Assessing blockchain applications for the public sector Blockchain basics for government
07 September 2018
Government organizations can truly transform and enhance collaboration through blockchain technology. However, while IT will be a key factor, the composition of stakeholders, operations, strategy, talent, and compliance will be just as important.
The buzz around blockchain is understandable—after all, it is likely to be the next big “foundational technology,” like the internet and personal mobile phones before it. And being a “new” technology, any conversation about its applications raises more questions than answers. But with a growing number of success stories emerging from the financial sector (where much of the current publicity for the technology originates), it would seem that blockchain may be living up to its hype.
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Governments too are exploring dozens of applications for blockchain, as highlighted in our explainer, Will blockchain transform the public sector? However, before diving into the technology, government agencies and organizations should take into account multiple factors; here we highlight the most critical of these.
Technology may be the most obvious consideration, but it’s certainly not the only concern. It is equally important to understand the unique ecosystem that is a blockchain and the considerations in successfully crafting a winning blockchain solution. We identify six key factors to consider in assessing the readiness of a government application for blockchain:
- Consortium: Partnering with the necessary players to ensure network effect
- Operations: Designating maintenance responsibilities
- Business impacts: Understanding impacts to core business processes
- Talent: Sourcing the right people to lead implementation
- Compliance: Adapting to accommodate rules and regulations
- Technology: Navigating through rapid technological changes
The particular challenges and approaches that should be taken with regard to each of these factors will depend on the specific public sector use case under investigation. Of course, before addressing these six factors, it should first be determined whether blockchain makes sense for a given problem/application.
To better understand how to consider blockchain’s potential in a government context, it’s helpful to examine a concrete use case. Intergovernmental transactions (IGTs) offer a clear example. IGTs are business activities conducted between two government entities. To properly record them and present the balances in the Financial Report of the United States Government, IGTs must be eliminated during the preparation process, or else they can result in misstated balances.1 In other words, when preparing the consolidated financial statements, intragovernmental activity and balances between federal entities should be in agreement and must be subtracted out, or eliminated, from the financial statements. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the consolidated financial statements.2
According to the US Government Accountability Office (GAO)’s Financial Audit of Fiscal Years 2017 and 2016, the federal government continues to be unable to adequately account for and reconcile intragovernmental activity and balances between federal entities. This inability can lead to issues such as the loss of billions of dollars in unreconciled activity; inaccurate reporting of assets, liabilities, costs, and other information; and errors and low trust in reporting.
IGTs appear clearly to be a problem, but is blockchain the right solution? To assess the quality of fit between a problem and a blockchain solution, we recommend viewing the problem through three lenses:
- Desirability: The challenge or potential opportunity is desirable for an agency if it aligns with and furthers its goals or operations, as well as that of its stakeholders. IGTs are a significant, shared business problem affecting nearly all agencies. A solution providing trading partners with a near-real-time settlement and an accurate record of transactions would be desirable for all involved. From a business perspective, it could help minimize errors and increase managerial confidence in transaction reporting. From the user’s perspective, it could minimize the time needed to complete administrative tasks and allow employees to reallocate their time to more mission-critical tasks.3
- Feasibility: The challenge or potential opportunity is feasible if there are no insurmountable technical or organizational obstacles to its success. IGT is, by definition, a business transaction between two heterogeneous business partners (agencies). Organizationally, the agencies may differ in their culture as well as policy. Complex questions concern the integration points between trading partners and systems, changes to current processes, and governance of the network. Data security and infrastructure are important to government leaders and may be key considerations when designing user interfaces. These are all issues that blockchain could be designed to wrestle with.
- Viability: After an agency has decided there is a desirable business case and determined it is feasible to move forward, it is imperative to evaluate whether the use case for blockchain is viable—meaning that blockchain would offer greater advantages and value than other solutions. IGT has the four main characteristics that make a viable case for blockchain—multiple writers who need access to shared data, in a low-trust process that requires immutability to address current problems. Blockchain also has added value potential for IGT through disintermediation via automated reconciliation and real-time transparency, as well as the possibility of codifying terms and conditions of the interagency agreement (IAA) into a “smart” contract on the blockchain.
In a separate, more extended discussion, the six key factors for assessing the readiness for blockchain are explored in more detail and examined with regard to IGT.
Even blockchain’s most enthusiastic supporters should not suggest it is a panacea. The desirability, feasibility, and viability of each use case must be considered and then the six readiness factors can be addressed. While the considerations for implementing blockchain solutions are many, the benefits are slowly becoming clearer. Blockchain offers government organizations an opportunity for true collaboration and transformation. Early adopters can expect to see the benefits sooner than most, while establishing themselves as leaders in areas that are likely to grow in importance over time.
Download the full report to know more about what a government agency should be considering when starting a blockchain project.
Also, check out the explainer, Will blockchain transform the public sector?
