Develop a “blockchain for DPI” playbook
By Shehnaz Ahmed and Swarna Sengupta
India’s G20 presidency has been marked by an emphasis on leveraging digital public infrastructure (DPI) for inclusive growth and development. The focus on DPI is not surprising as India has emerged as a global leader in building DPIs such as Aadhaar, Unified Payments Interface and Open Network for Digital Commerce. As India leads the conversation on DPIs and digital transformation at the G20, it is an opportune moment to explore the innovation potential of new decentralized technologies like blockchain in the design of such DPIs.
Blockchain technology enables ledgers to be shared across multiple parties to record information or transactions in a verifiable and permanent manner. Since the transactions are recorded and verified through a peer-to-peer consensus mechanism, there is no reliance on centralized intermediaries. Blockchain’s decentralized nature eliminates the risk of a single point of failure, thus creating a more secure ledger. The ledger can also be programmed to trigger transactions automatically through smart contracts. This creates enormous opportunities for blockchain to offer new services and renew existing legacy systems for recording transactions and information. The unique properties of blockchain such as immutability, auditability and distributed verifiability promote greater transparency and accountability and can help reduce instances of fraud, cut costs and thus unlock new efficiencies.
There are many countries that are exploring the innovation potential of the decentralized and distributed nature of blockchain-based accounting for use in the public sector. According to estimates, as of 2018, at least 46 countries had launched or planned to launch over 200 blockchain initiatives. It is predicted that by 2025 blockchain will account for 10% of global GDP. Blockchain experimentation for use in the public sector concerns areas such as land registers, health registers and the creation of digital identity. Estonia, for example, is a leading example of blockchain-based e-governance services. Blockchain forms the basis of selected state registers in Estonia, including the property register, the health register and the business register. Turkey has also announced its plan to launch blockchain-based digital identities for its citizens. Singapore is also exploring the potential of blockchain to revamp its payments infrastructure. Colombia has tested a blockchain-based public procurement system to increase transparency and accountability in public procurement processes, thereby reducing corruption.
Before deploying blockchain for DPI, policymakers need to consider whether blockchain is the most viable option for such a service. If so, the actual deployment and scaling of such blockchain projects must be supported by robust governance and technical standards. Blockchain networks consist of several parties such as developers, network operators, end users, miners and external gateways. The relationship between such parties is generally regulated by contractual arrangements. However, for blockchain networks that form the basis of any DPI and involve multiple parties and process sensitive personal information, it is important to have standardized terms of use. Legal certainty that governs blockchain use is crucial to stimulate participation in the network and scale up such solutions. This has also been emphasized by around eight out of 10 countries that have released a National Blockchain Strategy, including India’s National Blockchain Strategy. It has been shown that in many countries the failure to account for such legal certainty at the pilot stage has negatively affected the scaling of such solutions. Existing legal and regulatory frameworks are designed around identifying key points of accountability and responsibility that may conflict with the decentralized nature of blockchain, thereby affecting the legal feasibility of blockchain solutions. Furthermore, legal recognition of blockchain-based records under national laws may also need a separate investigation.
In a recent report, the Vidhi Center for Legal Policy argues for a governance framework that sets out essential terms of use for the adoption and operation of any blockchain-based solution so that it can operate in a legally sustainable manner. For countries exploring blockchain technology in the development of DPI, these terms of use will create an enabling environment for blockchain solutions, protect the rights of users/participants to the network and protect the data stored on such systems. Such terms include examination of the legal recognition of blockchain records under applicable national laws and the legal structure of the entity(ies) developing the solution. It will also involve determining the legal arrangement for managing the relationship between different participants in the network, and governance matters such as eligibility criteria for participation, delineation of rights and responsibilities for participants, and responsibility roles for each participant, dispute resolution, and determination of ownership of intellectual property rights in the solution. The terms of use should also set standards for data management, risk management strategies and the mechanism for removing and exiting participants from the network.
The G20 presidency is an opportunity for India to develop a playbook for deploying blockchain technologies for DPI and create a consensus to set global standards for emerging technologies such as blockchain.
Shehnaz Ahmed and Swarna Sengupta, fintech manager and fellow respectively, Vidhi Center for Legal Policy. The views are personal.
