Blockchain technology is beginning to move past cryptocurrencies into companies and now governments. Countries around the world are trialing the emerging technology in areas from recording votes in elections to storing the records of citizens.
Distributed ledger technology (DLT) or blockchain as it’s more commonly known was pioneered by the creator of bitcoin, a digital currency. Bitcoin’s blockchain is a public ledger of activity that stores information about all the transactions taking place on the network. It cannot be hacked or tampered with and it is not owned by a central authority. Instead, a group of participants uphold the network.
CNBC has previously taken a deep dive into how exactly the blockchain works and its use cases in the corporate world. The key part about the blockchain is that it allows several parties that don’t necessarily trust each other, to share a common database that is cryptographically secure. This means that complex processes like contract negotiations could be made cheaper, faster and simpler.
Blockchain, which was once viewed skeptically by governments worried about its affiliation with bitcoin and other cryptocurrencies, is in vogue. Experiments are taking place globally into how the distributed ledger technology could be used on a national level. Of course, it would not mimic the bitcoin blockchain, but instead take the principles of a distributed trust-based system and apply it to government processes.
DLT is still in its early stages and there are still many problems to overcome before scalable government-level uses of the technology can be seen. CNBC takes a look through how blockchain is being used by governments.
Given blockchain first began with bitcoin, it’s a natural next step that nations would begin thinking about their own digital currencies. Several countries have talked about state-backed cryptocurrencies but exactly how they work or what they will look like is still up for debate.
The first country to actually introduce a state-backed cryptocurrency is Venezuela. It’s known as the “petro” and was launched earlier this year in a bid to raise money amid economic meltdown and sanctions.
Venezuelan President Nicolas Maduro says the digital currency is backed by oil and it raised $735 million when it was first released. And in the latest attempt to save the country’s economy, Maduro devalued the Venezuelan bolivar and introduced a new fiat currency known as the “sovereign bolivar,” which will be backed by the petro.
But the petro does not trade, unlike most other major fiat currencies, and it has been called a scam by experts and illegal by Venezuela’s own parliament. It may seem odd for a country to introduce its own cryptocurrency, but Maduro’s comments in August highlight the motivation.
"They've dollarized our prices. I am petrolizing salaries and petrolizing prices … We are going to convert the petro into the reference that pegs the entire economy's movements," he said.
Venezuela would like to see the dominance of the U.S. dollar depleted and Maduro said last year that the country would like to “free” itself from the greenback.
But Venezuela's attempt at a state-backed cryptocurrency might not be the route for others to copy, according to Jeff Schumacher, founder of BCG DV, an investor in blockchain start-ups.
"State-backed cryptocurrencies in regimes like Venezuela will do nothing to stimulate economic recovery. Whether standard or crypto, any currency needs to be backed on the fundamentals of the underlying economy," Schumacher told CNBC by email.
"Venezuela's economy is in shambles and creating a crypto will not change that. Most people won’t value it because they don’t believe in the government or the economy. History will inevitably repeat itself and we will likely see Venezuela's petro collapse."
China and Russia are among the nations that have talked about state-issued digital currencies. Others include Turkey, Qatar and Iran. The similarities between them include being reliant on the U.S. dollar, as well arguably having somewhat authoritarian regimes.
Cryptocurrencies are seen as a way potentially to reduce reliance on the greenback as well as have more oversight into where money is moving.
“Digital currencies may help a number of countries who are looking to de-dollarize to do that,” Hileman said.
“Cryptocurrencies, with their autonomy could offer a more independent and trusted alternative to the U.S. dollar, especially if they have backing of strong assets in terms of oil or gold in the early stage before they get a degree of stability where they don’t need that,” he added.
But Hileman said it was unclear how these state-backed digital coins would work. They could be issued by a central bank and backed by an asset at the start, just like Venezuela claims its petro is.
It’s not just the more authoritarian nations looking into state-backed cryptocurrencies either. Others like Singapore are testing a way to use a digital version of the Singapore dollar for cross-border payments. Swtizerland’s government has also commissioned a study into the possibility of an “e-franc.”
It may be a mistake to call state-run digital currencies “cryptocurrencies” because they may not necessarily run on a blockchain. Instead they could be digital versions of a country’s fiat currency.
"No one's in a rush to get this done. Will it therefore be necessary for it (blockchain) to be part of a digital currency if central banks issued it? Well the answer is I think not," Stephen Poloz, governor of Canada’s central bank told CNBC in January.
This would be a big difference from bitcoin which is based on a blockchain and is decentralized. On the other hand, state-backed digital currencies would be issued by a central authority, perhaps a central bank.
Blockchain technology offers the promise of more efficient and accurate processes because of how it works. And for governments that is exciting given the amount of data that they hold on citizens and how they are pushing to digitize much of that. Nations are also responsible for a massive amount of record-keeping which could move to the blockchain.
Let’s a take a look at some key trials of blockchain technology in government.
Elections are susceptible to fraud and human error. Blockchain has been touted as a solution to fix that. A number of trials have happened around the world. One of the most recent happened during West Virginia’s primary election in May. Select votes could use a blockchain-based mobile app to vote. It was created by a company called Voatz.
So how did blockchain voting work in this situation?
People voted via a mobile app which was essentially the equivalent of a ballot paper. The mobile ballots are “tokens” or potential votes which are cryptographically tied to a candidate. The voter makes their decision, it is verified by a number of different servers or computers known as “validating nodes.” Upon verification, the token or ballot paper is debited from the voter’s ledger and put on the candidate’s ledger. This is an automatic process and means that a single person cannot vote twice. And it’s now on a blockchain that cannot be tampered with.
China has been cracking down hard on cryptocurrencies and ICOs, but it has been focusing heavily on DLT. Earlier this year, Chinese President Xi Jinping said that blockchain has “breakthrough” applications.
Parts of the Chinese government have been working with blockchain firms in various areas such as credit scoring. One of those companies is Points which has partnered with a subsidiary of China’s Ministry of Industry and Information Technology and the China Academy of Information and Communications Technology to create blockchain solution for know your customer (KYC) and credit scoring.
The KYC product removes the need for institutions to repetitively conduct the process manually.
“With its partnership with the Chinese government, Points has access to verify ID and criminal records on 1 billion people in China. Thanks to Points’ blockchain protocol, the normally time-consuming KYC process which would normally be done manually, increases the efficiency for institutional partners,” founder Sarah Zhang told CNBC by email.
“It does this by reducing the institution’s need to store data on their own servers as Points because they can simply verify identities or other relevant information through blockchain that has already been verified before.”
This process could be used all around the world but requires data to be opened up to allow verification of a person’s identity and their credit score.
Supply chains are very complicated with several parties involved across many countries. Goods are passed between various parties and lots of contracts are involved in the process. This is a scenario where DLT has been tested.
At a government level, the U.K.’s food watchdog carried out a pilot using blockchain technology in a cattle slaughterhouse. In the pilot, both the Food Standards Agency (FSA) and the slaughterhouse had permission to access the data. They were able to share information on the supply chain, working off one ledger, rather than various different documents.
Blockchain-based supply chains is something several companies are trying out too.
These are just a handful of examples where blockchain has been trialed with many more in the works.
Blockchain is without a doubt one of the most-hyped technologies this year with people working in the industry seeing it as a silver bullet solution to many processes, which indeed it may not be. Trials are underway but there’s a long way to go before this becomes mainstream.
A number of competing blockchain platforms from Ethereum to Hyperledger are battling to become the dominant player. But one big problem for DLT is scalability, that is, whether it can work on a wide scale efficiently, which would be crucial for it to be effective at a national level.
Hileman said that with the price of cryptocurrencies rising and falling many developers of the underlying blockchain technology may have taken their “eyes of the ball,” but are now back to creating solutions that may come to market soon.
“We will see further work done in the next 12-to-18 months in testing various scalable solutions that will deliver on the promises we have heard about,” Hileman told CNBC.
“There are questions that have not been answered, but I’m confident they will be. There are smart people with different blockchain designs and one of these will work, several of these will work. Resources are there, brain power is there, it’s just a matter of time and I think we will see major advances in scalability.”
Design and code: Bryn Bache
Editor: Matt Clinch
Images: CNBC and Getty Images
Correction: This article has been updated to reflect that Jeff Schumacher is the founder of BCG DV.