Blockchain: New technology offers benefits for some applications, but faces challenges

by · October 20, 2022

What the GAO found

Blockchain combines several technologies to provide a reliable, tamper-proof record of multi-party transactions without a central authority such as a bank. Blockchain can be used for a variety of financial and non-financial applications, including cryptocurrency, supply chain management and legal records. The GAO found that blockchain is useful for some applications, but limited or even problematic for others. For example, due to its resistance to manipulation, it can be useful for applications involving many participants who do not necessarily trust each other. But it may be too complicated for a few trusted users, where traditional spreadsheets and databases may be more useful. Blockchain can also present security and privacy challenges and can be energy intensive.

Blockchain has a wide range of potential non-financial applications (see figure).

Blockchain has many potential non-financial applications

For example, it can be used to organize supply chains, create less hierarchical organizations and document title records for property. However, most such measures are not yet beyond the pilot stage and face challenges. For example, most blockchain networks are not designed to be interoperable and cannot communicate with other blockchains. Organizations looking to use blockchain also face legal and regulatory uncertainties, and have found it difficult to find skilled workers to implement blockchain.

Financial applications of blockchain have the potential to reduce costs and improve access to the financial system, but they also face several challenges. Cryptocurrencies, probably the most well-known application, are a digital representation of value protected through cryptographic mechanisms, which facilitate payments. Some are known for volatility (ie frequent or rapid changes in value), but a type known as stablecoins can help reduce this risk. Similarly, an emerging area known as decentralized finance offers services such as blockchain-based lending and borrowing, which also faces several challenges. For example, blockchain-based financial applications may facilitate illegal activity, may reduce consumer and investor protection compared to traditional finance, and in some cases are subject to unclear and complex regulations.

The GAO developed four policy options that could help improve the benefits or reduce the challenges of blockchain technologies. The policy options identify possible actions by policymakers, which may include Congress, federal agencies, state and local governments, academic and research institutions, and industry. In addition, decision-makers could choose to maintain the status quo, where they would not take further measures beyond current efforts. See below for details of the policy options and relevant options and considerations.

Policy options that can help improve the benefits or reduce the challenges of blockchain technologies

Possibilities Considerations

Standards (report p. 38)

Policymakers can work together to unify standards that focus on the development, implementation and use of blockchain technologies.
  • Can simplify fragmented standards and help to identify gaps and reduce overlap in standard-setting work.
  • Be able to identify the areas where standards will be most beneficial across different sectors of the economy or applications of blockchain.
  • Can help meet challenges around interoperability and data security.
  • May require consensus from many public and private stakeholders, which can be time- and resource-consuming.
  • It may not be clear which entities should take the lead in establishing internationally recognized standards for various technologies and applications.
  • May require new funding or reallocation of existing resources to support new efforts.

Supervision (report p. 39)

Policymakers can clarify existing oversight mechanisms, including regulations, or create new mechanisms to ensure appropriate oversight of blockchain applications.
  • Clear, industry-specific US regulatory frameworks can provide the clarity needed for individuals and firms to more successfully engage in blockchain-related commerce in the US
  • Policymakers, including regulatory entities and developers, can use tools to create oversight mechanisms as well as test innovative products and services.
  • Can provide coordinated and timely clarity to promote safety and soundness, consumer protection and compliance with applicable laws and regulations to combat illegal activity in blockchain-related commerce.
  • Policymakers must determine the appropriate level of oversight. Aggressive oversight can stifle innovation and competition as technology matures, while too little oversight can leave consumers and businesses unprotected.
  • Asking for input across a range of stakeholders in different sectors can be time-consuming and challenging.
  • May require new funding or reallocation of existing resources.

Educational materials (report p. 40)

Policymakers can support the development of educational materials to help users and regulators better understand blockchain technologies beyond existing financial applications.
  • Can enable instructors to train a workforce skilled in developing, implementing, and using blockchain-based products.
  • Can increase consumer competence and help reduce negative public perceptions of blockchain.
  • Can stimulate critical thinking and innovation, in addition to stimulating innovative research and development.
  • Can help prepare decision makers to better use and regulate the latest technologies.
  • Educational materials will likely need to be tailored to meet a wide range of learning needs across multiple target groups.
  • It can be difficult to identify who can most effectively create teaching materials for a particular target group.
  • May require new funding or reallocation of existing resources, particularly to address the need for education regarding innovative uses of blockchain beyond existing financial applications.

Suitable areas of use (report p. 41)

Policymakers can support activities designed to determine whether blockchain is appropriate for achieving specific missions and goals or for mitigating specific challenges.
  • Actively researching where and when blockchain would be most useful can allow entities to capture all the benefits the technology can offer.
  • Supporting blockchain use, where appropriate, can increase the transparency and accountability of existing systems and services.
  • Legal or regulatory uncertainty may prevent some potential users from taking advantage of blockchain.
  • It can be difficult to revert to a non-blockchain technology when an entity has invested a significant amount of time and resources.
  • May require new funding or reallocation of existing resources.

Source: GAO. | GAO-22-104625

Why GAO did this study

Economies rely on central governments and trusted intermediaries to facilitate business transactions. Blockchain is a technology that can reduce the need for such devices while establishing a verification system. It can therefore improve a variety of financial and non-financial applications. However, the use of blockchain technologies raises a number of ethical, legal, economic and social concerns.

The GAO was asked to conduct a technology assessment of the use of blockchain, with an emphasis on foresight and policy implications. This report discusses (1) non-financial applications of blockchain, including potential benefits and challenges, (2) financial applications of blockchain, including potential benefits and challenges, and (3) policy options that could help enhance the benefits or reduce the challenges of blockchain technologies.

GAO assessed blockchain applications developed for or used in finance, government, supply chain management, and organizational management; interviewed a variety of stakeholder groups including government, industry, academia and a venture capital firm; convened an expert meeting in collaboration with the National Academies of Sciences, Engineering, and Medicine; and reviewed key reports and scientific literature. GAO identifies policy options in this report.

For more information, contact Karen L. Howard at (202) 512-6888 or [email protected].

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