Government Trust through Blockchain Accounting

Trust was a motif in the annual FreeBalance International Steering Committee (FISC) conference last month in Miami. Our view is that governments are faced with numerous “governance gaps“. This gaps limit sustainable. Some governments suffer from fewer gaps than others.
But, gaps integrate. This network effect means that any gap will lead to a trust gap. The Edelman Trust Barometer shows that global trust in government is low. Very low. In the era of “fake news”, the media is slightly less trusted that government in the 2018 survey.

Blockchain to the Rescue?

What is the promise of blockchain for government trust? In 2015, the Economist called blockchain “the trust machine.” Wired claims that blockchain “redefines trust“.
Blockchain is essentially technology-enabled accounting innovation.
Accounting innovation.
That might seem to be an oxymoron.
But, accounting forms the foundation of modern civilization.

  • Double-entry bookkeeping innovation enabled growth during the Renaissance
  • Accrual accounting innovation enabled finding the true value of any organization, although yet to be fully adopted in government
  • Commitment accounting, or fund accounting, innovation enabled government organizations to ensure spending against legal budgets (and tracking the funds available for spending, the “free balance”)
  • Goodwill innovation enabled valuing the business potential
  • International Standards, like IPSAS, enabled comparability among public sector organizations

Blockchain provides distributed ledgers. In other words, multiple-entry bookkeeping.  Data can be manipulated in manual accounting system. Even electronic accounting systems with additional financial controls, and segregation of duties can be manipulated by those who are tech-savvy. Or, by learning passwords from other users. Distributed ledgers mean that tech-savvy corrupt individuals would need to manipulate hundreds of systems. And, these transactions are encrypted.

Many public financial systems lack comprehensive integration among sub-systems. For example, the ERP system used in Malawi did not prevent line ministries from removing money from bank accounts. This points to the second innovation behind blockchain: the block and the chain. The transaction lifecycle is not fully integrated in traditional accounting. Commitment accounting provides the links from commitment to obligation to contract and payment. An ideal government Chart of Accounts includes information about the fund, or revenue source. This makes it possible possible to track a block of funds throughout the chain from revenue to payment transaction details, if supported in financial systems. Yet, many governments use different systems for revenue and expenditures. For example, the use of a standalone e-procurement system can obscure a part of the chain of transactions. As can separate assets, payroll, and tax administration systems. The chain is lost in sub-ledgers, interfaces, and differing metadata.
Blockchain links blocks, or individual transactions, in chains. Financial subsystems become integrated within chains. The linkage of chained blocks adds to transaction security. (This is a peer-to-peer model, not unlike e-mail.) This notion of blocks and chains can enable “smart contracts” whereby transactions are approved based on “proof of work” across distributed ledgers.

Blockchain Promise and Reality

Blockchain was developed to support the trust-less environment of cryptocurrencies. Traditional financial transactions pass through trusted intermediaries like banks and governments. Public and private sector organizations have experimented with blockchain, mainly in somewhat trusted environments, such as financial settlement among banks. Nevertheless, technology analysts, the Gartner Group, sees blockchain falling in the trough of disillusionment. “Gartner does not expect large returns on blockchain until 2025.” Market data from financial and technology analysts suggests that the public sector is the second largest “blockchain” market after financial services. Technology analysts, IDC, predicts that “by 2018, 40% of national governments will plan to test and/or pilot private or permissioned blockchain models to aggregate and track protected data, enabling trusted data sharing between organizations.”
Blockchain Market Observations
What is going on in the blockchain market? Why is blockchain adoption growth so modest? This is not unusual in emerging technology markets. Adoption friction includes:

  • Cryptocurrency confusion: Blockchain technologies used for cryptocurrencies is not often applicable for other scenarios, and the use of cryptocurrencies for illegal or unethical financial activities taints blockchain
  • Permissioned vs. permissionless: Cryptocurrencies use the permissionless approach to blockchain, while most governments should focus on permissioned and private approaches
  • Performance: Blockchain performance remains poor, particularly in “permissionless” implementations that require tokens and mining
  • Robustness:  Bugs in any blockchain system open up the possibility of exploitation because encrypted blocks are immutable
  • Pilot projects: Very few non-cryptocurrency blockchain projects have moved beyond the pilot stage, creating concern in potential adopters
  • Numerous platforms: Numerous blockchain platforms are in use, making it difficult to determine whether to use Ethereum, Hyperledger, R3 Corda or others
  • Horizontal vs. vertical: Blockchain platforms and techniques
  • Blockchain-like: Many analysts suggest that most blockchain initiatives do not need blockchain at all, that other mechanisms for distributing ledgers are more appropriate, or that problems can be solved by running existing software properly

Government Strategic Implications
Government decision-makers who consider the trust gap can best identify relevant uses of blockchain technology. Numerous sources describe three transaction trust concerns:

  • Sin of Commission (forgery of transaction)
  • Sin of Omission (censorship of transaction)
  • Sin of Deletion (reversal of transaction)

For government, blockchain promises to reduce fraud and corruption, while improving controls and data reliability. Government decision-makers should be less concerned about the state of blockchain adoption, or how to pick a platform. Governments need hands-on experience. This is an innovation trust opportunity. And, experimentation is relatively low cost.
The spirit of agile development is experimentation and learning. For example, the Lean Startup methodology is all about beginning “the process of learning as quickly as possible“. It is only through controlled and inexpensive experiments that governments can make breakthrough innovation.

Government Scenarios

Many vendors refer to technology “use cases”. I prefer “scenario” because use cases in product management are significant and comprehensive. Here are some of the more interesting scenarios for blockchain in government:
Public Finance Scenarios

  • Remittances
  • Tax compliance
  • Tenders and contracts
  • Online payments
  • Open fiscal data
  • Financial audit
  • Reconciliation
  • Disaster relief
  • Anti-money laundering
  • Social benefits
  • Government grants and loans
  • Aid management
  • Utility metering
  • Government assets, facilities, property, fleet, inventory
  • Government supply chain management

Other Government Scenarios

  • National IDs
  • Microfinance
  • Central bank settlements
  • Property registration
  • Voting
  • Records Management
  • National cryptocurrencies
  • Drug security
  • Secure IoT
  • Carbon trading
  • Certificates and licenses
  • Smart grid, smart energy

Blockchain in Government Next Steps

Traditional rigid and legacy IT project management techniques should be avoided when contemplating blockchain initiatives. These techniques have proven rather disastrous with traditional enterprise software in government. A more agile approach is required. For example, the notion of building a full business case for blockchain seems almost silly. The potential blockchain impact can be characterized, but hardly measured.

The FreeBalance Government Blockchain Adoption Framework consists of the following:
Agile Environment
Governments with agile capabilities can optimize results from blockchain initiatives:

  1. Bi-Modal Base: Process, controls, and information governance are more flexible in agile than traditional IT, so governments need to support bi-modal or multi-modal approaches to support traditional IT governance for core systems, and agile governance
  2. Experimentation Centre: Governments need innovation and experimentation centres to provide new perspectives and encourage creativity
  3. Design Thinking: Design thinking approaches focuses teams on problems, and engages users into uncovering solutions
  4. Learning Focus: The focus, especially of initial projects, is to learn through doing and getting user feedback
  5. Readiness Assessment: Any digital transformation project, like blockchain, should be contemplated only when project team members have agile skill sets
  6. Expectation Management: Stakeholder expectations need to be set, including the notion that many ideas will prove unworkable, but that overall costs will be lower because of agile feedback loops
  7. Measurement: Agile methods of measurement provides project teams and stakeholders with progress  information, while improving implementation predictability

Compelling Scenario
Governments select compelling ideas for experimentation:

  1. Trust Deficit: Scenarios that address trust concerns among stakeholders are likely to have more impact
  2. Financial Implication: Rather than a business case that focuses on expected returns, scenarios can be selected based on the financial size of the problem such as tax avoidance estimates, or remittances intermediary costs
  3. Potential Ease of Adoption: Stakeholders should be predisposed to solving underlying problems, or aspiring to improved controls
  4. Measurability: Prototypes and proofs-of-concept need output and outcome measurements designed ahead of time, and the definition of what success looks like
  5. Innovation Potential: Innovation aspirations need to align with innovation capabilities, although there are often opportunities for technology leapfrog
  6. Scalable Potential: There should be sufficient anecdotal and case study validation that selected blockchain scenarios could scale

Approach
Governments approach blockchain initiatives based on context to optimize results:

  1. Partnership Approach: Governments consider innovative business partners who guide project teams through processes, help identify scenarios, and provide technology insight
  2. Permissionless / Permissioned / Private / Blockchain-Like: Distributed ledger concepts should be aligned to scenarios, although proofs-of-concepts may adjust thinking & the need for tokens and token mining is likely unnecessary for most government scenarios
  3. Platform Similarities: It is difficult to predict which platforms will dominate blockchain implementations in the future, so governments should begin experiments with platforms that have shown some success in similar scenarios
  4. Experimentation Containment: Experimentation scope needs to be manageable by reducing potential external factors
  5. Process Comprehensiveness: Process scope needs to be sufficiently complete to prove or disprove experiments, such as handling multiple step workflows
  6. Usability: Usability needs to be addressed through prototyping sessions to ensure that experiments do not fail because systems were too difficult to use

Scaling
Governments use learning in prototypes and proofs-of-concept to scale blockchain initiatives successfully:

  1. Iterate: Successful proofs-of-concept will have feedback to enable improvement before implementing  in production
  2. Integration: Integration with dependent subsystems needs to become seamless
  3. Test: Load, regression, and security testing is required before production
  4. Change: Design thinking initiates organizational change by involving stakeholders, comprehensive change programs are necessary for blockchain in production
  5. Extend: Technologies used in any successful blockchain project could extend to similar scenarios

Blockchain is Part of Government Digital Transformation

Government digital transformation is about governance transformation. Technology-enabled governance transformation. Blockchain is a promising technology enabler. Like any digital transformation, governments can only achieve blockchain success through modern agile techniques.

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