[ARTICLE] Blockchain governance in the public sector: 3 keys to success

by Evrim Tan

Blockchain governance is a primary concern albeit one of the least understood aspects of blockchain-based systems. As a technology whose most salient feature is to build trust in governance processes without a need of a trusted third party, understanding what to govern and how to govern is fundamental for the public sector organizations for the application of the blockchain technology (BCT) in public governance processes. In that regard, two diverging views appear in the literature concerning the role of government. The first view is that blockchain denotes technological advancements within digital governance, which allows transparency, integrity, and traceability of data without a central authority to authenticate the information, and thereby reducing the transaction costs and enhancing the efficiency of public services. The second view, on the other hand, perceives blockchain as a disruptive technology that allows permissionless transactions in public governance in a truly decentralized manner, whereby the government loses its purpose as primus inter pares (Pierre and Peters, 2000) in public governance, as there won’t be a need for a centralized authority to coordinate, mitigate or govern public services.

In this post, I will discuss what does blockchain governance mean in public sector context, and what are the primary considerations for policy practitioners and system designers to successfully adopt BCT in public governance processes. As a starting point, a key consideration for any policy designer is that to assess the level of trust vested in society, public, private and non-governmental organizations that are expected to take a role in blockchain governance. A lack of trust in public governance can occur due to the roles, legitimacy or capacities of actors involved in the governance processes. Lack of trust can also occur because of the failure of previous initiatives or the prospect of the failure of the system to deliver the anticipated results. Therefore, it is important to analyse the causes of lack of trust before the onset of blockchain solutions in public governance. Once the cause of the trust problem is agreed upon, I expect that there are three base elements that need to be addressed to use BCT as a mode of public governance. These are political consensus mechanism, the survival of the system, and interoperability. 

Political consensus mechanism

A political consensus mechanism is crucial for the legitimacy of the change management system in blockchain governance. With political consensus mechanism, I am referring to both on-chain (rules for instituting changes are encoded in the blockchain protocol) and off-chain (decision is made outside the blockchain platform through the venues of community forums, social media sites and other communication channels) governance processes that engender legitimacy to the users of the blockchain technology. The institutional framework, area of application, and country-specific conditions may dictate different actors to take a more prominent role in the on-chain and off-chain governance processes of blockchain-based solutions. 

Since the core added value of blockchain technology is to establish trust in areas where there is a lack of it, the political consensus mechanisms need to prioritize the involvement of the relevant actors and establish the level of transparency in the design and operation of blockchain solutions. For that, a social layer -a deliberation platform either employing off-chain communication channels or traditional mechanisms such as public assemblies, committees, or discussion forums- can be introduced in blockchain governance, where system designers, stakeholders, and societal actors deliberate on the political and functional implications of the system design choices. The deliberations that take place at the social layer can foster on-chain processes to create a politically legitimate process and can serve as a dynamic constitution of the blockchain system. The difficulty of establishing an inclusive political consensus mechanism is that creating legitimacy in blockchain governance without deadlocking the governance mechanism. 

A case in point is the governance process to change the Bitcoin block size (originally set to 1MB) when it has become a nuisance against the scalability of the network. Various solutions were suggested to increase the size of the blockchain, but in the end, no political consensus was achieved among the ‘decentralists’ and ‘centralists’ cliques about changing the block size and creating a deadlock for the scaling solutions. Eventually, the Bitcoin community reached a conclusion by withholding the 1 MB limit and implementing the segregated witness (SegWit) protocol, improving the capacity of each block without changing its size, under the pressure of the users. Given the consensus rules of Bitcoin are controlled by the mining majority, the economic majority was able to force the activation of segregated witness, bypassing the blocking miners. 

A democratic constitution of blockchain governance is, therefore, necessary to establish the rules and roles of the verifiers, developers, and users of the system.  

Survival of the system

The survival of the system is about whether the governance mechanism can maintain itself in the long run and it rests upon several interrelated factors concerning system functioning, user engagement, and system security. The effectiveness and efficiency of the transactions on the blockchain platform, the incentives of the users and verifiers to participate in blockchain governance and the robustness of the system against cyberattacks and system malfunctions contribute to the survival of the system. 

Furthermore, the survival of the system is also related to the risk factors associated with the capture of the system. According to Zamfir (2018), there are four possible captures in blockchain governance. 

• First, corporate capture occurs when blockchain governance is captured by the corporate governance of a corporation that becomes the sole source of legitimacy in blockchain governance. 
• Second, state capture occurs when the regulators and courts of major jurisdictions enforce controls on blockchain governance. Zamfir gives the example of one day “Ethereum USA” might enforce US economic sanctions, “Ethereum Europe” might enforce GDPR, while “Ethereum China” might enforce capital control policies. 
• Third, developer capture can occur when the blockchain core developers capture governance because their software development process becomes the only source of legitimacy in blockchain governance. 
• Fourth, cartel capture occurs when a cartel of participants (e.g. a cartel of node operators or a cartel of token holders) colludes to control blockchain governance. 

The capture of blockchain governance reiterates the agency problem in a new dress, where the users of the system give up control on the blockchain governance in return of legitimacy and effectiveness of blockchain governance. However, the downside of the capture is, the interests of the capturing entity will be embedded in the blockchain governance, and a potential outcome would be downplaying the trust component of blockchain governance. If blockchain governance does not create trust, then there is little value on transferring the data from existing centralized systems to a decentralized system. 

Interoperability

Interoperability indicates to what extent blockchain governance complies with the existing mechanisms, technologies, regulations, and standards in the public governance landscape. Interoperability calls for considerations of the existing legislation on the role of public sector organizations as well as the regulations on data protection and transparency (also see the New European Interoperability Framework). Interoperability does not necessarily suggest a one-way street from the regulative framework to blockchain governance. The future of blockchain in public sector relies on laws that are more compliant with blockchain governance and blockchain governance is more compliant with laws (Finck, 2018). 

Interoperability is also about goal alignment with national and/or supranational strategies on blockchain and data management. European Blockchain Services Infrastructure (EBSI) is a relevant example of how supranational strategies can affect choices at the national level. EBSI aims to provide cross-border public services using blockchain technology and creating a European self-sovereign identity to European citizens. In this vision, member states are expected to promote self-sovereign identity policies and establish the necessary infrastructure for this transition. For the moment, the scope of EBSI is limited to create open-source toolbox and suggestions for the transition, but the EU is already investigating the legislative framework for the interoperability of the national laws with an EU wide regulation on decentralized self-sovereign identity management. 

Interoperability of the blockchain governance is also about the convergence of blockchain technologies that the public sector organizations employ at the national and supranational levels. The technology choices of the stakeholder organizations in the blockchain ecosystem can promote a blockchain infrastructure and some governance choices over others. 

Another technological consideration about interoperability is that to what extent blockchain governance can incorporate big data solutions and the data collected from Internet of Things (IoT). The digital transformation in public sector has introduced several technologies and solutions and blockchain as a disruptive technology has a higher chance of success if it complements the existing technologies rather than replaces them. 

A final consideration of interoperability is that blockchain governance needs to comply with the existing capacities and practices at societal level concerning digital governance. A core consideration is to what extent people can manage their digital identities and assets and whether they need custodian organizations in public governance. Those are essential factors in user experience and thus in the adoption and success of any kind of technical project, especially blockchain-based ones.

Conclusion and Discussion

To conclude, I want to highlight three arguments about blockchain governance in public sector. First, at least for now, blockchain governance does not mean self-governance. The assumption of blockchain governance is free from actor interference is not realistic. Even if, in future autonomous and self-governing decentralized autonomous organizations can replace some public sector organizations in public governance, for the moment there are many regulative, technological, and administrative uncertainties. Democratization of blockchain governance is therefore essential for the effective uptake of blockchain technology in public services. Here, the challenge for system designers and policymakers is creating an open governance design, which does not undermine the effectiveness and efficiencies of transactions while safeguarding the privacy and autonomy of the users. Establishing a political consensus mechanism, securing the survival of the system, and ensuring the interoperability with existing infrastructures, regulative and institutional frameworks are three core considerations for system designers and decisionmakers to adopt blockchain technology as a governance mechanism. 

Second, blockchain governance is not agnostic nor apolitical. Blockchain technology necessitates the government and public sector organizations to give up certain prerogatives in the governance of public space. To what extent the government needs to give up its prerogatives through blockchain technology is associated with the level of trust vested in the public sector organizations and society. Permissionless-public blockchains are expected to be desirable in public service areas where there is a low level of trust among users (Meijer & Ubacht, 2018). However, the literature on trust suggests that when there is a low-level of trust in society or other stakeholders, decision-makers are more disposed to keep the control through direct or indirect means (Bijlsma-Frankema & Costa 2005). Furthermore, BCT can confirm the genuineness of a transaction but whether the rules on the transaction are genuine and fairly established is beyond the technical scope of blockchain. Therefore, ‘who will be authorized to make changes in the system?’ and ‘what are the rules/procedures in the governance of the system?’ are important for the adaptation of blockchain technology in public governance. The answers to these questions are context-dependent and can call for a combination of political, administrative, and technological solutions. Further empirical research on the use cases of BCT in public services is needed to understand the dynamics between trust and the choices in blockchain architecture.  

Third, design choices with blockchain governance need to be integrated into legitimate and transparent political and administrative decision-making processes. The rules of transactions in blockchain governance are set at the design phase, and once a decision is made a change in the system requires the consent of authorized users. Even minor editing requirements in the data structure may cause significant transaction costs. Consequently, establishing necessary change management mechanisms in the governance design is important because blockchain as a technology re-establishes the importance of trust in the initial design phase instead of the implementation phase. Different contexts may require different user roles for change management with private-permissioned, public-permissioned, or hybrid design solutions. An important rule of thumb with change management mechanisms can be whether a design solution creates legitimacy in blockchain governance. The change management in blockchain governance is currently an unexplored area and more research is needed to gain further insight into the future of blockchain governance in public sector.  

Evrim Tan is a postdoctoral researcher at Public Governance Institute at KU Leuven. His research interests focus on decentralization, public governance, blockchain, local government, and governance capacity. He is also the author of ‘Decentralization and Governance Capacity: The case of Turkey’ by Palgrave Macmillan. You can find more about his work on his personal website.

References:

Bijlsma-Frankema, K. & Costa, A. C. (2005). Understanding the Trust-Control Nexus. International Sociology, 20 (3), 258-282.

Finck, M. (2018). Blockchain Regulation and Governance in Europe. Cambridge University Press.

Meijer, D., & Ubacht, J. (2018). The governance of blockchain systems from an institutional perspective, a matter of trust or control? Proceedings of the 19th Annual ICDGR: Governance in the Data Age.

Pierre, J., & Peters, B. G. (2000). Governance, Politics and the State. London: Macmillan.Zamfir, V. (2018). Blockchain Governance 101. https://blog.goodaudience.com/blockchain-governance-101-eea5201d7992/   Accessed 3 December 2019.