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Implementing Blockchains in the Public Sector - Legal Perspective

By Katarzyna Ziółkowska, PhD candidate at the University of Warsaw, visiting research student at the University of Birmingham, member of the Centre for Research on Legal Aspects of the Blockchain Technology at the University of Warsaw


15 August 2019





The emergence and further rapid development of distributed ledger technologies have made the administration face unprecedented challenges. On the other hand, the public sector was given a new instrument with the potential to improve its functioning. The blockchain technology has been noticed first by the private sector as a solution for eliminating the middle-man from transactions between two parties, an undeniable information storage medium and a secure and effective data processing tool. Due to distinctive features of this technology (decentralisation and anonymity or pseudonymity of its users) and the lack of regulation in this area, public administration (regulators of capital markets, tax offices, prosecutors) are experiencing serious difficulties in preventing or even tackling opportunistic behaviour.


Simultaneously, as the experience of some countries shows, blockchains can be also successfully used to improve the functioning of public administration, adapting it to the new technological reality. This notwithstanding, the possibilities of using blockchain for this purpose are not unlimited. In addition to the obvious technological, economic and social aspects, there are also legal restrictions. What's more, the public sector is more intensively regulated, the regulations are often very detailed, which is why the implementation of blockchains in the public sector looks completely different than in the private sector. In this blogpost, I will try to point out some of the problems that legislators have to face while regulating the implementation of blockchains in public administration as well as a potential solution to these problems.



The importance of an adequate legal framework for blockchain implementation in the public sector



Public administration, as the emanation of imperious functions of the State, processes and deals with the registration of much larger amounts of data than private entities. At the same time, it has to guarantee the transparency and accountability of data processing, correctness and security of the recorded data. Therefore, legal obligations towards public administration should be much bigger than towards private entities. And this is, in fact, the case - administrative bodies are, as a rule, subject to very detailed regulations related to data circulation, storage or exchange, just to name a few. However, this does not answer the question: “Why the legal framework for blockchain implementation in the public sector is so important?”. There are many private entities that also process large amounts of data (like social media platforms), but legal regulations interfere in their activities to a much lesser extent.


The answer to this question results from the rule of law and the right to good administration. At the core of the rule of law, that underpins the legal order of most of the western countries, has traditionally been the principle of legality. It means that the state, government, and any person acting under government authority (including a corporation), may only act according to law, and legal norms must specify their competences, tasks and procedures, thus setting the limits of their activity. In other words, public authorities can operate only within these limits. Consequently, as individuals are free to act in accordance with the principle that what is not expressly prohibited by law is permitted, public authorities may act only there and in so far as the law authorizes them.



Therefore, the possibility of transforming administration by means of blockchains is not only limited by various existing legal regulations, but also new regulations are necessary to enable that transformation. So as the first and most important requirement is ensuring compliance with the principle of legality, there are also obligations arising from relevant legal safeguards, the need to ensure the highest technological reliability and - last but not least - preparing the society (combating digital exclusion, providing information, training public officials).



Building the legal framework when discretion, technological failure and incompliance aren’t an option



When it comes to blockchains and public administration, the introduction of new laws, modification of or even simply compliance with existing ones must be done with a view to the features of this technology. In this blogpost, I purposely use the term blockchains, not blockchain. Although some basic assumptions may be common, information systems based on blockchain technology will eventually be as many as there are practical applications of this technology.


The implementation of blockchains in the public sector is, therefore, first and foremost, not a legal but technological and management issue. Modernization of public administration with the use of blockchains should not be an end in itself, but serve to solve a problem of specific public authority, introduce a better (safer, faster, more accessible) way of providing a specific public service or create specific facilitations at the state level. Such a focus on increasing the efficiency of public administration with blockchains makes it possible to determine the particular features that a given blockchain-based system should have. Only at this stage, a comprehensive legal analysis can begin to identify additional features of the system that are needed to ensure compliance with legal regulations.


For instance, the main issue that potentially hampers blockchains’ development and adoption in the public sector is, ironically, the same thing that made them so appealing at the first place: public, immutable ledger. There are multiple doubts and concerns as to the compliance of blockchains with privacy laws and data protection rights, but computer scientists also managed to come up with several potential solutions to these problems[1]. Their usefulness, however, will always depend on the particular implementation case.


But what about the principle of legality and restrictions related thereto? The purchase and widespread implementation of the system based on blockchain technology by a public authority (in particular in external contacts with citizens) cannot take place until legislators create the appropriate legal framework (authorizations and procedures). That creates a paradox – new laws cannot be introduced because there is no fully deployed technology in use, and the technology cannot be fully deployed because there are no laws enabling that.



Technology neutrality – another complication or a potential solution?



At this point, it is necessary to add to the discussion one more notion – the principle of technology neutrality. There is no consensus among experts as to the exact meaning of that principle but one of the most frequently cited is particularly relevant to the problem of blockchain implementation in the public sector. Therefore, the principle of technology neutrality could mean that legal rules should not favour or discriminate against a particular technology (Reed, 2007). To be more specific, legislators should refrain from using regulations as a means to push the market toward a particular structure that the regulators consider optimal. In a highly dynamic market, regulators should not try to pick technological winners (Maxwell, Bourreau, 2014). The requirement of technology neutrality, understood in this way, is particularly important in the public sector, as a highly regulated sphere.


Adding that to the impasse that was described before (no regulation without technology and no technology without regulations), at a glance, the situation seems even more complicated – the legislators cannot directly support the use of blockchains in the public sector. But in reality, it's not a complication, but actually a hint. The emphasis in regulations aimed at allowing the use of blockchains in public administration should be put not on ordering public authorities to implement blockchain, but simply on enabling such implementation next to other technologies. For the rest - legislators, instead of describing the features that blockchains used in public administration must have, should rather indicate the effects (including legal consequences) to be achieved in a given area of ​​administration (without discriminating or favouring existing technologies as well as future technologies). Such an approach would not only ensure compliance with the principles of legality and technology neutrality but also incentivises technology providers to propose tailored and effective solutions.


The above-described regulatory problems are obviously of a much more complex nature and the term “blockchain revolution in public administration” created in public discourse well reflects that[2]. New perspectives for public administration include: the possibilities to benefit from the use of blockchains, the need to fight effectively against abuses carried out using blockchain technology, and the general necessity to keep up with changing reality. Technological modernisation of public administration in that broad sense is therefore essential and it has to be done in line with the rule of law and in order to ensure the rule of law.



References:


Berryhill, J., Bourgery, T., Hanson, A., 2018, June. Blockchains Unchained: Blockchain Technology and its Use in the Public Sector, OECD Working Papers on Public Governance, 28.

European Parliament resolution of 3 October 2018 on distributed ledger technologies and blockchains: building trust with disintermediation (2017/2772(RSP)).

Maxwell, W.J., Bourreau, M., 2014, November. Technology neutrality in Internet, telecoms and data protection regulation. Computer and Telecommunications L. Rev. (2014 forthcoming), p. 1.

Reed, C., 2007, September. Taking Sides on Technology Neutrality. SCRIPT-ed, 4(3), p. 266.

Key words: blockchain, public administration, legal framework, regulation, principle of legality, technology neutrality

[1] See more at: https://www.ibm.com/downloads/cas/2EXR2XYP and https://www.eublockchainforum.eu/sites/default/files/reports/20181016_report_gdpr.pdf


[2] See: https://openledger.info/insights/blockchain-public-governance/ or https://www.eublockchainforum.eu/sites/default/files/reports/eu_observatory_blockchain_in_government_services_v1_2018-12-07.pdf

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