New kid on the block: How blockchain could transform local government

20 March 2018

With the recent press speculation about the collapse of Bitcoin – the world’s first and largest cryptocurrency – you’d be forgiven for thinking that the technology underpinning it, known as blockchain, is unlikely to have much use in the local government sector. However, in this article, Raj Shah, a solicitor in Sharpe Pritchard’s Projects department, explains how in fact blockchain may well transform local government operations via a simple Q&A.

What is blockchain and how does it work?

Put simply, blockchain is a decentralised database held by all those who use it and which securely records transactions.

It’s often described as a digital distributed ledger. Rather than each party to a transaction retaining its own set of balanced books, the ledger is constituted by a continuously growing list of encoded electronic transactions themselves (called ‘blocks’), each of which has a timestamp and a cryptographic link to a previous block (known as a ‘hash’, which is essentially a digital fingerprint). This prevents any block from being inserted between two existing blocks and helps to make blocks tamper-proof.

The blocks are copied across a computer network and regularly updated. So, unlike a traditional ledger book kept in one location, copies of a blockchain can be maintained by multiple parties (with no one copy being the master copy), and each user on a blockchain network can be sure that the same ledger is being shared without requiring the verification of a centralised third party.

The reason for each user’s trust in the blockchain is because it is secure. Unauthorised changes to the ledger are extremely difficult to make because the ledger provides traceable records on the asset’s history, and identical copies of the database are shared between users. Blockchain’s instantaneous nature additionally means there is virtually no opportunity for someone to alter a transaction before it is recorded on to the ledger. The software on which blockchain runs automatically distributes data to the decentralised database as soon as new transactions are made.

Almost anything of value can be tracked and traded on a blockchain network, from tangible assets such as land to intangible assets such as copyrights. This is what makes the technology so attractive to so many different industries – anything from cryptocurrency to medical records can be added to a blockchain.

Fully decentralised blockchains are known as public blockchains – anyone can access them. It’s also possible to have consortium blockchains that operate under the leadership of a group, or private blockchains to which access permissions are tightly controlled to certain individuals.

What does this have to do with Bitcoin?

Bitcoin is simply one well-known application of blockchain technology. It’s a virtual cryptocurrency and each transaction made via Bitcoin is recorded on a public blockchain. This means that each Bitcoin’s history can be traced, so users cannot spend Bitcoins they do not own, make unauthorised copies, or undo transactions (since the hash means that each block is linked to the block that came immediately before it, so records cannot be retrospectively altered).

What are the main benefits and drawbacks of blockchain, especially in the context of local government?

The main benefits are accuracy and security of transactions. Beyond this, a key advantage is the time saved in complex, multi-party interactions, since there is no requirement for central verification of a transaction. There are also potential cost savings insofar as less oversight of transactions is required (so intermediaries in transactions can be eliminated) and there is no need to duplicate work since all users have access to a common shared ledger. From the perspective of local authorities, any possible reduction in costs is welcome in the current climate of austerity. The adoption of blockchain technology may also increase efficiency and transparency.

On the other hand, distributing a common digital ledger across networks requires people, computers and servers, so it’s fairly resource-intensive from a technological point of view. This, along with other factors such as security, privacy, and regulatory compliance, may make the adoption of blockchain technology more difficult in a local government context. There are also concerns about the risk of destabilising local government operations through cybersecurity risks and dividing participation in the technology along the lines of age and wealth in the local population.

What potential uses are there for blockchain in local government operations?

The delivery of day-to-day public services by local government could potentially be transformed by blockchain technology. Potential applications might include:

  • ensuring that each voter has only one vote via secure electronic voting;
    administering the collection of council tax;
  • confirming certain entitlements of local residents, such as to parking permits or to school places within the local catchment area;
  • providing greater transparency in grant allocations;
  • identity verification in a more time-efficient and cost-effective manner;
  • tracking benefits claimants’ receipts and spending patterns to inform subsequent financial management advice; and
  • using the concept of a distributed ledger to provide access to transparent records of day-to-day activities such waste collection and to enable local residents to record related issues, such as uncollected rubbish.

One particular mainstream application within local government could involve embedding blockchain with code known as ‘orders to execute’, which will only permit certain financial transactions to proceed once certain pre-defined conditions have been met. These are commonly called ‘smart contracts’, and they could help to make payment on achieved outcomes or milestones under common works, supplies, and services contracts easier to track and less likely to be the subject of dispute, particularly because the transactions are open, trackable, and auditable.

What are some of the legal issues surrounding the application of blockchain, and what is the future for blockchain in local government?

G-Cloud 9, the current iteration of the Government-led framework agreement for use by public-sector bodies in the UK for IT and digital services, currently includes a limited number of services relating to blockchain, including services offered by a provider of digital ledger technologies. It is likely that the number of relevant suppliers will increase in the next iteration of G-Cloud.

There are a number of legal issues surrounding blockchain technology that will need to be resolved. Legal hurdles include governing law and jurisdictions (there is scope for jurisdictional confusion if a breach or failure occurs somewhere else in the world as a result of the decentralised nature of blockchain), data protection and privacy issues (particularly in light of the imminent entry into force of the EU General Data Protection Regulation), and the legal enforceability of smart contracts.

Nonetheless, it is likely to be only a question of time before this technology permeates local government operations, which it is why it is important that local authorities begin sooner rather than later to explore the value of adopting this technology – for example, by participating in joint pilot projects to understand and recognise better the potential efficiencies that can be unlocked in embracing this technology.

Raj Shah, Sharpe Pritchard LLP

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

 

 

 

 

 

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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