Should governments buy into blockchain?

Governments will always be outpaced by technological innovation. The internet, or more broadly cyberspace, is a unique domain that governments have yet to successfully navigate as they have with land, sea, air and space. It was the first technology to mature into an intangible commodity that couldn’t be manufactured, distributed and regulated in the traditional sense.

There’s growing evidence that current policy strategies don’t work with cyber and, more specifically, with blockchain technology. Blockchain is creating an unbreakable, enduring and largely permissionless system that negates the traditional foundations of trust that government authorities and large corporations provide. Key to understanding this phenomenon is that, while blockchain technology is closely associated with decentralised finance and cryptocurrency, its utility extends beyond those arenas.

IBM defines blockchain technology as ‘a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network’. The fundamental innovation of blockchain is that it enables a peer-to-peer network with a shared history of messages and no central authority. A blockchain message content can be anything a network agrees is valid and can even include program installation and execution messages.

Governments need to recognise that their traditional strengths and regulatory capabilities are not as effective in this digitalised world. Instead, they are increasingly reliant on private-sector innovation to protect national interests. Simultaneously, the private sector is becoming less dependent on governments. This operational shift is occurring as strategic global power competition overshadows a realistic assessment of these changes and their implications.

Blockchain is enabled by a network of nodes that crosscheck and verify information and operates as a distributed ledger that is a constantly growing record of all transactions. The technology enables high transparency without compromising anonymity.

Stored data cannot be altered or deleted—all information can be traced and verified as true and accurate by the user community. Crypto wallets, for example, allows users to remain largely anonymous without compromising the integrity of transactions. Smart contracts are protocols run on the blockchain to ensure transactions occur with certainty when predetermined conditions are met.

Central to understanding the long-term implications of blockchain technology is that the network can’t be broken or taken down by a single authority. It would take an event affecting the operation of the internet globally for it to cease working, something that is highly unlikely.

These functions of blockchain technology have facilitated the creation of hyperstructures, defined as ‘crypto protocols that can run for free and forever, without maintenance, interruption or intermediaries’. Hyperstructures fundamentally challenge the traditional role of governments, multinational corporations and critical national infrastructure providers because these services and platforms can be operated and maintained without them.

The permanence of hyperstructures also affects how some public goods are created, maintained and owned. A hyperstructure typically functions as a decentralised autonomous organisation, or DAO—a legal structure with no governing body. Ownership and decision-making are shared by the DAO’s members, which make decisions benefiting the community at large as opposed to individual interests.

There is huge potential for hyperstructures to operate as a public good in the form of a digital backbone for critical national infrastructure such as water-processing plants, power plants and other utility providers. Hyperstructures limit the risk of human error and cyberattack and remove the onus of responsibility and ownership from a single provider by functioning as a DAO. These facilities can operate independently and perpetually.

While the technology is still in its infancy, hyperstructures demonstrate the potential that blockchains hold for social, political and economic organisation by changing the currency of trust. Trust enables reliable, effective and truthful exchanges in society and is often facilitated by an intermediary such as a government body or a corporation. Trust has not always been guaranteed by governments.

For example, the Soviet Union’s failure to provide adequate trust in its institutions gave rise to an effective mafia culture. Criminal organisations were able, through brute force and protection services, to ensure alternative avenues of trust in economic, political and social exchanges where the state failed. Now, although trust in states is not necessarily failing, blockchain and hyperstructures offer an alternative. However, while the continuity of the mafia’s success in the Soviet Union couldn’t be guaranteed, the enduring, permissionless and unstoppable features of blockchain technology are ensured. This reflects a shifting balance of power between the public and private sectors.

The popular non-fungible-token (NFT) marketplace Zora is an example of a functioning hyperstructure that has been used to influence global events. In March 2022, an NFT of the Ukrainian flag was auctioned by social advocates, including the Russian protest group Pussy Riot, using the Zora marketplace in aid of the Ukraine crisis. The NFT sale raised €6 million. The auction couldn’t be stopped by participants, adversaries or Zora administrators. The event illustrates how instantaneously the technology can be used to achieve a goal without the need for intermediaries, such as governments, to support or facilitate the allocation of funds or aid. The funds were then able to be directly and transparently traced to their intended recipient.

Blockchain’s ability to enable trust in the authenticity and provenance of information is used by organisations such as Starling Lab, which captures, stores and verifies information. Its research and experimentation ensure ongoing trust of digital information. Starling Lab has used the technology to document and secure the integrity of digital evidence of Russian war crimes in Ukraine. That the public can use blockchain to hold states accountable demonstrates how the technology is likely to lessen reliance on government to validate and provide trust.

The same principles are applied by the Decentralised Identity Foundation, which uses blockchain to develop protocols enabling individuals to be securely and accurately identified without the need for a centralised system or authority. The successful application of these protocols could even reduce reliance on governments to provide items such as drivers’ licences and passports to authenticate personal information, if a digital identity is equally as trusted.

The Decentralised Identity Foundation’s concept involves a singular digital identity interoperable among service providers and organisations, reducing the amount of personal data stored in individual profiles with each company. The digital identity can reliably plug in and out of their systems with trusted authenticity. Debates on data sovereignty and the security of personal information are set to be impacted by this concept, because blockchain would provide individuals with transparency about how their data is used.

These examples show how the private sector can use changes in public trust infrastructure to distance itself from government. Blockchain technology is transforming the way we store data, communicate it and control it. Being decentralised, it provides an alternative to the traditional role of the government and large corporations in providing trust between two agents.

Because blockchain is in its formative stages, there’s an opportunity for governments to consider how involved they want to be in shaping its development, domestically and globally. Canberra needs to consider buying into DAOs so it can interact effectively with public infrastructure and represent Australia’s broader security interests in governance structures. Without ownership in the DAOs’ governing hyperstructures, governments would have little ability to influence their operations. Practically, this would initially involve identifying hyperstructure projects that hold value for critical national infrastructure or are already being used by providers.

The government also needs to consider too whether actively engaging with decentralised infrastructure and governance systems aligns with the liberal democratic tenets of Australian policy. This opens an opportunity for discussion on how radically the government is willing to expand its regulatory toolbox.

The 2020 national blockchain roadmap outlines Australia’s preliminary investment in research to ‘capitalise on opportunities and address challenges’. However, this is a rapidly changing field, and the technology’s use during the Ukraine crisis demonstrates how quickly and ingeniously it can be adapted to meet different needs. How Canberra can be informed, active and creative during this period of innovation needs to be at the forefront of discussion. Regulation needs to be less short term and reactive, and instead should proactively consider the long-term relationship with the private sector.

Key to this is learning how to adapt to the shifting balance of power between the private sector and governments. Ultimately, as the mechanisms of social trust change, so too must the government’s outlook on its domestic and international capabilities and intentions.

This article was published by The Strategist.