Can Blockchain put an end to corruption?

Lebanon has been witnessing, for the past 35 days, rallies and strikes against corruption in public administration and deteriorating economic conditions in the country. The latest events in the country revealed that trust between the people on one side and the government, central bank and financial institutes on the other side, has collapsed. Blockchain technology promise to revolutionize interactions between peers that require high degrees of trust and for dissolving the issue of trust in the sharing economy. So, will blockchain technology be the next disrupting technology to revolutionize governments? Can it be a game changer in the fight against corruption?  The answer lies in the way a blockchain operates. 

Blockchain first emerged in the financial sector through the very well-known cryptocurrency Bitcoin. While still being tested, its disruptive potential in the public sector cannot be overstated. Pilot and proof-of-concept projects, such as identity management, property registration, voting and records tracking, driven by a myriad of startups, are mushrooming. The blockchain technology is not a software or an application but rather a new methodology or even a philosophy for sharing, validating, documenting and storing data on the internet. It is an additional layer of technology on top of the internet and is defined as the internet of assets in contrast to the World Wide Web being the internet of information. There are many definitions for the blockchain, but my favorite is the following: Blockchain is a distributed immutable chronological ledger that is hosted, updated, and validated by several peer nodes, rather than by a single centralized authority. Blockchain is also transparent. The transparency of the blockchain stems from the fact that all digital transactions on a blockchain are recorded on a distributed tamperproof ledger. This ledger can be shared across multiple parties, and it can be private, public, or semi-private. In a public blockchain, such as Bitcoin, every participating node has his own copy of the ledger saved on his computer. What you will find in a ledger is the time of the transaction, block hash, block number, sender’s address, receiver’s address and transaction value and fees. It is important to know that it is not the information included in the block that is stored on the distributed ledger and is transparent to all nodes, but rather the block’s hash. Block hashes are generally done in combination with the original data stored off-chain. To better understand it you can compare it to what fingerprints are for the human body. Digital fingerprints are hashed into the blockchain, while the main body of information can be stored offline. Nevertheless, it is deceptive to view the blockchain primarily as a distributed ledger, because it represents only one of its many dimensions. In the same way, and although the blockchain’s reputation was based on top of the Bitcoin revolution, it is delusive to consider this technology for just moving tokens around, because it is only one of its many applications. The blockchain has the potential to innovate and transform a wide range of applications in different sectors, including but not limited to banking, insurance, supply chain, industry, healthcare, education, retail, media, travel and tourism, telecom and energy. The blockchain can have a profound social and economic impact on the existing traditional models. It might offer an alternative to the way people transact, share value, store data and do business. How policymakers use blockchain to build more trust and transparency in government is a critical issue that should be on top of the political agenda in countries such as Lebanon. 

Corruption is defined as the abuse of entrusted power for private gain. It manifests in a variety of forms such as bribery, misuse, rent-seeking, favoritism…etc. Corruption occurs both in the public and private sectors and ranges from petty to grand in scope, from political to bureaucratic in focus, from incidental to systematic in frequency, and from individual to systemic in nature. It will be wrong to assume that corruption is unique to developing countries alone or that it has declined on average. Rather, it is a constantly growing weed in our farms, limiting productivity in every country, on a global scale. Truthfully, the anti-corruption war, enormous efforts, remains a never-ending war where there is no losing side. So how can blockchain contribute in this war?

First, blockchain is well known for eradicating the need for third parties or middle men, being a peer-to-peer structured network. By cutting the middle man from any transaction, the risk of bribery, commission or excessive charges can be avoided. So, this is a first step on the road to enclose corruption. Thus, in the case of any commodity transaction, such as selling a car or a house, using blockchain technology, the services of a broker are no longer required and the transaction is executed in near real time, therefore, people don’t have to bribe public sector employees to speed up the registration process. Moreover, with blockchain and cryptocurrency, the money transfer between peers is directly executed without the need for banks, thus minimizing the paid commission and transaction fees. Blockchain technology can play a major role in increasing data transparency and integrity, relate to the registration of assets and the tracking of transactions. Recently in Lebanon, the case of illegal subsidized housing loans has made the headlines. Blockchain technology can help building an immutable title system, preventing fraud. Any blockchain-powered real estate registry can make the details of real estate transactions or loans visible to all involved parties including relevant public authorities, thus making it more difficult to any party to fraud any real estate registry or file for an illegal loan. Blockchain makes corruption more difficult because it is a distributed-ledger technology that can certify records and transactions without the risk of being erased, altered or tampered with. Hence, lets consider the case where any speeding ticket, parking ticket…etc., issued by any police officer is directly registered as transaction on the blockchain. In such case, no judge or highly ranked officer can scratch this ticket and delete it from the system.

Often, traditional methods of keeping a track of any transaction is prone to fall prey to corrupt practices. The reason for this is that only a single individual is in charge of tracking such transactions. However, with employing blockchain, the interests can be completely safeguarded. Blockchain ensures that the data collection and preservation is completely decentralized and renders the data unalterable. Blockchain technology is recently being tested to create tamper-proof company registries, which would help determine their true beneficial owners and prevent money laundering. This application would make know-your-customer regulations easier to comply with and would allow for more effective oversight by financial regulators, law enforcement and tax administrations. Blockchain feature as a facilitator of financial reporting and accountability can help fight tax evasion. Blockchain can be applied to transactional taxes, such as VAT, withholding tax, stamp duties and insurance premium taxes. The technology could also help with transfer pricing. Blockchain makes fraud and errors far easier to detect because the system provides clear and transparent information about transactions and items in the network. This could be particularly useful in tracking if and where VAT has been paid, and in doing so reduce VAT fraud. While blockchain is not a silver bullet for the tax system, it could be applied in a number of areas to reduce the administrative burden and collect tax at a lower cost, helping to narrow the tax gap. On the other hand, a complete set of blockchain proof-of-concepts focus on tracking transactions, especially high-risk government transactions such as public contracts, cash transfers and aid flows. These applications seek to mitigate the risk of fraud and leakage in the flow of funds.

One of the most frequently mentioned use cases of blockchain is its use for online voting. Unlike conventional technologies, blockchain allows to bring end-to-end transparency to the voting process and results with strictly protecting the anonymity of the voters. The conventional electronic voting systems are highly fragile, expensive and always open for hacker attacks. Blockchain voting tools decrease the security challenges and make voting cheaper. Free and fair elections are a central feature of democracy. Blockchain technology have the potential to make voting more accessible and improve election integrity. It might be too soon to integrate blockchain in the election of parliament members, but at least blockchain can offer a platform for conducting referendums on national critical issues.

On another level, the World Customs Organization (WCO) has initiated work to identify possible case studies and uses of blockchain for Customs and other border agencies with a view to improving compliance, trade facilitation, and fraud detection. Customs may become part of the blockchain and become more embedded within trade processes. Data conveyed by the blockchain could be integrated automatically into Customs systems and checked against the data submitted by traders and transporters. In a more integrated version, Customs could even automatically clear the goods within the blockchain itself. Blockchain can enhance revenue compliance and cooperation between Tax and Customs. The automated access by Customs to data lodged in export countries’ systems will encourage revenue compliance in import countries. This would help Customs with issues around valuation and transfer pricing and underpin further cooperation between Tax and Customs authorities. Blockchain can help Customs to better combat financial crimes.

Furthermore, last year a scandal of diplomas forging aroused in Lebanon and several public and private parties where involved. Blockchain offers an open source platform to issue and verify digital diplomas and certificates in a completely decentralized way. Imagine a platform where any official diploma issued by the ministry of education or private educational institute is published publicly after being validated by multi-signature. Thus, any private or public employer can access this platform and validate the diploma or certification of any job seeker. Such blockchain platform can make certificate counterfeiting nearly impossible.

In light of the recent degrading economical condition in Lebanon, lack of liquidity has pushed banks to enforce some sort of capital control on their customers introducing a trust problem between depositors and financial institutes. With Blockchain and cryptocurrency, money supply is relatively immune to political interference and pressure.  Moreover, in a blockchain environment, financial entities cannot deny individual’s access to their funds or impose new regulations to depositors since any relation between two parties is governed by a smart contract where a set of rules is encoded and cannot be modified once approved by both parties and published on the blockchain.

The potential of blockchain technology is enormous and the promise it holds to root out corruption is simply too great to ignore, in a world scarred by recurrent corruption scandals. To go through all possible blockchain anti-corruption applications is more than what can be covered in a single article. Nevertheless, the point is that this technology can basically solve many problems as all transactions are recorded and kept secured for eternity, pruned when needed and always remaining intact. The benefits of using blockchain technology in combating corruption has been rightly pointed out by the World Economic Forum: “Blockchain provides an unprecedented level of integrity, security and reliability to the information it manages, reducing the risks associated with having a single point of failure. It eliminates the need for intermediaries, cuts red tape and reduces the risk of arbitrary discretion. It also makes it possible to track and trace transactions. The immutable trail of transactions can be used by law enforcement and government auditors”. But unfortunately, the situation in Lebanon is comparable to the condition of patient with stage four cancer and his only cure is still going through research and testing. We need a cure right away when blockchain technology is still in its early days and governance models are still under development.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s