Commentary: Blockchain for government? Not so fast.

Blockchain technology has become a polarizing touchstone, with people either singing the praises of what they view as a transformative system or rolling their eyes at a wasteful technological solution in search of a problem.

And most people don’t know what the confusing technology is or does beyond a dim awareness that it undergirds cryptocurrencies like bitcoin. Few other technologies will engender this much passion among experts while remaining largely obscure to most of the public, a byproduct of both its newness and complexity.

You don’t need to understand how GPS works to understand what it does for a user, or how cellular networks work to comprehend that data is transferred from servers in point A to your phone in point B, but blockchain’s novelty is its technical structure. So, let’s attempt a succinct explanation: In the most fundamental terms, a blockchain is a ledger that records information, which can be practically anything – currency balances, yes, but also text, photographs, spreadsheets, whatever you want.

That’s not particularly interesting, but its idiosyncrasy is that this ledger isn’t held in one central location, the way a file is held in your computer. It is held by a network of devices that act as nodes, and each one has its own copy. Every change or transaction is recorded not just on one device, but on all of them, which functionally verifies a transaction is legitimate and makes it so the ledger can’t be modified in one location.

Recently, the state Legislature moved to enact a two-year ban on energy-intensive bitcoin proof-of-work authentication in the state (the way new bitcoin are created is having computers perform complex mathematical equations and then have this work verified by other nodes in the network, a process that gets more difficult over time and utilizes massive amounts of computing and electrical power). Gov. Kathy Hochul has yet to either sign or veto the bill.

Another bill that passed at nearly the same time got far less attention but could pave the way for additional adoption – or regulation. The blockchain cryptocurrency study bill, which was sponsored by state Sen. James Sanders Jr. and Assembly Member Clyde Vanel and has passed both houses but not yet been signed, would establish a state “cryptocurrency and blockchain study task force to provide the governor and the legislature with information on the effects of the widespread use of cryptocurrencies” as well as “ancillary systems, including but not limited to blockchain.” The 16-member board would then issue a report by the end of 2024, which seems geared mostly toward understanding the growth of the cryptocurrency industry in the state and how best to regulate it.

For example, the board would examine “the transparency of the digital currency marketplace and the related potential of market manipulation and other illegal activities,” a clear response to the perception that cryptocurrencies often leave consumers and investors unprotected since they are not federally backed or insured. That’s not speculative; the recent crash of the currencies offered by crypto firm Terra wiped away billions of dollars in value, prompting some investors to turn to thoughts of self-harm.

“It is extremely vital for New York to strike the proper level of regulations to ensure that New Yorkers enjoy the benefits of this emerging industry while minimizing its negative impacts,” Sanders said in a statement to City & State.

While urging passage of his legislation, Sanders added, “The bill requires the government to set up an inclusive task force that includes environmentalists, the community, the finance industry, regulators and academics to help guide us on policy. We are excited to help make New York the capital of blockchain industry jobs and opportunity.”

The technology’s biggest booster in the state is undoubtedly New York City Mayor Eric Adams, who infamously converted his first few paychecks to bitcoin right as the price was crashing. Adams has said that putting birth certificates and deeds on the blockchain “is the way of the future, and we’re excited about it,” though such initiatives still exist only at the idea stage. The mayor’s proposed executive budget for fiscal year 2023 did not include any allocations for blockchain technologies; asked about the actual state of adoption of any potential blockchain tools for use in city government and the timetable for deployment, a City Hall spokesperson acknowledged the questions but did not respond to them before press time.

“If you look at a lot of what state governments are talking about currently around blockchain and cryptocurrency, it’s really more about how they can regulate it. And maybe a little bit about how governments can leverage the technology themselves,” said Lorna Stark, a state and local government national leader at KPMG. She and others are advocating for a reversal of that approach, with governments instead largely turning to blockchain as a tool, in particular to centralize information. Essentially, specific information about residents could be stored as part of a blockchain and then distributed to agencies as needed, instead of each department having its own repository of information.

“You only have your information in one place,” Stark said. Currently, someone receiving services from the government might have to “separately give your information to (the state Department of Motor Vehicles), and then you separately give out information to (the city Administration for Children’s Services), and separately give your information to (the state Department of Health), and separately give your information to the Department of Buildings. So it takes a lot to make this work.” The flip side is that this all could be done without blockchain.

In fact, skeptics and proponents of blockchain tech often point to the exact same features as either benefits and shortcomings. The reality that blockchains are inherently public – this is, after all, the only way they can possibly work, and so-called private blockchains are using some of the same tech without really applying the concept – means that nothing can be obscured or deleted. Every piece of information would be accessible, even if there were attempts to anonymize it, which also means that very sensitive information couldn’t be kept on a government blockchain. If an agency employee, for example, accidentally posted a person’s Social Security number to a blockchain, the entire chain would have to be taken offline.

The inability to reverse transactions is supposedly a panacea for verification, but it also means that any transactions affected by hackers or other bad actors cannot be undone, a fact that cryptocurrency and non-fungible token, or NFT, investors have recently learned the hard way as assets were stolen without much recourse. It doesn’t take much imagination to see how this might be a problem when it comes to, for example, land deeds. If an attacker tricks a bureaucrat or landowner into executing a smart contract (the terms of which are written into the code itself, a feature of the blockchain) that transfers the deed to them, it can’t be taken back. It’s unclear what that would mean, legally.

“There’s no arbitration. If I’m a merchant and you buy something with a credit card, and I defraud you, you file a claim with your financial institution,” said Bruce Schneier, a prominent cryptographer and public policy lecturer at the Harvard Kennedy School. That option doesn’t exist on the blockchain. “What was wrong with land deed records? What was wrong with municipal bonds? What is the problem that this is trying to solve?”

That last criticism is the crux of much of the hand-wringing. The whole thing has the veneer of a futuristic, sci-fi tech that can prove very enticing to elected leaders hoping to project a sense of keeping up with innovation and courting the tech industry, but ultimately the question to answer is what exactly it’s for, practically and realistically. So far, it seems that the technology itself isn’t fundamentally able to perform functions that the government doesn’t already perform so much as to do them differently.

Whether that’s good or bad depends on your perspective on the trade-offs – smart contracts in exchange for higher energy consumption and more time to complete transactions; government transparency in exchange for the inability to keep any information on the blockchain private; a tamper-proof system that also cannot reverse malicious transactions; and so on. These questions are now being grappled with by political leaders in Albany and in cities across the state.

New York wouldn’t be the first city to implement blockchain for governance – Reno, Nevada, for example, has made it a priority – but it would be by far the largest and the first in New York state. It would no doubt set an example for others to follow, and Adams seems as enthusiastic a booster as any mayor in the country right now. Whether he can overcome the skepticism and criticisms, and push the issue to the fore at a time of multiple crises, including the perception of rising crime and the reality of housing unaffordability, remains an open question.