Blockchain for Government: Can the Technology Rein in Waste?
ATLANTA—“I don’t want to go on a rampage. But there’s no accountability [for government spending],” said Georgia Senator Michael Williams at a panel during the IoT Blockchain Summit held in parallel to Industrial IoT World on Oct. 29.
A CPA by trade, Williams took office in 2015 and since then says he has seen several examples of government agencies with trouble accounting for large sums of money. “There are billions of dollars that go missing,” he said. Earlier this year, Politico reported that a Pentagon agency couldn’t account for $800 million of spending. The city of Philadelphia recently lost track of $33.3 million. And in 2014, $619 billion was apparently missing from a federal government intended to provide transparency of government spending.
According to Williams, the solution to the problem can be summed up in one word: blockchain.
Accountability Through Immutability?
One of blockchain’s foundational principles is its design to store data permanently. Not everyone agrees that immutability is strictly possible or always desirable, but the fact remains: digital ledger technologies like blockchain are different than traditional databases. Unlike relational databases, for instance, whose files can be overwritten, blockchain can provide a theoretically permanent record of transactions in the ledger. Immutable data storage isn’t limited to blockchain, the proponents of such digital ledger technology argue that blockchain is “the most sophisticated tracking system yet to be developed,” as Mark Van Rijmenam and Philippa Ryan argue in Blockchain: Transforming Your Business and Our World. And unlike traditional databases, data isn’t stored in a central vault but is copied across all users’ systems.
The question of whether blockchain for government can provide an accurate accounting of spending at large depends not just on the widespread deployment of the technology among the government and its suppliers, but that the data entered into the ledger is accurate in the first place. Otherwise, the classic “Garbage In, Garbage Out” data problem applies.
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Experts disagree on what constitutes trustworthy data. The World Economic Forum, for instance, has recommended ruling out blockchain applications involving physical assets because doing so involves coming up with a digital equivalent to the physical asset. Nevertheless, the idea of “tokenizing” physical assets to represent them in a distributed ledger remains popular and is at the heart of many proposals to use blockchain for supply chain traceability applications.
Part of the reason for that popularity is blockchain’s potential to identify and prevent fraud and counterfeiting. Creating an immutable digital representation of an item poses a challenge for counterfeiters, who may succeed in cloning an item but struggle to clone its digital identifier.
Counterfeiting is a significant problem for the Department of Defense and a number of the replacement electronics (an estimated 15 percent in 2015) it procures for missile and satellite applications are imitations of legitimate parts. The problem has been long known to the military and can be costly to address. For instance, a 2012 Washington Post reported that the cost to swap a counterfeit memory device in a Missile Defense Agency missile was $2.7 million.
When the IoT Blockchain Summit panelists were asked what sparked their interest in blockchain for government applications, Bob Betts, chief executive officer of Blocnets said: “If I had to point to one thing, it was the Department of Defense’s report on the number of counterfeits that are in our DOD supply chain and where they come from and how much that puts people at risk,” Betts. “That was startling to me. That is really what triggered me to find some way to solve that problem.”
A Closer Eye on Spending?
While counterfeiting is certainly a significant problem, a more universal governmental spending hurdle, however, is simply closely tracking and providing information to document individual transactions. In 2016, Michigan State economist Mark Skidmore raised eyebrows when he identified $21 trillion in unauthorized spending from the Departments of Defense and Housing and Urban Development between 1998 and 2005. That works out to more than $60,000 per U.S. citizen. A 2016 report that focused on $6.5 trillion worth of DOD accounting adjustments in which the agency failed to provide written authorization for many transactions. In 2017, the Department of Defense announced its plans to perform its first ever annual audit at a cost of nearly $1 billion and, more recently, stating that it would audit its aerospace supply chains.
It is not the case, however, that the DOD has lost or misspent trillions of dollars, stressed Under Secretary of Defense David Norquist in a C-SPAN interview from January. “When you see an article that says [misallocated] trillions of dollars and you realize we only receive $600 billion in a year, you realize there is a mismatch,” Norquist said.
The DOD has a ledger-based system to keep track of spending. When a spending item is recorded in the ledger, it is referred to as a journal voucher entry. Journal vouchers lacking adequate support are deemed unsupported. “Now from a management point of view this is bad,” Norquist said. “It’s not the same as not being able to account for money that the Congress has given you to spend.”
Ultimately, the question of whether blockchain for government can force accountability determines on whether government agencies and its private-sector partners are willing to embrace the technology at scale — or are mandated to do so.
For the Pentagon, for instance, deploying blockchain at scale to track hundreds of thousands of parts in a global supply chain would be no small feat, but could potentially provide unprecedented resolution in tracking the granularity of spending.
The Department of Defense for one is investigating the technology — at least for cybersecurity-based applications. An article titled “The Pentagon Has the World’s Largest Logistics Problem. Blockchain Can Help published on DefenseOne calls for the Pentagon to
experiment with the technology for logistics applications. While blockchain proponents argue that the technology could save the government agencies billions of dollars, the prospect of deploying the technology at scale across government agencies and their suppliers is anything but certain.
Senator Michael Williams joined Georgia State Senator Joshua McKoon to author Senate Bill 464 to allow the Georgia Department of Revenue to accept blockchain-based cryptocurrencies from citizens paying license fees and tax bills.
Williams said his effort to legitimize cryptocurrency and blockchain in general quickly encountered resistance from other legislators. There is “a long learning curve” to be able to advance blockchain, he said. “As I approached nearly all of the legislators in the past session, trying to get their support for this bill, without a doubt, without failure, every single conversation led to Silk Road and Mt. Gox,” he said, referring to the dark website that used bitcoin to process payments for illicit goods and the now defunct bitcoin exchange base, which at one point reported losing track of 850,000 bitcoins then valued at more than $450 million.
In any case, deploying blockchain at scale across governments will likely be an uphill battle for the time being. Prominent media outlets such as the Economist and HBR aren’t fully sold on digital ledger technology. And payment-focused firms such as SWIFT and Stripe have given up on blockchain projects.
In addition, education remains an important barrier that could constrain adoption for the time being. When Williams attempted to convince other legislators of blockchain’s value for payments, other lawmakers asked him: “Why do we want to pass a bill that will help out criminals? He concluded. “There is a big gap there between what they are thinking about blockchain and what blockchain is. […] trying to help educate our legislators on what blockchain is.”
Another central obstacle in using blockchain to fundamentally change how businesses interact is the potential resistance from incumbent businesses. A “lot of incumbent businesses” could be “put out of business,” Williams said. “Once those incumbent businesses realize that, they are going to spend a lot of money lobbying their elected officials to do whatever they can to stop blockchain from moving forward,” he added. “We have already seen that happen at the federal level with the SEC. – some of the things they are doing to slow down the progress of blockchain.”