Home Blockchain Unchained melody: finance ministries explore blockchain

Unchained melody: finance ministries explore blockchain

Global Government Fintech Lab 2023 breakout session: Mai Santamaria, Dominik Freudenthaler, Dina Buse and Siobhan Benita (moderator) at the Global Government Fintech Lab 2023


How are finance ministries exploring the use of blockchain? Daniel Tost reports on a breakout session at the Global Government Fintech Lab 2023

A growing number of public authorities are exploring the possibilities of using blockchain – a type of shared database that stores data in blocks linked together via cryptography – as part of their own operations.

Important facets of the technology include immutability (that once data enters the blockchain, no-one can change it); the elimination of a single point of failure; and enabling trust among people or organisations who do not know each other to directly conduct transactions.

The topic of how finance ministries are exploring blockchain was the focus of a breakout session at the Global Government Fintech Lab 2023 in Dublin.

The session brought together senior public servants from Ireland, Austria and Latvia – all member states of the European Union (EU). Examples of blockchain initiatives in the 27-member bloc include the European Blockchain Partnership, an initiative to develop an EU strategy on blockchain and build a blockchain infrastructure for public services. Related initiatives include the European Blockchain Services Infrastructure (EBSI) and recent launch of a ‘European Blockchain Sandbox’.

The discussion, moderated by former UK civil servant Siobhan Benita, featured three speakers: Mai Santamaria, head of Ireland’s Department of Finance’s financial advisory unit; Dominik Freudenthaler, fintech expert in Austria’s Federal Ministry of Finance; and Dina Buse, deputy director of the financial market policy department and head of the credit institution and payment services policy division in Latvia’s Ministry of Finance.

‘Understanding the technology’

Mai Santamaria

Santamaria focused her opening remarks on describing a ‘whole-of-government’ hackathon that aimed to bring together government officials, software developers and academia to explore the potential of blockchain technology in the public sector.

She explained how the ‘Blockathon Ireland’ event – which was held in 2019 and supported by her department and the Department of Public Expenditure and Reform, among other partners – encouraged public-sector participants to openly acknowledge challenges and engage with the private sector to discuss solutions. “Sometimes it’s very difficult to get a government department to admit there are things that probably don’t work,” she said.

The hackathon ran from a Friday to a Sunday, with around 20 challenges considered. The winning solution focused on ensuring the integrity of data for Ireland’s Central Statistics Office.

During the event, developers pointed out that not all challenges actually required blockchain solutions. “That in itself allowed the government departments to understand what the technology can and cannot do,” Santamaria said.

Plans for a second ‘Blockathon’ were disrupted by Covid-19, she said. Yet blockchain’s potential became more apparent during the pandemic. “How to keep track of medical equipment was the ‘number two’ issue in the Blockathon,” she said. “If we would have had that solution in place, a lot of the issues would probably have been solved earlier.”

She was unaware of the Irish government yet starting to use any blockchain technology, despite this initiative. But noted the government’s involvement with the European Blockchain Partnership to explore potential solutions.

Solution for unknown problems?

Dominik Freudenthaler

Freudenthaler described a “vibrant and fruitful environment” for private-sector blockchain (and, more broadly, fintech) initiatives in Austria – facilitated by the existence of a financial market authority-run sandbox, which opened in 2020.

In terms of public sector use, however, he said he wanted to be “provocative” and encouraged the panel and audience to consider blockchain as “a wonderful solution for problems we haven’t found yet.”

That said, he described one Austrian blockchain use-case involving cash-slips aimed at tackling fraud. By incorporating blockchain technology via a QR (quick-response) code printed on cash-slips, transactions can be easily tracked, preventing manipulation, he explained.
This solution, which was introduced a couple of years ago (for businesses above a certain annual turnover), is not necessarily “bulletproof” in terms of tackling fraud, however. “If you have a merchant that wants to be fraudulent, he can just not type it into the cash register,” Freudenthaler said.

More broadly, he acknowledged the apparent irony that blockchain – as a “technology able to erase the problem of having a central trusted party” – may not be a perfect fit for governments, which (in theory) should be trusted parties themselves.

In an earlier session of the Lab focused on data, the Central Bank of Ireland’s Gavin Curran had mentioned the book ‘Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will’. Freudenthaler made reference to this, similarly highlighting the importance of not underestimating humans. Austria’s authorities employ, he said, “very talented” tax inspectors with “very intelligent” solutions for problems. To illustrate, he told an anecdote of an inspector auditing a sausage-vendor’s stand. Suspecting financial jiggery-pokery, the inspector bought a pair of sausages and measured the amount of mustard and ketchup he received. He then compared the amount of sausages in the sales turnover and the amount of ketchup and mustard that would correspond to that. They did not match.

He also raised the obstacle of resistance to technological solutions, citing the challenge faced when introducing QR-code slips and the blockchain technology behind it. “There was huge resistance from merchants and so on,” he said. “It was challenged until the Constitutional Court then actually said that this was all legal and perfectly constitutional.”

Tax payments and bond issuances

Dina Buse

Buse began by setting the context of Latvia’s creation of a national fintech strategy, which involved collaboration between government institutions and the private sector – and included a hackathon-type event (similar to Santamaria’s Ireland example).  

She mentioned the importance of the EU’s Markets in Crypto Assets (MiCA) regulation, saying that Latvia had become the first EU jurisdiction to define a set of rules for operation. The country is aiming for European ‘passporting’ within 12 months. “Passporting is of high interest for market participants because blockchain and crypto assets are all about operating across borders,” she said. “You cannot make big change if you’re operating only nationally.”

She also mentioned the importance of the EU’s Digital Operational Resilience Act (DORA). “We [Latvia] also have made preparations for very fast implementation of this European legislation,” she said.

Use-cases of blockchain technology are being discussed within governmental institutions and are also championed by the country’s blockchain association, she said.

For instance, her ministry is discussing with the State Revenue Service the possibility of enabling the payment of taxes in digital currencies using blockchain technology. Various aspects are being considered, such as the necessary technology requirements, Buse explained. “Before the payment is made to the State Revenue Service, the virtual currency would need to be exchanged into euro [Latvia’s currency], of course,” she added. The focus is on resolving the conversion process and ensuring the provision of liquidity in order to potentially implement such a payment option.

Another potential use-case is the possibility of paying statutory capital, a compulsory requirement for enterprise registration, in digital currencies. “We are planning to make legislative changes,” she said. She also raised the issuance of green bonds using blockchain as an area of governmental interest (a topic she also mentioned during a Global Government Fintech webinar on ‘blockchain bonds’ in March).

FURTHER READING Blockchain bonds: digital issuance breakthroughs build buzz – write-up of our webinar (23 March 2023) asking ‘Blockchain-based bonds: what potential for the public sector?’

‘Lots of hurdles’

Panellists were asked to take a step sideways and explain the benefits of blockchain technology, considering that examples of governments using it remain relatively thin on the ground.

“There are probably fewer working examples, but this doesn’t mean that governments are not looking for them,” Santamaria answered. She listed several projects that had been considered in Ireland in the realms of payments, voting or renewable-energy pricing. “We looked at wind energy and how we could actually incentivise the usage and then payment directly to the grid,” she said. However, the process of the whole set-up was a “huge leap”, Santamaria said, pointing to legal issues.

But there are a growing number of examples globally of blockchain being used to boost transparencies and efficiencies in supply-chain management; and, more clearly in the purely financial realm, for public sector bond issuances – the World Bank started the ‘blockchain bonds’ ball rolling five years ago with the launch of bond-i (the first bond to be created, allocated, transferred and managed through its life cycle using distributed-ledger technology – DLT) and Hong Kong authorities announced a successful issuance of tokenised green bonds earlier this year.

“The leap [to actual use] is all about trust,” said Santamaria. “From that use case with a PoC [proof-of-concept] to it actually happening, it’s huge because there are lots of hurdles.”

Additionally, she pointed out that the stakes are high for governments, which cannot afford to get things wrong (she mentioned attempts at introducing a national ID card in Ireland).

Buse said that she saw processing speed and day-to-day operational savings as core benefits of the technology. “You have to have oversight mechanisms for these solutions but, for the government, it’s definitely and obviously a lot of saving of resources,” she said.

FURTHER READING Blockchain regulatory sandbox launched by European Commission – an article (20 February 2023) on a regulatory sandbox for projects with potential to become ‘innovative use cases’ involving DLT being launched by the European Commission

Permission required

Discussion turned to the topic of data protection and the type of blockchain being used in Austria’s QR-code example.

Freudenthaler was asked by an audience member about reconciling blockchain’s use with the EU’s general data protection regulation (GDPR), specifically article 17: the ‘right to be forgotten’. He replied that this was a non-issue for Austria’s cash-slip QR-code blockchain system because only transactional data and no personalised data was ‘hashed’ on the blockchain (a technical term referring to a cryptographic hash function).

Austria’s system, he said, is being run via a “private platform hosted with our IT services” – a ‘permissioned’ blockchain (a blockchain that is not publicly accessible), operating within the state realm, as opposed to a decentralised blockchain (as used by well-known cryptocurrency Bitcoin, for example).

The government selectively adopted certain aspects of blockchain technology “and we put it on tracks that were suitable for us,” Freudenthaler explained, adding that transaction volumes have not caused any difficulties for the technology.

FURTHER READING California governor signs blockchain order to ‘get ahead of curve’ – an article (11 May 2022) on Gavin Newsom issuing an executive order to ‘spur responsible web3 innovation’ for the public good (the order set out seven priorities, as well as plans for the California Government Operations Agency to ‘explore opportunities to deploy blockchain technologies to address public-serving and emerging needs’)

Technology ‘cannot solve governance problems’

Freudenthaler went on to refer to a (non-Austrian) blockchain use-case: for land registry, particularly in developing countries where the hope is that using blockchain will provide more efficiency and transparency amid fraud and corruption.

“If the reason you want to use the blockchain is because you have a huge amount of corruption, no trustworthy gatekeepers and the system is not working, then I wonder if this [blockchain] is really solving the problem,” he said. “Because then probably a warlord will just come along and say: ‘you might be in the blockchain, but I don’t care: pay me or this is not your land anymore.”

Buse concluded: “You cannot solve governance problems with technology.”

Santamaria agreed and Freudenthaler added: “You can probably mitigate them. But if things are so bad, that you’re not trusting the judge in charge of keeping the land register, you’re probably not solving that problem with a blockchain.”

FURTHER READING Governments urged to boost support for blockchain as public service delivery ‘asset’ – a UK-focused article (8 November 2021) based on a report that partly examined government and broader public sector interest in blockchain

Collaboration augurs well

The discussion overall illustrated growing enthusiasm among public authorities for exploring the potential for blockchain in a government context.

But it is also clear that the implementation of this technology in the public sector is still in its early stages, at least in the case of the three administrations represented.

Despite its advantages, there remain numerous obstacles to overcome from a governmental perspective.

The growing number of cross-border initiatives at a European level at least augur well.

In terms of national administrations, blockchain’s advocates will hope that the spirit of public-private collaboration engendered by initiatives such as Blockathon Ireland and in the creation of Latvia’s fintech strategy will accelerate not just explorations but also adoption.


Global Government Fintech’s Blockchain topic section