Bitcoin and the blockchain technology that drives it are among the most disruptive digital innovations to have emerged in recent years.

Depending who you ask, these technologies are either potential catalysts for transnational crime, or potential tools in the fight against corruption.

The truth, however, lies somewhere in between.

BITCOIN AND BLOCKCHAIN EXPLAINED

One example of a cryptocurrency, bitcoin is a decentralised digital currency based on a peer-to-peer payment system built on cryptographic principles. Rather than data being stored on one central server, it is simultaneously stored on nodes in a system where each node communicates with the others to record and verify each transaction.

Information is publicly recorded in ‘blocks’. Blocks are simply collections of data and can store any type of data; bitcoin is only one of the many applications of the technology. Blocks contain not only the data that was recently stored in them, but all previous data points. This makes it possible to link one block to its previous block, creating a chain of information. This is why the underlying technology of the bitcoin system is referred to as a blockchain.



RISKS
In September 2017, JP Morgan CEO Jamie Dimon told a conference that “the only people who are better off using Bitcoin as opposed to official currencies are murderers, drug dealers, or people living in places like North Korea.”

If you are using Bitcoin with an established online wallet or exchange service, your account has to be linked to a personal identity. But this is not a requirement to complete Bitcoin transactions elsewhere.

Criminals can easily disperse their bitcoins across multiple accounts to avoid triggering reporting requirement (if they exist at all; there is no central monitoring body that would otherwise flag or block suspicious transactions).

Criminals and the corrupt can also obscure the origins of money through layers of multiple transactions, creating a web too complicated to unravel. Bitcoin transactions are nearly instantaneous, which allows money to be rapidly shifted to different locations. This makes it difficult to track the flow of funds, as well as stop a transaction if there is suspicion of illegal activity.

ALL BAD?
However, some people argue that claims of the anonymity that Bitcoin provides are exaggerated.

Although transactions do not record the identities of those involved, they do still log the public keys used by all involved parties. Actions are recorded on the blockchain and are freely available to inspect. The public keys can be tracked, meaning Bitcoin flows can be observed to see where the money went.

Furthermore, digital currencies are increasingly accepted as a legitimate investment. Some researchers contend that any bitcoin tied to illicit activity will eventually find its way to one of the mainstream Bitcoin exchanges. These mainstream marketplaces record personal information about account holders, so users can be identified if they are suspected of illegal activity.

THE ANTI-CORRUPTION POTENTIAL OF BLOCKCHAIN
When looking at the potential of blockchain technology in anti-corruption efforts, it is important to separate it from bitcoin and other cryptocurrencies. As of now, blockchain is not typically used as a specific anti-corruption tool, but the permanence of data recorded in blockchains makes it resilient to manipulation for fraudulent purposes.

There are already some promising applications for blockchain technology in government services such as land registries and voting systems, and private applications such as financial transactions, supply chain management and contracting.

BLOCKCHAIN AND LAND GOVERNANCE
Blockchain can be used to store land registry entries and land titles to protect them against fraud and corruption. Several countries are running pilot projects in this area:

Brazil - Brazil's state-run technology company Serpro recently launched a blockchain platform that hopes to reduce fraud in Brazil's antiquated land titling system, which currently allows vast swathes of Amazon rainforest to be cut down for soy and beef farming.

Sweden – ChromaWay is developing a concept to test the possibility of running housing purchases using blockchain and smart contracts. The project is still in its exploratory phase.

Georgia – The Exonum framework is being used to transfer the Georgian land registry onto a blockchain, securing land titles from tampering and providing a time-stamped and sealed copy of the data.

Voting could also be revolutionised by blockchain, particularly in countries with high levels of corruption where voting processes are often subject to fraud. With FollowMyVote, for example, voters install a digital voting booth on their computer, submit their identification and get verified with voter registries. They can then submit their ballot to a blockchain-based ballot box while remaining anonymous using private keys.

Some pilot programmes are testing the viability of blockchain in transactions for distributing humanitarian aid. In 2017, the World Food Programme (WFP) began distributing food vouchers at a refugee camp in Jordan using the Ethereum blockchain. Food vouchers are assigned to refugees, who access them in supermarkets inside the camp using biometric data. So far, the WFP has transferred over US$1.4 million in food vouchers to 10,500 refugees, and plans to extend the programme to 100,000 refugees in 2018. The blockchain-based pilot project runs more efficiently and provides better security against fraud than traditional systems.

Several organisations are working to use blockchain technology as they digitalise supply chains. Everledger is a global registry for diamonds that run on a blockchain. It registers a unique ID for each diamond, starting in the mine. This system is meant to combat counterfeiting and stop the spread of conflict diamonds. IBM is running several projects aimed at creating blockchain-based supply chain management systems.

One of the most cited blockchain applications are smart contracts. These are contracts written in code instead of text and are signed by digital signatures and automatically implemented. Audits and safeguards can be coded into a smart contract and cannot be altered without consent, which could in theory limit the scope for fraud and corruption. This makes smart contracts potentially applicable to several areas of government contracting, especially with regards to limiting manipulation during public procurement processes. Like other blockchain transactions, the process cuts out the middle men.

EARLY DAYS
As many observers hail the advent of the blockchain revolution, significant challenges remain to using blockchain technology for securing government data, formulating smart contracts, managing supply chains, or keeping track of cross-border money flows.

While the potential for using blockchain in this context is significant, it will probably take years for the technology to mature to widespread use. In the meantime, the risks of cryptocurrencies enabling illicit financial flows cannot be overlooked.

Peril and promise, it seems, are two sides of the same digital coin.

Image: Creative Commons, Unsplash, Andre Francois


For any press enquiries please contact press@transparency.org