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

by · July 18, 2022

What 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. GAO found that blockchain is useful for some applications, but limited or even problematic for others. For example, due to its resistance to tampering, it can be useful for applications involving many participants who do not necessarily trust each other. But it can be too complicated for a few trusted users, where traditional spreadsheets and databases can be more useful. Blockchain can also present security and privacy challenges and can be energy consuming.

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

Blockchain has many potential non-financial applications

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

Blockchain financial applications 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 stack coins can help reduce this risk. Similarly, an emerging area known as decentralized finance offers services such as blockchain-based lending and borrowing, which also face several challenges. For example, blockchain-based financial applications can facilitate illegal activity, can reduce consumer and investor protection compared to traditional finance, and in some cases are subject to unclear and complex rules.

GAO developed four policy options that can help improve the benefits or reduce the challenges of blockchain technologies. The policy options identify possible actions by decision makers, 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 implement further measures beyond the current efforts. See below for details on 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)

Politicians can work together to reconcile standards that focus on the development, implementation and use of blockchain technologies.
  • Can simplify fragmented standards and help identify gaps and reduce overlap in standard setting work.
  • Be able to identify the areas where standards will be most advantageous across different sectors of the economy or blockchain applications.
  • 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 redistribution of existing resources to support new efforts.

Supervision (report p. 39)

Politicians 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 trade in the United States
  • Politicians, 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 trade.
  • Politicians must determine the right level of supervision. Aggressive supervision can hamper innovation and competition as technology matures, while too little supervision 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 financing or reallocation of existing resources.

Educational materials (report p. 40)

Politicians 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 that is proficient in developing, implementing, and using blockchain-based products.
  • Can increase consumers’ competence and help reduce negative public perceptions of the 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 probably have to be tailored to meet a wide range of learning needs across several target groups.
  • It can be difficult to identify who can most effectively create teaching materials for a specific target group.
  • May require new funding or redistribution of existing resources, especially to meet the need for education regarding innovative use of blockchain beyond existing financial applications.

Suitable applications (report p. 41)

Politicians can support activities designed to determine whether blockchain is appropriate to achieve specific missions and goals or to reduce specific challenges.
  • Actively exploring where and when blockchain would be most useful can allow devices to capture all the benefits that 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 go back to a non-blockchain technology when a device has invested a significant amount of time and resources.
  • May require new financing or reallocation of existing resources.

Source: GAO. | GAO-22-104625

Why GAO did this study

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

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

GAO assessed blockchain applications developed for or used in finance, government, supply chain management and organizational management; interviewed a number 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].

Tags:

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *