August 16, 2018
What is blockchain and why is it important for citizens and governments? This Q&A summarizes the findings from Mowat’s Inside the Black Blocks: A policymaker’s introduction to blockchain, distributed ledger technology and the “Internet of Value”.
Q1: What is blockchain technology and why is it important?
Blockchain is an emerging and innovative digital technology. It involves using digital ledgers to list the ownership of a set of assets as well as a transaction history for those assets that is made essentially tamper-proof through the use of cryptography.
For governments and the broader public sector, blockchain has the potential to improve the effectiveness of numerous operations and services. But it also has the potential to disrupt essential systems, such as currency issuance, that governments have – until recently – effectively monopolized.
Q2: How do blockchains work?
Blockchains are operated by a peer-to-peer (P2P) network of computers in which each of the computers on the network independently maintains a complete copy of the ledger. Each copy is regularly updated as the nodes of the network work together to record every transaction that occurs on the blockchain in a way that ensures all copies remain consistent. This illustration shows how this process works:
Q3: What makes blockchain technology innovative?
Because computers are so good at copying digital information quickly and cheaply, it used to be impossible to create digital files that had unique individual value, such as units of digital money, artworks or collectibles. It was just too easy for them to be counterfeited. Blockchain technology now makes the creation of digital uniqueness possible. Or, in other words, it enables the creation of “digital scarcity.”
Q4: But wait, don’t we already have digital money? Isn’t that what a credit card does?
Yes, but… It’s true, it is already possible to move value around digitally using things like credit cards. But credit card networks require a central authority that has special powers to operate them. And that creates a number of problems.
For starters, centralized systems give central authorities the ability to charge the people who use them a lot of money. They also allow corrupt or controlling central authorities to steal from users and limit their freedom. Furthermore, when the central authorities fail, the entire system fails. Finally, because they centralize data in one place, hackers are able to steal this information more easily.
In contrast, blockchains do not rely on a central authority. Thanks to this decentralized nature, blockchain technology promises (eventually) a cheaper, freer, and more reliable and secure digital payments system when compared to existing systems like credit card networks.
Q5: So all blockchain does is give us a cheaper and safer digital payments system? What’s the big deal?
Blockchain’s applications go well beyond payments. By creating the first “digitally native value system” – that is, a monetary system that is created, defined and controlled by software instead of central banks – blockchain expands the scope of what can be automated. For example, combined with advances in AI and the IoT, blockchain is enabling “smart contracts” – business logic and legal agreements encoded in software – to begin controlling money, and the things money can buy, autonomously.
By creating the first “digitally native value system” – that is, a monetary system that is created, defined and controlled by software instead of central banks – blockchain expands the scope of what can be automated.
Q6: Interesting, but what could this actually change?
Potentially, a lot. This could mean, for example, rooftop solar panel systems autonomously buying and selling power to and from the traditional grid as needed. Or, if you lease a car using a smart contract connected to the car’s internal computer, the contract could automatically lock you out of your car if you missed a payment – or, conversely, automatically pay for repairs for which you are eligible under the car’s warranty.
In the longer term, it could also result in the creation of much stranger innovations, such as autonomous corporations that have no owners, directors, or employees but are programmed to autonomously buy and sell services in a competitive digital marketplace.
Q7: Beyond money and business transactions, what else could blockchain change? Didn’t you mention something about freedom and decentralization?
Indeed. Blockchain could also create a much more decentralized Internet and, by extension, economy and society. Many believe that blockchain could disrupt and disintermediate the “superstar” technology firms that increasingly control our economy. In so doing, they foresee blockchain helping return the Internet to its decentralized origins and re-empowering individuals by enabling them to better control and protect the data they create.
More concretely, by decentralizing the money system, blockchain could make it impossible for governments to debase their currencies – as the governments of many countries, such as Zimbabwe and Venezuela, have previously done. While not without its own potential problems, this is a change that residents of these countries would probably welcome.
Q8: What about the public sector? Couldn’t they use blockchain technology to improve their services as well?
Definitely. For example, blockchains could increase the efficiency of government permit issuing processes by enabling multiple government departments to maintain a single shared source of reliable information. This could free citizens from having to ferry physical documentation between multiple government offices while also slashing the time required to gather all these permits from weeks and even months to days.
The use of blockchain could also make electronic health records (EHR) systems more secure and interoperable, give patients greater control over who is able to access their records, and improve medical research by enabling sophisticated algorithms to study enormous pools of medical data while preserving patient anonymity and privacy.
Q9: Wait, shouldn’t governments also worry about some of the wider implications of blockchain?
Yes, they should. Four important “issues to watch” that come to mind are:
- Competition in governance services
The creation of Bitcoin highlights how blockchain can empower individuals and small groups to challenge institutions like states. Facilitated by the Internet, blockchain enables individuals, organizations and even other states to offer individuals services like currencies and business registration that were previously the monopoly of an individual’s home government.
- Decreasing effectiveness of “negative” regulatory frameworks
The Internet is already undermining a number of existing “negative” regulatory frameworks – regulatory approaches that achieve objectives by blocking particular actions. By further empowering individuals, blockchain stands poised to accelerate this trend. In response, governments will need to clarify their objectives and develop alternative “positive” approaches that advance these goals through inducement instead or prohibition.
- Novel legal questions
Blockchain is creating a digitally native value system in which digital units of value, like bitcoins, can be controlled by software. In so doing, blockchain is enabling new forms of economic activity that were not anticipated when our current legal and regulatory frameworks were created. For instance, should autonomous corporations be allowed? If not, how can we stop them?
As the importance of popular blockchains like Bitcoin and Ethereum grows, questions around how their governance should interact with the traditional structures of democratic governance will grow. The non-traditional and ad hoc way in which these platforms are currently governed is unlikely to satisfy all those impacted by them. Meanwhile, governments are unlikely to take a hands-off approach should their interests, or the interests of their citizens, be seriously threatened.
Q10: What can governments do to realize the promises of blockchain while avoiding its perils?
There are a variety of actions that governments should consider. First, governments should build internal capacity by supporting employee education, staff exchanges with the private and not-for-profit sectors, and small scale proofs of concept and pilot projects. Governments should also build an attractive environment for blockchain innovation in Canada. This should include updating existing regulatory frameworks and building bridges with Canada’s growing community of blockchain innovators.
These first two recommendations depend on, and could help government support, internal and allied experimentation with blockchain applications in the broader public sector. Applications in areas like EHRs and government permit issuing represent a real opportunity to further the public interest. Moreover, by working with private firms on these sorts of projects, governments can help to foster growth in Canada’s blockchain industry.
Insofar as new regulation is required, we recommend that government make greater use of standards and other flexible regulatory tools than has traditionally been the case. Working with the blockchain community, as well as other stakeholders from civil society, will be critical – as will a willingness to be creative.
Finally, blockchain is a truly global phenomenon that will reduce the importance of national borders. Thus, effective governance of blockchain will need to be predominantly international. Canadian governments need to actively push global governance cooperation on blockchain to make sure that Canadians’ interests are reflected in these governance regimes.
Q11: What are your three key takeaways for policymakers?
- Blockchain marks the arrival of the first digitally native value system. This lays the foundation for potentially revolutionary forms of automation by enabling software to do many new and important things that it cannot easily do today.
- Blockchain and associated technologies offer other less revolutionary, but still significant, innovations in terms of organizing and coordinating information systems. These applications will enable greater efficiency and decentralization which could help secure greater privacy and a more even distribution of economic and social power.
- The most significant implications of blockchain will arise from its interactions with other emerging technologies such as artificial intelligence and the Internet of Things. It is critical for government to understand and engage with all of these innovations as part of a wider and interconnected technological revolution which will require a holistic public policy response.