Most people will likely already have heard about “blockchain”. But what exactly is this new technology and why and how should organizations use it? We delve deeper into these topics in this article. We explore why blockchain, the technology which is at the heart of virtual currencies like bitcoin, is relevant in the public sector and when it might be appropriate to consider this opportunity. We also provide a straightforward example of how blockchain technology could be used to change existing processes specifically for the public sector.
Our economic and legal systems are, to a large extent, structured around (records of) transactions and contracts. These serve several purposes. First off, they influence interactions between individuals and organizations. In addition, they are used to authenticate one’s identity and to serve as a record of events. Moreover, they secure assets and guide managerial behavior.
Despite their critical role, these tools have not kept up with the rapid digital transformation that is sweeping through society and the economy. In our digital world, how we control and regulate our administrative processes needs to change to keep up. Blockchain technology promises to solve this problem.
Blockchain technology is part of the family of “distributed ledger solutions”. More specifically, it is a distributed database that records transactions between different parties. So it is a trusted public ledger that, on a continuous basis, keeps track of all transactions recorded in a given public network. This public ledger is shared with all the different computers that are part of the network, which are called nodes. Since all information is shared with all computers, there is no centralized authority. As a result, all the nodes share one “single source of truth”. This truth is adapted in real time and on the computers of all the participants in the network.
For a transaction to be included on the blockchain, it first has to be visible to all the participating nodes and then verified by the wider blockchain community. This validation process is based on the principle of a consensus mechanism, meaning there is no single user (i.e. an administrator) who can singlehandedly decide on, or overrule, a specific transaction. A majority (i.e. a consensus) of all the participating nodes is required. If the transaction is approved, the data record or “block” is added to the blockchain, making the transaction final. The result is an un-editable and transparent record of all transactions.
The applications of blockchain in the public sector are based upon three pillars. Firstly, the transactions constitute a transfer of value, where each transaction between people, organizations or institutions is registered on the blockchain, which acts as a trusted third party. Secondly, a blockchain is a chronological chain of transactions, and the “lifecycle” of each transaction is permanently registered on the blockchain. New transactions are added to the blockchain in a linear, chronological matter. Hence, these transactions are added to the existing ones, but can never replace the old ones by deleting them. Finally, blockchain is an inter-organization facilitator breaking down the silo structure of organizations in terms of information communication, allowing different organizations and its departments to tap out of the same information pool.
The benefits of blockchain technology for the public sector are threefold. Firstly, significant administrative simplification can be achieved through the redesign of administrative processes, which typically involve numerous parties and often one or several intermediaries, based on the concept of shared information on the blockchain. While in current processes the government, a bank or another third party often acts as an intermediary to generate trust between parties, the blockchain technology removes the need to rely on the other participants in the network. This enables these actors to focus on their role: adding value for their clients. In addition, through the use of integrated smart contracts, greater efficiency can be realized. Smart contracts can be defined simply as self-enforcing pieces of code, stored on the blockchain, unmodifiable and therefore trust-worthy. Moreover, the registration of transactions on the blockchain is secured by means of cryptography and this registration is stored on all the different nodes in the network, which for all practical purposes makes it nearly impossible to commit fraud, delete or alter previously registered transactions.
Blockchain is applicable in much of the public sector and specifically when there is a) a transaction of value, b) a registration of existence (e.g. a birth) or ownership (e.g. real estate), and/or c) a process in which multiple parties are involved. The latter is especially relevant when the integrity of a party is uncertain. While this problem is generally outsourced to a trusted third party (e.g. a notary service), blockchain renders such an intermediary obsolete, guaranteeing the authenticity of each transaction through its design.
Shifting traditional transactions in the public sector to the blockchain can result in significantly faster processes, which are much more cost efficient as they no longer require numerous time-consuming steps. As the information on the blockchain is stored on multiple nodes, this data is secure, immutable and transparent. Also, a wide variety of transactions can be automated through the use of smart contracts, as described above.
A straightforward example of the benefits linked to blockchain can be described by a person’s lifetime of encounters with the government. Across a lifetime, a person likely comes into contact with multiple layers of government (e.g. municipal, regional, federal, etc.). Often, the government requires personal information, which is already known by another government organization from a prior encounter, but was not shared. Blockchain eliminates this inefficiency by storing information on the blockchain as off the first encounter, requiring an update only when there is a new “event” (e.g. moving to another city). Blockchain allows all relevant information about a person or organization to be stored and accessed by other authorized individuals or organizations. While this may lead to privacy issues, the right architecture and set-up can mitigate these concerns through the use of smart contracts and by allowing access only to relevant information.
To summarize, blockchain is part of the family of “distributed ledger solutions”, which records transactions between different parties. The application of blockchain technology in the public sector is particularly useful when there is a) a transaction of value, b) a registration of existence or ownership, and/or c) a process in which multiple parties are involved. Blockchain and smart contracts facilitate the essential redesign of administrative processes, allowing the government or intermediaries to focus on their role: adding value for their clients. Moreover, transactions on the blockchain are secured by means of cryptography and the registration of these transactions are stored on all the different nodes in the network. This makes it nearly impossible to commit fraud. All of this means a secure, efficient and innovative future for public sector transactions.
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