promote sandboxes and innovation hubs, supported by adequate levels of investments and continuous dialogue through public-private partnerships. Further, jurisdictions should look to participate in global forums, such as the FCA-led Global Financial Innovation Network, where they can share best practice and collaborate on common challenges or policy questions. This would not only enable regulators to share experiences of innovation in respective markets, but also provide firms with an environment in which to trial cross-border solutions, accelerating global blockchain/DLT adoption.

Avoid premature termination of use cases

Trend: A number of jurisdictions, including the UK, lament the habit of testing use cases, only to let the project die upon completion. There seems to be a lack of understanding from certain Ministerial Departments in the technology’s potential as numerous successful proofs of concepts are never taken to the next stage. Certain use cases, such as benefit payments in the UK and Indonesia, the trading of agricultural goods in Haiti, and the drug supply chain in the U.S., show evidence of blockchain saving public money and driving efficiencies.

Recommendation: As expressed by representatives from Bahrain and Estonia, key to successful blockchain adoption is remaining technology agnostic i.e. assessing the clear benefit in applying blockchain to a particular area of the public sector. There must be an economic rationale for moving from the traditional database infrastructure to a blockchain-based model. Once the merit of using blockchain is established, Governments should ensure that sufficient resources are assigned to test the application and, should the test be successful, establish a clear plan forward. As expressed by the UK, public sector projects must be underpinned by strong leadership. Jurisdictions with a clear plan and vision when it comes to blockchain implementation in the public sector will be complemented by an equally ambitious and thriving private ecosystem.

Define public procurement criteria

Trend: Whether it is IBM providing the cloud environment for the Dubai Blockchain Platform, ConsenSys writing Thematic Reports in partnership with the EU Blockchain Observatory & Forum, or the Ghana Lands Commission support for the BenBen Land Registry initiative, public procurement for blockchain projects is common among most of the observed jurisdictions. However, this method currently faces a number of challenges. Successful public procurement must be based on a legal framework that encourages free and open competition and value for money. It must also be transparent. Due to the technical complexities and cutting edge nature of the current blockchain/DLT marketplace, government departments can have difficulty in establishing trust in and verifying the quality of  contractors and their extended supply chains, as well as reconciling electronic payments with assets and services. At the same time, a system actually based on blockchain could itself help to improve the public procurement process.

Recommendation: In Lord Holmes’ Report on report Distributed Ledger Technologies for Public Good: leadership, collaboration and innovation (November 2017), he argues that the increased transparency, traceability and trust enabled by blockchain technology could be used to better regulate public procurements, whatever the project. A blockchain-based public procurement process could improve government performance as a buyer by providing greater visibility into and understanding of the entire supply market. This could enable a move towards a more distributed model for public sector buying, improving access for SMEs, promoting local growth and supporting regional policies. Beyond the use of blockchain for the procurement process, clear and transparent purchasing and quality criteria should be established for governments wishing to work with blockchain providers no matter the type of public procurement.

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