Is blockchain a suitable anti-corruption tool?

The services we use and assets we own are increasingly digital. They are represented by data residing somewhere. Over the last few years, blockchain has been touted as a tool that can handle secure, transparent, and unalterable transactions of our digital assets. And where public registries have been plagued by tampering from corrupt public servants, the blockchain promises transparency and immutable registries.

Naturally, those who have promoted this technology are the experts and enthusiasts. Billions of dollars have been spent to develop concept notes, pilot projects, and tests to probe whether the blockchain can deliver on its promise as an anti-corruption tool. This U4 Issue looks at some of these experiences to try and extract lessons learned and recommendations for policymakers.

The blockchain and Bitcoin

In 2008, a secretive developer, writing under the pseudonym of “Satoshi Nakamoto,” first described Bitcoin and its underlying blockchain technology. Since then, the digital currency has gained momentum and is now used for peer-to-peer transactions globally. It allows transferring of legal and illegal funds and works much like cash. Except that no banks or borders obstruct the flow of funds in the Bitcoin realm. Official exchanges, where the digital coins can be converted to fiat currencies, are regulated in some countries and subjected to compliance with anti-money laundering guidelines. Elsewhere though, the exchange happens informally between individuals in closed chats or social media groups.

One of the shortcomings of Bitcoin is its computational demand and therefore its cost in terms of energy consumption. Its energy footprint is not sustainable. As a result, competing blockchains with smaller energy footprints are emerging. These competitors may be able to reduce computational and processing needs.

Sovereign and corporate cryptocurrencies

At its origin, Bitcoin and the blockchain were designed to exist without a central regulatory authority. Recently, state actors have shown an interest in the cryptocurrency. The same institutions the digital currencies tried to forego in the first place now want to use the technology for financial purposes.

In 2019, the social media giant Facebook launched a project to develop Libra, a digital currency governed by a consortium of companies and NGOs. If the project comes to fruition, Libra could become a reliable currency for approximately 2,4 billion Facebook users and could overnight lead to the creation of the largest bank on the planet. Nobody knows the effect something like Libra may have on small, national currencies. Governments have doubts about its potential and are wary of its possible impact. Meanwhile, several central banks are researching how to incorporate a national, digital currency in their financial systems.

Harnessing the blockchain’s potential

Blockchain technology has been deployed in experiments and pilot projects within identity management, land rights, in provenance tracking, and within logistics. Promising use cases are found in diverse fields. Identity management and cash-based assistance for refugees in camps have reduced transaction costs and increased traceability of funds. The shipping industry uses blockchain for tracking containers and customs clearance to increase transparency and speed up the movement of cargo around the planet. Applications within the contexts of land registries and land rights have instead shown mixed results, especially where poor digitalisation and unresolved conflicts are present.

A secure proof of identity is fundamental for financial inclusion. Blockchain has been suggested as a technology that can provide secure identity, and pilot projects are ongoing in developing countries. Digitising public registries and providing digital public services are means to increase transparency. Securing such registries with blockchain technology may hinder corrupt practices and tampering of records.

Estonia ranks high among the countries that have digitised government services – initiated long before blockchain was invented. Georgia is using blockchain to secure its land registry, but the country’s improvements on the corruption perception index started long before introducing the technology.

Blockchain may be useful in corruption prevention, but only in the presence of certain prerequisites. Connectivity, digital literacy, and reliable institutions are essential for blockchain technologies to be successful.