How Local Government Can Harness Blockchain Technology
In August of 2021, the Mayor of Miami, Florida made good on a long-standing social media promise to dive headlong into the cryptocurrency world and take his city along for the ride. The nation’s first city-specific cryptocurrency, MiamiCoin, was live.
But is MiamiCoin, or MIA, the future of municipal financing or just a way for Mayor Suarez to encourage the city’s burgeoning status as another tech hub, akin to Silicon Valley or Austin?
Is the blockchain, the technology that makes the creation and trading of cryptocurrency possible, the future for cities, or an overhyped tech-trend?
The answer has repercussions for local governments and the folks they serve. Tackling the idea of implementing blockchain in government requires exploring the function of blockchain, the potential it offers local governments, and the drawbacks that can’t be ignored.
What is blockchain?
In simplest terms, the purpose of blockchain technology is to store identical copies of databases in various locations, communicating and saving changes to each copy of the database when needed.
This makes it ideal not only for storage of data, but also for keeping that data updated, relevant and reliable for all parties involved. Because it independently verifies the data, it replaces a third party transference or storage institution, like a bank.
This article in Digital Government puts it best: “Blockchain is technology that builds a trustworthy service in an untrustworthy environment.”
How is this possible? The answer is a bit more complicated.
Essentially, multiple systems are connected through a series of nodes, or data reception and storage points. These nodes handle data sharing, transaction processing and data validation.
As data is changed or a transaction initiated, each node uses a consensus algorithm to make sure all nodes are on the same page about the change. The multiple, decentralized systems rely on the nodes, and the algorithmic language they speak, to ultimately act as one. No human intervention is required.
How can blockchain be used in local government?
Hopefully, you now have a better idea of what blockchain is. But how is blockchain currently being used, and are these use cases applicable to local government?
Blockchain Use Cases for Local Governments
As in the Miami example, blockchain is a core mechanic in the mining and storage of cryptocurrency. You may wonder what the benefit of a city-specific cryptocurrency is. Miami leadership might say it’s building a more equitable digital landscape for Miami residents to gain a foothold in the future. But in addition, 30 percent of all MIA currency mined goes straight into Miami’s coffers, paying for public works projects, development, and basic city services.
But financial transactions using blockchain aren’t limited to cryptocurrency. Financial transactions with traditional currency like dollars and euros can also occur speedily and securely over the blockchain, which can save time and money in the long run.
Record ownership transfers are another example of a practical application of blockchain technology for local governments. Though NFTs, or non-fungible tokens, might be the most popular example right now, blockchain technology allows many types of records to be transferred while securely and reliably recording the transaction.
Local government employees are up to their elbows in real estate deeds, vehicle deeds, wills and trusts, local bonds, public information requests, and many other types of records that must be transferred or shared securely. Similarly, blockchain is being used to create smart contracts, which kick-in automatically once conditions are met.
Experts believe that the security and speed of blockchain could eventually be used to empower democracy. Though it’s not a proven use case yet, voting systems could use blockchain to remove human error from elections.
Of course, the United States voting system is overwhelmingly reliable, thanks in no small part to hardworking and well-trained poll workers. The potential benefit of blockchain technology would be in saving administrators time and effort.
What are the benefits of using blockchain technology in government?
Blockchain doesn’t have to be public. In a permissionless blockchain, anyone can join the network of nodes. But in a system that requires permission to join, like the network you may have to log into at your place of work, only trusted members of an organization can serve as transaction nodes. This is particularly important in public sector use of blockchain; local governments wouldn’t benefit from the many uncontrollable variables of permissionless blockchains, like mining cartels or high energy expenditure.
Copies of data will always be available. Anyone who uses the blockchain data will have copies of data available to them at all times, no independent file storage needed. If you serve as a node on a permissioned or a permissionless blockchain, your files will receive the pings from the system and be updated with the shared information, putting the days of strict naming conventions and draft numbering behind us.
Assets in the blockchain are automatically verifiable. Blockchains serve as a mechanized version of a notary public, ensuring the data’s authenticity and preventing fraud. Different types of blockchain do this in different ways, but both permissioned and permissionless blockchains authenticate data without the risk of human error or reliance on third party systems.
Blockchain serves as a trustworthy record of transactions. Like in a general ledger, transactions are recorded in order. Blockchain technology can even be used to trace illnesses or counterfeit items.
What are the potential downsides of using blockchain in government?
Transaction times could be slower even than current government processes. This is because blockchain depends on multiple approvers per transaction. The reason blockchain can avoid the potential hassle of a third party financial authority is because there are multiple check-ins along the value’s journey from sender to recipient. These verification steps mean transaction time isn’t always instantaneous.
Permissionless blockchain technology uses more energy than traditional financing. Because all nodes have to verify transactions by solving algorithmic puzzles, the energy expenditure is immense. In the world of cryptocurrency, the by-product of this computational effort, called “mining,” results in nodes obtaining and storing units of a specific currency.
Data recovery ranges from challenging to impossible. Blockchain is decentralized by definition. That’s a huge part of its appeal, especially when it comes to data security. A trade-off is that it is challenging to recover the digital keys that control an individual’s access to the blockchain assets they own, typically stored in blockchain wallets. If local government adopted blockchain, forgetting your password wouldn’t be fixed with a quick call to the IT department.
For the public sector, blockchain is extremely private. Again, blockchain’s security and user privacy are majorly appealing qualities of the technology. But in the context of the public sector, where all actors are accountable to residents and oversight officials, not just their own pocketbooks, too much privacy can foster misuse and even corruption. Illegal transactions, including government fraud, are more easily traced by traditional financial institutions.
Government services won’t be replaced by blockchain technology, but agencies should still pay attention.
As with so many technologies on the forefront of innovation, like machine learning or augmented reality, the potential of blockchain far exceeds its current application. Municipal technological infrastructures are undergoing a security renaissance in the wake of increased hacking attempts.
Still, the average American locality has a long way to go before IT systems and teams are prepared to take on the immense regulatory and engineering commitment that the blockchain currently poses.
Right now, local governments and, when appropriate, government vendors should take the opportunity to get smart on using blockchain for government services. That means creating safe environments for research, standard setting, and boundary-testing.
Major sandbox work is already being done by enterprising public-private partnerships. These safe experiments will prove instrumental in crafting the ultimate public sector blockchain playbook.
Government will play a role in the future of blockchain.
Even if Miami may be ahead of the curve when it comes to adopting a geographically-specific cryptocurrency with a percentage return to city coffers, experts agree that widespread government adoption of blockchain will take time.
While blockchain technology itself is not new, the ways institutions can apply blockchain to improve security and operations are still emerging. There are still aspects of blockchain adoption and technology development that need to be understood before taxpayer resources are entrusted to it. However, the government will always play a regulatory role in the growing industry.
In a best case scenario, public sector tech’s vital oversight authority is bound to inform the technology’s ultimate role in empowering public service.
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