Blockchain: An Anti-corruption Tool

The basic tenet of a healthy democracy, is open dialogue and transparency.

Peter Fenn

Introduction:

Lamentably, western societies have witnessed a decline in confidence towards government and policymakers, which has raised serious concerns regarding the health of democracies. Governments across the globe are embracing new technologies and going digital, in an attempt to remold relationships with their citizens and to modernize their bureaucracies. Technology is rightly said to be the greatest ally of transparency. Citizens who are digitally savvy demand greater accountability, speed, and quality of services from the government and are also less tolerant of corruption, by virtue of being equipped with greater means to uncover it.

Experts dealing in anti-corruption policies have postulated that the issue of corruption would be better resolved by addressing the causes which allow that corruption, rather than individually punishing the people responsible for the illegitimate acts. Since corruption represents a breach of trust, a technology that strengthens trust, presents itself as an attractive solution to this problem. Blockchain technology has been gaining popularity in this regard, as having the potential to revolutionize the government and bring about integrity and transparency in public administration. It is designed to operate in environments where trust in data/code is greater than trust in individuals or institutions.

The World Economic Forum has even stated[1] that “Blockchain has emerged as the most promising disruptive technology in the fight against corruption… as it possesses features capable of anchoring integrity in bureaucracies.” It has even been suggested as a tool to fulfill the Sustainable Development Goals (SDGs) related to legal identity and financial inclusion. With the ‘expectations bubble’ regarding this technology expanding, it is necessary to assess both the potential and pitfalls of blockchain, along with its usefulness as a tool in the anti-corruption field.

What is Blockchain?

Blockchain has been defined as a public digital ledger used to record transactions across many decentralized or distributed computers in a peer-to-peer network, where transactions are added to a block.[2] It is important to note that blockchain itself isn’t a device or a machine, rather a system or a method to keep track of information. Cryptocurrencies such as bitcoin, ethereum, litecoin work on Blockchain platforms only. Nowadays, companies and industries are relying on blockchain to create safe houses for sensitive data since it leaves no room for manipulation.

Why is blockchain relevant to the field of corruption?

Blockchain consists of a continuous chain of blocks, which contain information about completed transactions. Since each subsequent block includes the data of the previous ones, the information contained in blocks can only be verified, it can’t be deleted or modified. The data is stored in many computers which ensures there is no risk of data loss and since it is encrypted, the confidentiality of data is also maintained.

Being a public ledger of all transactions, it is searchable and can be easily used to track all transactions. It is a decentralized and distributed database which implies the absence of a single storage and management center. It is these features of integrity, confidentiality, easy tracking, and decentralization which make the technology so appealing in the field of anti-corruption.

How would blockchain work in the public sector?

To provide an illustration, if a government decides to construct a school and uses blockchain for the project implementation, it would be able to track how each Rupee is being spent, identify all the users of the funds and ensure that only authorized persons can spend the funds on originally intended expenses, within the allotted time. At each stage of the project (school construction), all operations will be recorded in the system. If during the process all or any portion of the funds is illegally transferred from one wallet to another, a new block containing the data regarding this transaction will be created in the distributed ledger. Such data can be neither altered or deleted, and the absence of anonymity will help in identifying the offenders. Thus, fraud and corruption investigations which typically take an average of 15 months can be performed at the touch of a button and at a fraction of the cost! All that is required is using blockchain software and adopting a cryptocurrency.

How blockchain technology can be used as an anti-corruption tool?

1. Tracking Public Procurement

Public procurement (or government contracting) is globally, the single largest marketplace for government spending and the biggest source of official corruption. The World Bank has estimated that businesses and individuals pay $1.5 trillion in bribes every year, which corresponds to 2 percent of global GDP.[3]

Blockchain can be used to automate and track high-risk transactions such as public contracts. This would allow us to detect red flags, bid-rigging, phantom vendors, and price-fixing by using advanced analytics. Blockchain could add critical value to public contracting up to the delivery of the goods and services, by locking in critical information at every step of the procurement chain which can be monitored, tracked, and audited.

Limitation: The technology may not capture the entire Universe of relevant human interactions and it is possible that collusions and bribery would still take place offline.

2. Preventing Manipulation in Public Procurement

The process of selecting vendors is complex and opaque and usually involves a high degree of human discretion. This leads to financial wastage, distorts market prices, reduces healthy competition, and hence, results in substandard quality of goods and services. This is where smart contracts can be useful.

Smart contracts are contracts that are written in code instead of on paper and incorporate the important terms and conditions. Once these conditions are met and verified, the contract would be automatically executed. A smart contract based on blockchain would limit the possibility of contracts being illegitimately altered and hence prevents manipulation in the procurement process.

3. Payments and Financial Transactions

Some governments give grants to supports the arts, education, social assistance, and humanitarian aid efforts. Many international development organizations also provide budget support or financing for specific projects to recipient countries. However, the process is opaque and inefficient which could potentially allow corruption to take place. Government cash transfer and payment systems are especially vulnerable to corruption. They have multiple points of human discretion which creates opportunities for bribery, fraud, and falsification. Limiting the physical interaction between citizens and officials will reduce such opportunities. Blockchain can dis-intermediate and reduce the number of actors involved, which would reduce costs as well as the potential for illicit financial siphoning.

4. Tracking Certain Goods

Diamonds, gemstones, and other luxury items can be recorded on blockchains to provide proof of provenance and to prevent illegal goods from entering the market. The technology has multiple uses and can be implemented to increase efficiency, profits, and traceability, hence reducing the risk of disputes.

5. Verifying Identity

Blockchain would allow one to authenticate the identity of individuals and corporations. The absence of a simple way to prove one’s identity feeds bribery, contributes to fraud, and creates barriers to financial inclusion. Various countries have realized this and implemented their own identification systems – India is providing a single digital identity to its citizens, using biometric technology, as part of the Aadhaar. Estonia is operating a national digital identity scheme, where personal information is stored on a distributed ledger that individual’s control. Interestingly, both these systems currently encrypt identity information but not (yet) through blockchain technology.

6. E-voting

Recently, there have been growing concerns regarding election security, voter turnouts, voter registration integrity, and poll accessibility which have led states to consider blockchain-based voting platforms. This would establish trust, integrity, and ensure the participation of citizens in essential democratic processes. The WEF has observed, “Blockchain’s decentralized, transparent, immutable, and encrypted qualities could potentially help minimize election tampering and maximize poll accessibility.”[4]

7. Registering Land Titles

Existing methods of registry are outdated and vulnerable to corrupt practices. Governments are now experimenting on ways to integrate blockchain in their property registry and land titling systems. Blockchain-based land registries can provide a secure, decentralized, publicly verifiable, and immutable record system through which individuals would easily assert their land rights. Ownership would gain precedence over the manipulation of land rights in self-interest.

8. Beneficial Corporate Ownership Registries

Secretly operated companies can easily be used to launder money, pay bribes, or self-interestedly sway governmental investment. Recent scandals have brought the matter of undisclosed beneficial corporate ownership to light. Many countries are thus, beginning to develop central registries for beneficial corporate ownership in order to keep a better track of conflicts of interest and criminal activity. Tamper-evident and broadly accessible blockchain-based registries could provide some much-needed transparency and disclosure.

9. Other Spheres

Thus, the proper implementation of cryptocurrency and blockchain technology could help prevent fraud and corruption and reduce the costs of enforcement by having faster crosschecks and easily accessible information. It would further help in monitoring the efficiency and effectiveness of spending leading to development impact and growth of economies. Once this is achieved, the universality of Blockchain also consists in the possibility of its application in various other fields like State Administration, International economic relations, private enterprise, production, trade, the Judicial system, Medicine, Education, Science, etc.

Limitations and drawbacks in the implementation of this technology

1. In land registry – Countries who have implemented blockchain for land title registries have reached the finding that “blockchain does not replace a property registry; it enhances it.” This means that Countries with non-existent, incomplete, or incorrect land registries need to go first through the difficult process of gathering, cleaning, and digitalizing this information before a blockchain-based land title registries can function. Introducing the technology in a weak land registry system might be futile and therefore resources would be better spent fixing the legacy institutions.
2. Most countries still do not require companies to maintain beneficial ownership information about themselves. Further, the adoption of a comprehensive and verifiable blockchain-based registry would require buy-in from big businesses, banks, politicians, etc, many of whom may feel their interests will not be served by the public transparency and auditability of such a system.
3. In cases where blockchains hold registries of physical items, trusted gatekeepers would have to ensure that the physical reality and digital information are in alignment.
4. In e-voting – A voter verification system that uses biometric software, such as facial recognition, could result in false positives or negatives in voter identification, thus facilitating fraud or disenfranchising citizens. There may also be votes manipulation, paper trail erasure, or electoral chaos due to cyber-attacks.
5. Any new technology system, including blockchain, is vulnerable to cyber-attacks and other security risks.  “Spamming” and “draining” attacks might cripple the anti-corruption potential of this system by flooding it with useless or malicious information or by robbing it of the funds required to complete transactions. The infamous Petya virus is an example of an attack relating to cryptocurrencies. The virus simultaneously blocked access to thousands of computers and shut down the operations of hundreds of companies. The attacker demanded 300 USD in bitcoins to his digital wallet in exchange for unlocking the computers.[5]
6. Individuals and organizations who are less technologically savvy or well-resourced may face discrimination or exclusion if they are unable to use the system. Thus, the state would require a tech-aware population, along with sufficient connectivity and tech support services. This is not commonly found in most developing countries, why is it emphasized that countries need to “get the basics right first” before straightaway implementing these reforms.
7. Records entered in the blockchain are transparent and immutable. Because of these features, there may be conflicts with individual rights such as the right to privacy or the right to be forgotten.
8. As a decentralized system, blockchain is supposed to be self-governing. This means that governments that opt for a public, permission-less blockchain would have to accept that it will have virtually no control over how that system is governed. While the power would be taken away from the hands of politicians, it would simultaneously result in ‘code power.’ Trust would be dependent on the quality of the code and those with the competence to alter the code would be in control.[6]
9. Last, there is the challenge of the costs and scalability of blockchain. While the applications of blockchain-based solutions in public administration are limited in scope, their scalability remains an open question considering their governance requirements and the amount of energy they consume. The question then becomes whether the potential benefits outweigh the costs, which will be particularly high for governments that have not yet digitalized their records. The need for digital literacy, laws and regulations, or political decisions might be more challenging for a digitalization process than the technology itself. 

Present Scenario and International Perspective

There are many countries that are moving forward aggressively in order to use blockchain as a fundamental tool in public administration. A few administrations which have launched blockchain-based projects are:

• Estonia was the first country in the world to make use of blockchain at a national level. Since 2012, blockchain has been in operational use in Estonia’s registries, the e-law system, judicial, national health, and commercial code systems.[7]
• In Jordan, the UN World Food Program recently conducted a pilot project using blockchain in order to manage cash-based transfers to Syrian refugees to increase transparency, eliminate leakages and reduce transfer costs.
• Dubai has created an ambitious Dubai Blockchain Strategy which seeks to make Dubai the happiest place on Earth while increasing government efficiency and eliminating red-tape by putting all the city transactions on the blockchain.[8] The Director-General of Smart Dubai has remarked “We want to make Dubai the first blockchain-powered government in the world by 2020.”
• China has over 500 reported blockchain projects registered, many of which are by their government.
• Denmark’s Liberal Alliance party was the first local association in the world to perform an internal election through the application of blockchain technology.
• The Republic of Georgia launched the world’s first blockchain land-registry system. Their aim was to strengthen the property owner’s rights and enhance the citizen’s trust in the government. Sweden is also testing this land registry system.[9]
• In India – The Democratic Party utilizes a blockchain-based voting platform for consulting citizens for determining future policy positions.[10] The Maharashtra Government and the Dept. of Revenue have also partnered with an open-source hybrid blockchain platform for completing a Proof of Concept regarding land records.

Conclusion

In a world where governments are stained by repetitive corruption scandals and distrust of their citizens, the potential of blockchain to bring about transparency is enormous and the promise it holds to eliminate corruption is simply too remarkable to be ignored. Many of the limitations of the technology can be met and it would lead to a ‘revolution in trust’ by strengthening public integrity.

On the other hand, one must also admit that while the idea of using modern technology sounds appealing, the prerequisites for applying this technology are many – ranging from tech-aware citizens to digitalization laws, regulations, and technical infrastructure. Keeping in mind the huge amounts of energy the system would consume and the costs involved, it all comes down to whether the potential benefits would outweigh the costs. This cost would be higher for developing countries or for those states which do not have accurate and digitalized records. Thus, the author holds the opinion that states must first digitalize their records and lay down the groundwork for implementing blockchain technology in their administration, while simultaneously conducting research on this subject. Once this stage is crossed, countries can gradually implement and expand the technology to different spheres of the public sector.

Although Blockchain is a relatively new technology, it already boasts of a rich history and interesting developments are being made across the globe. With the looming possibility of more uses for this technology to be discovered in the future, the time to experiment and uncover its untapped potential in the anti-corruption field is now.

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References:

[1] World Economic Forum, Supplemental research report – Exploring Blockchain technology for government transparency, WEFORUM (June 2020). http://www3.weforum.org/docs/WEF_Blockchain_Government_Transparency_Report_Supplementary%20Research.pdf.

[2] Iansiti Lakhani, Karim R Marco, The Truth about blockchain, Harvard Business Review 57 (2017).

[3] Security Council, Global Cost of Corruption at Least 5 Per Cent of World Gross Domestic Product, Secretary-General Tells Security Council, Citing World Economic Forum Data Meetings Coverage and Press Releases Un.org (2018), https://www.un.org/press/en/2018/sc13493.doc.htm.

[4] Carlos Santiso, Here’s how technology is changing the corruption game World Economic Forum (2019), https://www.weforum.org/agenda/2019/02/here-s-how-technology-is-changing-the-corruption-game (last visited Aug 29, 2020).

[5] Mike Mcquade, The Untold Story of NotPetya, the Most Devastating Cyberattack in History Wired (2010), https://www.wired.com/story/notpetya-cyberattack-ukraine-russia-code-crashed-the-world (last visited Aug 29, 2020).

[6] Mareike Möhlmann & Andrea Geissinger, Trust in the Sharing Economy: Platform-Mediated Peer Trust, The Cambridge Handbook on Law and Regulation of the Sharing Economy (2018).

[7] Security and safety, e-Estonia, https://e-estonia.com/solutions/security-and-safety/ (last visited Aug 29, 2020).

[8] Smart Dubai, ConsenSys, https://consensys.net/blockchain-use-cases/government-and-the-public-sector/smart-dubai/.

[9] Arturo Castellanos & Raquel Benbunan-Fich, Digitalization of Land Records: From Paper to Blockchain, 39 in International Conference on Information Systems (2018).

[10] The Indian Sun, Horizon State ties up with Democratic Party of India The Indian Sun (2018), https://www.theindiansun.com.au/2018/09/21/horizon-state-ties-democratic-party-india/ (last visited Aug 29, 2020).