Harnessing Blockchain for American Business and Prosperity

11/01/2018

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Kati Suominen | Center for Strategic & International Studies

Introduction

Imagine running a restaurant and hearing about a food outbreak in your city stemming from contaminated spinach. You just ordered 200 pounds of fresh spinach to serve to your patrons. Wouldn’t you love to be able to trace both the contaminated spinach and the spinach you just received to their origins to see if your spinach happens to be from the contaminated batch? Now imagine running an airline. One of your paramount concerns is passenger and crew safety; another is speed of turnaround of planes at the gate. To accomplish both missions, you need to ensure each of the thousands of parts and components in your planes is top-quality and know which may need maintenance soon—so you can replace them before they break down and cause delays. Wouldn’t you love to be able to verify where each part came from, have access to a reliable certificate on its quality, and know how parts made around the same time by the same company are performing? Next put yourself in the shoes of a corn grower in a region with extreme weather conditions. Your instinct is to insure your crop against Mother Nature’s fury, but you also know that the insurance is expensive, and getting a claim paid can take a long time and might require an expensive lawyer. Wouldn’t you love to have insurance that would automatically be paid when a devastating hail storm damages your corn field? Blockchain can resolve each of these challenges. A foundational technology that can transform social and economic interactions, transactions, and business models across such sectors as health care, manufacturing, and financial services, blockchain is being adopted by startups, major corporations, and government agencies. Globally, there have been over 650 equity investments totalling $2.1 billion between 2012 and 2017 in blockchain companies across industry verticals.1 Fortune 500s such as Walmart and GE have made substantial investments in blockchain and participated in over 140 deals totaling $1.2 billion. It is hardly a stretch to claim that blockchain can unlock trillions in new economic value through efficiency gains, greater transparency, trust, and customization. Blockchain may sound exotic, but it is not unlike the internet or social media—only it is more private and secure, and increasingly capable of automated transactions. One way to think of blockchain is like a basketball game: one person throws a ball to another and that person throws it to still another, and all these movements are recorded in real time and visible to everyone in the game. Blockchain codifies a series of movements—transactions, shipments, and so on—among parties in the same game or network. Once the parties have agreed that these movements (or “blocks”) are real, blockchain makes the movement data accessible to all players and ensures none of them can contest or tamper with the data, such as on who got the ball moving to begin with. At any stage of the game and after it, everyone has an accurate, commonly agreed picture of every move throughout the game. Blockchain is particularly useful in settings where there are large networks of players, high intermediation costs, significant informational asymmetries among the players, and concerns about veracity of data and frequent concerns about fraud. By enabling interactions among anonymous users without central authority, using tamper-evident data on those interactions that are visible to all users in real time, blockchain adds new value to economic and social life. For example, blockchain applications enable individuals to secure personal data and identities; help overcome lack of trust between two parties who do not know each other but wish to engage in transactions; save intermediation costs between two transacting parties by automating verification and compliance with contractual obligations; and reduce coordination costs among multiple players needing access to the same information at the same time. These benefits have various second-order effects. By codifying parties’ transactions and loan repayments, it can open credit to segments of the population that previously needed to show high levels of collateral. It can create market efficiencies in areas where buyers are inherently wary of sellers’ motives and the quality of assets, such as in markets for used cars or fine art. It can improve data sharing among border agencies and accelerate customs clearance of imports. The purpose of this paper is to review how blockchain can be used to solve complex business problems across various sectors and areas of life, assess myths and challenges surrounding blockchain, and, in particular, to discuss what the U.S. government’s policy should be regarding blockchain. This paper does not focus on Bitcoin or other cryptocurrencies enabled by blockchain; rather, the focus is primarily on enterprise blockchains—blockchain applications operated by a company or an organization for a specific community of users. This paper uses the term “blockchain” loosely to refer to a family of distributed ledger technologies. U.S. companies, a number of government agencies, and several state governments are already exploring and applying blockchain, for example, to trace products in supply chains, enable energy trading between households, and administer medical records. Several states have developed laws around blockchain to define the term “blockchain” and to make smart contracts embedded on blockchains legally enforceable. This report proposes that the U.S. government and companies can work together to take these efforts to the next level in five ways:
  • Lead the development of global blockchain standards at the International Standards Organization (ISO) and beyond that encourage innovation and use cases involving blockchain applications, scalability of blockchain platforms and ecosystems, and integrity and usefulness of data and smart contracts built on blockchain.
  • Encourage innovations around and investments in blockchain through regulatory certainty and flexibility, including via a blockchain sandbox—enabling businesses to test markets for new blockchain solutions without needing to meet the gamut of regulations that otherwise might apply—and via a safe harbor law allowing blockchain platform managers to be immune from liability for the platform users’ activities.
  • Commit federal funds to accelerate the development of blockchain use cases, blockchain security and encryption technologies, and public-private partnerships in such areas as defense, counterintelligence, customs and border protection, trade enforcement, and health care management.
  • Create with key allies and development partners a Global Blockchain Development Fund (GBDF) to accelerate the uptake of blockchain in developing countries and by so doing improve business environments, advance the UN’s 2030 Sustainable Development Goals, and open new opportunities for U.S. technology companies in developing economies.
  • Accelerate blockchain’s adoption through raising awareness about the benefits of blockchain among regulators, federal and state government agencies, and U.S. businesses.
The next section discusses blockchain’s properties and why they are transformative. Section three discusses 10 use cases of blockchain and startups and the companies driving them. Section four turns to myths and thorny questions surrounding blockchain, such as whether the entries on it can truly be immutable and whether smart contracts built onto blockchains are smart enough to do what contract writers tell them to do. Section five discusses key considerations for policymakers considering ways to enable blockchain to benefit U.S. businesses, consumers, and government. Section six concludes. 181101_Suominen_Blockchain_v3

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