Can Blockchain Revolutionise Governance?
Introduction
Transparency is a critical aspect in maintaining investor confidence and upholding the integrity of businesses and governments alike. Several high-profile scandals and crises have brought transparency issues to the forefront, underscoring the importance of accurate and open financial practices. The infamous Enron scandal exposed fraudulent accounting tactics employed by the once-leading energy company, leading to one of the largest corporate bankruptcies in history. Similarly, the Petrobras scandal in Brazil revealed the magnitude of corruption within both governmental institutions and private companies. This article explores how blockchain could potentially help address such challenges, by fostering greater trust, transparency, and accountability at both governmental and corporate levels.
Blockchain and Governance: Potential for Corporates
In the realm of corporate decision-making, complexities arise due to the involvement of multiple parties and intermediaries in tasks such as shareholder identification, information exchange, communication, and voting. The adoption of blockchain technology can help to mitigate these issues enabling direct and transparent voting for shareholders. Embracing blockchain can create more precise voting processes, cost reductions, heightened shareholder engagement, and improved fairness among stakeholders, ultimately bolstering shareholder democracy.
Blockchain can be utilised through a permissioned blockchain model, facilitating direct communication between issuers and shareholders during Annual General Meetings (AGMs). AGM documentation is uploaded to the blockchain, ensuring universal access to the information for all participants. Through recording all transactions on the blockchain, shareholder voting rights can be directly associated with their respective shareholders using a Know Your Customer (KYC) process. Several initiatives have already explored the potential of blockchain in shareholder voting. Australian Securities Exchange (ASX) has explored blockchain usage for their AGMs. However, the project to move much of ASX’s workflow to a shared, distributed ledger similar to blockchain faced several obstacles related to company resistance and design flaws, which ultimately led to its cancellation. This reflects the broader trend amongst global exchanges facing challenges in leveraging blockchain technology for institutional adoption.
Blockchain and Governance: Potential for Governments
Governments can also benefit from blockchain’s potential, as demonstrated in the initiative led by the World Economic Forum in partnership with the Inter-American Development Bank (IDB) and the Office of the Inspector General of Colombia, known as the Transparency Project. This project aims to investigate and implement blockchain for corruption-prone government processes, focusing on public procurement in Colombia. Public procurement is susceptible to corruption due to the large sums of money involved and the complexities in the procurement process which provide ample opportunities for shortcuts and unethical behaviours such as bribery and favouritism.
The software proof-of-concept (PoC) developed by the project aims to enhance the vendor bidding and selection phase of public procurement through various channels, including permanent and tamper-evident record-keeping, real-time procedural transparency, automated functionalities with "smart contracts", reduced reliance on centralised decision-making, and increased citizen engagement. The project highlights several challenges and lessons related to corruption in public procurement. Some of the key challenges include maintaining vendor anonymity, integration with official state procurement software, and addressing spamming and draining attacks. The use of blockchain technology offers many advantages to governments including censorship resistance and enhanced transparency. However, there are also potential risks associated with spamming and malicious interference in a public and open procurement system. Strategies like cryptographic solutions and other innovations might also be explored by governments to mitigate these risks.
Political Risk Considerations
The regulatory landscape surrounding blockchain adoption holds significant importance in governance and is influenced by political decisions. There are three key political risk considerations in the widespread adoption of blockchain by corporate and government entities.
1. Regulations
It is crucial to analyse how regulations impact blockchain adoption, their level of favorability or restrictiveness, and their alignment with governments' ESG objectives. Switzerland is a prime example of a country with a favourable regulatory environment for blockchain adoption. The government has implemented regulations that support blockchain growth, providing legal clarity and a stable framework for innovation. This has attracted numerous blockchain startups and companies, including IBM, a multinational technology company actively involved in blockchain technology and adoption. When analysing the impact of regulations, companies like IBM consider the regulatory landscape of different countries to determine their investment and expansion strategies.
2. Government policies and support
Government policies and support play a vital role in enhancing governance practices, transparency, and public service delivery. The efficacy of utilising blockchain can be subject to the influence of three pivotal geopolitical factors. Firstly, the diverse regulatory frameworks across countries may exert a significant impact on the facilitation or hindrance of its adoption and cross-national collaboration. Secondly, governmental policies wield substantial potential in shaping the landscape of innovation and cooperation within the blockchain space. Finally, diplomatic ties and relations between nations play a pivotal role in promoting cross-border collaboration on blockchain projects, as demonstrated by the European Blockchain Partnership's initiation in 2018. This partnership between 29 European countries created the European Blockchain Services Infrastructure (EBSI) which serves as a decentralised, blockchain-based platform enabling participating nations to securely share public services and data across borders.
3. Cybersecurity and data privacy
There are also major risks related to cybersecurity and data privacy in blockchain implementations. Governments should evaluate their data protection laws and cybersecurity measures and ensure that the necessary controls are in place. Additionally, governments may also find it advantageous to consider the potential benefits that could arise from collaborating with international partners to effectively tackle cross-border threats and vulnerabilities within the expansive realm of global blockchain networks.
Conclusion
Blockchain technology holds promise in improving transparency and accountability in both corporate and government governance. Addressing challenges and implementing thoughtful planning can pave the way for a more transparent and accountable governance ecosystem. That being said, solely relying on technology will not suffice to address the core challenges embedded in human behaviour. Therefore, a holistic approach is indispensable—one that combines the advancements of technology with purposeful societal changes, paving the way towards a future that thrives on both transparency and accountability.