Blockchain Revolution

CHAPTER 8

REBUILDING GOVERNMENT AND DEMOCRACY

he Republic of Estonia is a Baltic state with Latvia to the south and Russia to the east. With a population of 1.3 million, it has slightly fewer people than the city of

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Ottawa.¹ When Estonia regained its independence from the former Soviet Union in 1991, it had an opportunity to completely rethink the role of government and redesign how it would operate, what services it would provide, and how it would achieve its goals through Internet technologies.

Today, Estonia is widely regarded as the world leader in digital government, and its president, Toomas Hendrik Ilves, will be the first to say so: “We’re very proud of what we’ve done here,” he told us. “And we hope the rest of the world can learn from our successes.”²

Estonia ranks second of all countries on the social progress index for personal and political rights, tied with Australia and the United Kingdom.³ Estonia’s leaders have designed their e-government strategy around decentralization, interconnectivity, openness, and cybersecurity. Their goal has been to future-proof infrastructure to accommodate the new. All residents can access information and services online, use their digital identity to conduct business, and update or correct their government records. While much of Estonia’s work predates the blockchain, the country introduced a keyless signature infrastructure that integrates beautifully with blockchain technology.

Central to the model of e-Estonia is a digital identity. As of 2012, 90 percent of Estonians had an electronic ID card to access government services and travel within the European Union.⁴ The chip embedded in the card holds basic information about the cardholder as well as two certificates—one to authenticate identity and one to provide a digital signature—and a personal identification number (PIN) of their choice.

Estonians use these to vote, review, and edit their automated tax forms online, apply for social security benefits, and access banking services and public transportation. No need for bank cards or Metrocards. Alternatively, Estonians can do

the same with mobile-ID on their mobile phones. In 2013, Estonians submitted over 95 percent of taxes electronically and conducted 98 percent of banking transactions online.

Parents and students use Estonia’s e-School to track assignments, curriculum, and grades, and to collaborate with teachers. Estonia aggregates in real time diverse health information from various sources into a single record for each citizen, and so these records don’t reside on a single database. Each Estonian has exclusive access to his own record and can control which doctors or family members have access to these data online.⁵

Since 2005, citizens have used i-voting for their national elections. Using their ID card or mobile-ID, Estonians can log in and vote from anywhere in the world. In the 2011 parliamentary election, citizens cast almost 25 percent of ballots online, up from

5.5 percent in the previous parliamentary election. The people obviously like and trust the system: the number went up again for the 2014 European Parliament elections in which a third of voters participated over the Internet from ninety-eight different countries. The Estonian cabinet uses a paperless process and makes all draft legislation accessible online. The average length of weekly cabinet meetings has gone from around five hours to under ninety minutes.⁶

Estonia has an electronic land registry that has transformed the real estate market, reducing land transfers from three months to a little over a week.⁷ In the last few years, Estonia has launched its e-Residency program, where anyone in the world can apply for a “transnational digital identity” and authentication to access secure services, encrypt, verify, and sign documents digitally. An entrepreneur anywhere in the world can register his or her company online in fewer than twenty minutes and administer the company online. These capabilities contribute to Estonia’s image as a digital country.⁸

None of this would work or be acceptable without solid cybersecurity. As Mike Gault, CEO of Guardtime, noted, “Integrity is the number-one problem in cyberspace and this is what Estonia recognized ten years ago. They built this technology so that everything on government networks could be verified without having to trust

humans . . . it is impossible for the government to lie to its citizens.”⁹

Estonia’s cybersecurity derives from its keyless signature infrastructure (KSI), which verifies any electronic activity mathematically on the blockchain without system administrators, cryptographic keys, or government staff. This capability ensures total transparency and accountability; stakeholders can see who has accessed which information, when, and what they may have done with it. Consequently, the state can demonstrate record integrity and regulatory compliance, and individuals can verify the integrity of their own records without the involvement of a third party. It

lowers costs: there are no keys to protect, and no documents to re-sign periodically. According to e-Estonia.com, “With KSI, history cannot be rewritten.”¹⁰

Clearly, blockchain technology applies not only to corporations fixated on profits

but also to public institutions focused on prosperity for all, from government, education, and health care to energy grids, transportation systems, and social services. Where to start?

SOMETHING IS ROTTEN IN THE STATE

In his Gettysburg Address in 1863, Abraham Lincoln said that society’s greatest goal was a “government of the people, by the people, for the people.” Twelve decades later, President Ronald Reagan said in his 1981 Inaugural Address, “Government is not the solution to our problem; government is the problem.” Many in the nascent blockchain ecosystem agree. In a 2013 survey, over 44 percent of bitcoin users professed to be “libertarian or anarcho-capitalists who favor elimination of the state.”¹¹

Libertarians of all stripes tend to support bitcoin. It’s decentralized and free from government control. It’s anonymous and difficult to tax. It resembles gold in its scarcity, and libertarians favor the gold standard. It’s a pure market, driven by supply and demand rather than quantitative easing. Not surprising, the first 2016 presidential candidate to endorse bitcoin for campaign payment was Rand Paul.

The libertarian bent has given opponents of digital currencies fodder for dismissing blockchain technologies outright. Jim Edwards, founding editor of Business Insider UK, wrote of the libertarian paradise he called Bitcoinistan, a country like Somalia “with as little government interference as possible, in a market free of burdensome laws and taxes.” He described the paradise as “a total nightmare . . . characterized by radical instability, chaos, the rise of a boss-class of

criminals who assassinate people they don’t like, and a mass handover of wealth to a minority even smaller than the one percent that currently lauds it in the United States.”¹²

Certainly, we live in a crisis-racked world. “The world has not seen this much

tumult for a generation. The once-heralded Arab Spring has given way almost everywhere to conflict and repression,” wrote Kenneth Roth, executive director of Human Rights Watch, founded in the 1970s to support citizen groups. “Many governments have responded to the turmoil by downplaying or abandoning human rights,” using the Internet to spy on citizens, using drones to drop explosives on civilian populations, and imprisoning protesters at mega public events like the Olympics.¹³

That’s the wrong response to turmoil, according to renowned Peruvian economist Hernando de Soto. “The Arab Spring was essentially and still is an entrepreneurial revolution, people who have been expropriated,” said de Soto. “Basically, it’s a huge rebellion against the status quo,” and the status quo is serial expropriation—the repeated trampling of citizens’ property rights by their governments until they have no choice but to work outside the system to make a living.¹⁴

So trampling more rights is the worst possible response because it pushes more people—such as journalists, activists, and entrepreneurs—outside the system. During the past twenty years, voter turnout has dropped in most Western democracies, including the United States, the United Kingdom, France, Germany, Italy, Sweden, and Canada. In particular, young people are looking to bring about social change outside the system, certainly not by voting. Most Americans think their Congress is dysfunctional and deeply corrupt. And for good reason: as in many countries, U.S. politicians are beholden to wealthy contributors and interest groups, and many members of Congress go on to become lobbyists. Case in point: 92 percent of Americans want background checks of people buying guns, but the rich and powerful National Rifle Association thwarts any legislation to effect change. So much for a “government of the people, by the people, for the people.”

The more citizens don’t feel their political institutions reflect their will and support their human rights, the more these institutions overstep their authority, the more citizens question the legitimacy and relevance of the institutions. Political sociologist Seymour Martin Lipset wrote that legitimacy is “the capacity of a political system to engender and maintain the belief that existing political institutions are the most appropriate and proper ones for the society.”¹⁵ And increasingly young people look to bring about change through means other than governments and even democracy. The bumper sticker “DON’T VOTE! IT ONLY ENCOURAGES THEM” tells the story.

“For individuals, it might not be desirable for them to be in a searchable, verifiable database of recorded history that governments could potentially use to exploit or subjugate people,” de Soto said. “The legislation of most of the countries in the world is so badly done, so unwelcoming, that the cost of coming into the legal system doesn’t make sense to poor people. And a country with too many poor and disconnected people causes too many problems.”¹⁶

As legitimacy fades, libertarianism ascends. But it’s not the answer to what ails the body politic. In this troubled world, we need strong governments, and ones that are high performance, effective, responsive, and accountable to citizens.

What should governments do? “Build, streamline, and fortify the laws and structures that let capitalism flourish,” de Soto wrote in The Wall Street Journal. “As anyone who’s walked the streets of Lima, Tunis and Cairo knows, capital isn’t the

problem—it is the solution.”¹⁷ So what’s the problem? “Getting their people identified,” he told us. “There is no way a government can go in and force people inside the system. So I think that governments all over the world right now are willing to turn the system around.”¹⁸

That’s where the blockchain comes in. The design principles of the blockchain should drive this transformation as it supports and enables higher levels of the following:

Integrity. To rebuild the public’s trust in political institutions, elected officials must behave with integrity. Trust must be intrinsic to the system, encoded in every process, not vested in any single member. Because the blockchain supports radical transparency, it is becoming central to rebuilding trust between stakeholders and their representatives. Ongoing transparency is critical to maintaining this relationship.

Power. Everyone has a right to take part in the government, directly or by voting. Whoever is elected must conduct affairs in the full light of day as a peer among peers. With the Internet, citizens took more responsibility for their communities, learned from and influenced elected officials and vice versa. With blockchain, citizens can go one step further: they can advocate for sealing government action in the public record in an unalterable and incorruptible ledger. Not just checks and balances among the powerful few but broad consensus of the many, for example, to effect background checks on potential gun owners.

Value. Votes must have value. The system must align the incentives of all stakeholders, be accountable to citizens rather than big money, and invest tax dollars wisely. The machinery of government must be high performance, better and cheaper with technology.