The common assumption today is that artificial intelligence will soon drive our cars, manage our work, and manufacture our goods, but how will technology impact our governments? Unfortunately, much of the public sector has been slow to fully embrace digitalization. This is partly because of the complexity and security risks inherent in implementing information technology across public institutions. Fortunately, emerging technologies like blockchain or distributed ledger technologies (DLT) are making this process vastly easier.
Indeed, many early stage companies around the world are seeking to leverage distributed ledgers to streamline public sector functions, including identity management (passports, drivers licenses, bank logins), healthcare (medical records, supply chains, medical research), and real estate (land registry, titles, property management). The value of distributed ledgers to governance is that all participants can be guaranteed equal access to an identical copy of encrypted ledger data. A distributed ledger is essentially an asset database that uses encryption and peer-to-peer distribution to share secure data across a network.
Estonia, for example, has emerged as a global leader in leveraging blockchain to digitize governance. Estonia’s digital infrastructure is built on an open-source backbone—first instituted in 2001. The country’s 1.3 million citizens are issued an ID card that uses 2048-bit public key encryption, enabling online access to voting and healthcare. In fact, the Estonian government has deployed blockchain technology to secure more than a million healthcare records. Based on X-Road and the KSI blockchain (used by NATO and the US Department of Defense), the country’s “E-Estonia” plan is one of the most ambitious electronic government projects in the world.
So how will technologies like blockchain redesign governance in the United States? Consider the example of the financial sector. Since the 2008 financial crisis, the U.S. financial sector has been inundated with new waves of regulation at a substantial cost. Amid an increasingly regulated financial landscape, many firms are turning to regulatory technologies or RegTech to reduce the risk of noncompliance. Indeed, the demand for RegTech in the form of biometrics, machine learning, and DLT, is beginning to transform the industry.
RegTech itself is not new. Incumbents and technology companies have been developing technology-mediated regulatory solutions for years. But the promise of RegTech is real-time compliance through algorithms (read: artificial intelligence). Major market players in banking, payments, and insurance are increasingly collaborating across the compliance space in order to reshape the way regulatory compliance is managed. In fact, a recent academic study of RegTech suggests that the future is “close to real-time” regulation and regulatory compliance.
In an era in which regulators are anxiously driven to keep pace with accelerating innovation through new and constantly evolving compliance requirements, RegTech promises to significantly reduce the need for human agency. In order to keep pace with accelerating technologies, US policymakers and regulators would due well to focus on RegTech in reshaping how compliance is managed. Put more bluntly, RegTech is driving a paradigm shift that necessitates the reconceptualization of financial regulation and government’s role in this process.
The hope is that blockchain-based RegTech can leverage distributed ledgers to improve the ability of government to resolve compliance issues and enforce audit requirements quickly and easily. This could mean a radically new form of transparency as well as a new standard in regulatory management. To be sure, one powerful consequence of the decentralization or disintermediation that distributed ledgers provide is the removal of the middleman— including government— in delivering faster, more transparent oversight.
While traditional regulatory solutions may be robust, they often suffer from rigidity and centralization. Pioneers in the RegTech space aim to streamline and/or automate the process of compliance while significantly reducing costs. The key difference between traditional solutions and the next generation of RegTech is agility. Often stifled by legacy infrastructure and byzantine bureaucratic processes, many firms now seek software solutions that simplify and automate the compliance process.
In the context of KYC (know your customer) requirements, for example, blockchain technology can offer significant cost savings to both the financial services industry and government regulators. KYC processes can be a major hurtle for young companies and blockchain can be helpful in simplifying this process. KYC rules are intended for banks and other financial institutions to help authorities combat terrorism, money laundering, and theft. But these regulations can be onerous and challenging. Anyone with experience in cryptocurrency exchanges can attest to this.
So what is the solution for government? In the future, regulators could leverage public blockchains as compliance systems to modulate certain pre-defined conditions, managing pre-described limits. Consider, for example, these basic applications of blockchain to regulatory oversight:
· A single platform for improving the speed and quality of regulatory review, potentially eliminating the need for both regulators and insurers to keep duplication of records.
· A shared execution system, providing a means for permanently storing and encrypting transactional data, enabling massive reductions in cost through speed and automation.
· Transparent oversight for regulators to oversee and track compliance with little or no effort.
· Access to data sharing by design, eliminating the need for regulators to collect, store, reconcile and aggregate any data themselves.
To date, RegTech has largely focused on the digitization of manual reporting and compliance processes. But as venture capitalist Marc Andreessen has explained, software is now eating the world and every function within it. This is no less true of regulatory compliance or any other (outdated) function of public governance. Indeed, as Deloitte concludes, in the near term RegTech will automate the more mundane compliance tasks and reduce operational risks associated with meeting compliance and reporting obligations.
In the future we can expect a blockchain-based RegTech to leverage real-time information, and the incorporation of algorithms and analytics in remaking the compliance space entirely. This includes new processes to streamline anti-money laundering (AML) and customer due diligence. Leveraging AI and machine learning, much of this space can and will be automated. What this means is that it’s time to rethink what we mean by public governance.