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States have been experimenting with blockchain-based voting systems, smart contracts for ID management and fintech sandboxes, but implementation challenges exist, report says.
Seeing the potential of blockchain in sectors beyond finance, where it’s most commonly used, the Government Accountability Office recently released four suggestions that could enhance the technology’s benefits and mitigate its challenges.
“Blockchain is useful for some applications but limited or even problematic for others,” according to GAO’s technology assessment on blockchain. “For example, because of its tamper resistance, it may be useful for applications involving many participants who do not necessarily trust each other. But it may be overly complex for a few trusted users, where traditional spreadsheets and databases may be more helpful. Blockchain may also present security and privacy challenges and can be energy intensive.”
Areas with potential include voting, organizational structure and ID management. In fact, some states have said that using a blockchain-based voting system would enhance remote-voting security and election audibility. West Virginia was the first to experiment with it in 2018. Last year, a bill was introduced in Alaska proposing to adopt the technology in its voting security system.
According to GAO, blockchain-based voting would involve four steps. First, a jurisdiction would have to generate the digital equivalent of unmarked ballot ovals. Second, it would have to credit votes to the registered voter’s anonymous ID. Third, when the voter votes, that creates a debit on their account and a credit on the chosen candidate’s account. Last, officials would add the credits to vote totals to determine the winner.
“According to one vendor of blockchain-based voting systems, such systems would likely need to be hosted on a permissioned blockchain network controlled by a certifying authority, such as a state’s chief election officer,” GAO’s report states. “This authority could control the number of blockchain nodes, the physical location of the servers that act as nodes, and the identity of the auditors of the system.”
Potential disadvantages of such a system include increasing the attack surface because of the many nodes required and removing anonymity because blockchain networks rely on timestamps to create an unchangeable record of transactions. Those stamps could be used to link a vote to someone’s identity.
Organizational structure is another potential use case for blockchain because the technology has enabled a new organizational form called a decentralized autonomous organization, which are “entities in which groups of people collaborate and govern themselves online using a blockchain-based system of smart contracts and tokens.” DAOs have a reduced hierarchy, with token holders voting on proposals and votes weighted based on how many tokens members have. Wyoming passed a law that began allowing in July 2021 some DAOs to register as legal entities. As of last December, more than 100 had done so.
ID management may also benefit from blockchain, the report states, by adding transparency, traceability and decentralization, and protecting privacy.
“A blockchain-based digital ID may give a user greater control over personal data than traditional ID systems,” the report states. “For example, specially designed blockchains using smart contracts and advanced cryptographic techniques for digital IDs could provide proof of age without revealing any other information. In contrast, a driver’s license includes personal information such as a birthday and driver’s license number that may not be necessary for obtaining a specific service, unnecessarily exposing such personal information.”
Other states are considering using blockchain-based records, such as smart contracts. Vermont was the first to do so in 2016. Two years ago, “Illinois enacted the Blockchain Technology Act, which in part makes smart contracts and blockchain records admissible as evidence in legal proceedings. Arizona and Tennessee, among other states, have passed similar legislation addressing smart contracts,” according to GAO.
The report lays out four policy options that GAO believes could help give clarity to blockchain’s use, although it also notes where complications could yet lie. One option involves setting standards that focus on the development, implementation and use of blockchain. The report identifies opportunities such as finding and filling gaps, determining where standards would be most beneficial, and addressing challenges with interoperability and data security. Potential downsides – GAO calls them “considerations”—include figuring out who should take the lead in establishing internationally recognized standards and complexity in getting consensus from many public and private stakeholders.
The second option is about oversight—specifically, clarifying existing oversight mechanisms, including regulations, or creating new ones. This would create frameworks that could offer clarity around using blockchain and around compliance with laws related to blockchain-related commerce. Determining just how much oversight is enough is a major consideration, the report adds.
One way to improve oversight is through regulatory sandboxes. Arizona has been hosting the FinTech Sandbox since 2018, and although only 13 companies have participated, at least two involve blockchain.
GAO’s third policy option is producing educational materials to help users and regulators understand blockchain. Advantages include enabling training of a workforce skilled in blockchain products, prompting innovative research and development and preparing policymakers in regulating the technology. The challenges lie in ensuring that the materials meet many learning needs across many audiences and identifying who could most effectively create the materials.
Fourth is appropriate uses. Opportunities here involve investigating when and where blockchain would be most useful and using the technology to increase transparency and accountability of existing systems and services. “Legal or regulatory uncertainty may hinder some users from benefiting from blockchain,” the report states, adding that it “could be difficult to revert to a non-blockchain technology” after an agency invests time and resources in it.
Stephanie Kanowitz is a freelance writer based in northern Virginia.