OPINION: Blockchain—an ideal technology for government and tax authorities

OPINION: Blockchain—an ideal technology for government and tax authorities.

Blockchain is a new distributed platform that can reshape the world as we know it, argues Laurent Lamothe, president and founder of LSL World Initiative.

The technology likely to have the greatest impact on the future of the world economy has arrived. It's called Blockchain. After the Internet of Information, now we have the dawn of the second digital revolution. Powered by Blockchain technology it is the Internet of Value—a new distributed platform that can reshape the world as we know it to record everything of value to humankind.

According to Brian Forde, Director of Digital Currency at MIT in co-authors Don and Alex Tapscott's new book The Blockchain Revolution, "Blockchain is quickly becoming one of the most important emerging technologies since the Internet."

Its tamper-proof distributed ledger will bring security and peace of mind to transactions around the world and help reduce fraud. It can be used for property rights, land titles, taxes and even in elections to register votes that cannot be deleted later on.

Blockchain technology holds a vast amount of promise and can, and indeed will, make a positive impact in the very near future in all business transactions. Its possibilities are still being explored and researched within and beyond the realm of finance. Significant investment is being directed towards the technology on the premise that it will solve multiple business processing and transactional problems, among many others. It has already been successful in various arenas— it may not be the solution for all problems, but it certainly will be the solution for many of them.

Blockchain is a revolutionary technology, but it is still in its infancy as a technology. The benefits of the technology are numerous. The technology can be applied to a wide array of businesses—not just financial services—to markets and any transaction involving different levels or stages of a hierarchy or process, from logistics to retail and even government agencies. In fact some say that Blockchain technology is ideal for government services. It can be used for the following processes:

Verification

  • licences, proofs of records, transactions, processes or events
  • government tender processes and purchases

Movement of Assets

  • the transfer of money from one entity/person to another
  • direct payments and swift, secure, transparent transactions, costing less

Ownerships

  • land registries, property titles—any kind of real estate ownership
  • the perfect keeper of the chain of custody
  • the immutability of records

Identities

  • the creation of E-identities, similar to a passport
  • verification that one man has only one vote—no voting fraud
  • access to services and rights

In addition, by creating a new concept of services or forms of public value, each transaction could be used by governments as a means of revenue-raising for socio-economic development. This is in itself a very exciting prospect for all governments— especially the governments of emerging countries.

Shift in mindset

In fact Innovative Financing for Development (IFD) can work hand-in-hand with Blockchain. Micro-contributions on globalised sectors such as telecommunications and financial services, when aggregated can provide significant revenue. This could be used to finance Blockchain which then can "feed" IFD through the revenues that could be generated on the various transactions.

Innovation is important in the development arena. Blockchain requires a fundamental shift in mindset because the current regulatory framework aims to regulate the financial system through the access point of a central operator, regulator or management body.

However, in total contrast, a central tenet of Blockchain philosophy is the idea of self-management between transaction participants with no central figure. Thus, the fundamental philosophical underpinnings of our payment systems regulation may need some urgent re-thinking as the two philosophies are diametrically opposed.

Once this challenge is overcome and Blockchain can be accommodated within the financial services/banking regulatory framework, it will facilitate global, cross-industry and cross-entity transactions particularly within financial services, insurance, telecommunication and other large enterprises.

It will allow people to cut out the middleman and reduce the associated transaction costs. In fact, it will have a huge impact on the way we do business—in particular on the global tax system. It could be used to register and record property transactions, for example, or government-licenced assets, intellectual property, even to make sure that one voter uses one vote only.

On a day-to-day level Blockchain technology could also make government tendering processes and purchases more efficient, and reduce the potential for fraud and error.

The use of Blockchain in government is more than speculation. The Isle of Man government recently tested a Blockchain registry that records which local companies are using distributed online ledgers. In Estonia, NASDAQ—which runs the country's stock exchange—is creating an e-voting system based on the technology and in April the government in Georgia announced a deal to develop a Blockchain-based land registry.

In the United Kingdom, Cabinet Office Minister, Matt Hancock, announced earlier this year that the government had started to look at Blockchain as a way of improving public services, initially as a way of streamlining the process of distributing grants.

Other areas where the technology could also be used usefully are in tracking the movement of student loans from the Treasury to a student's account or tracking overseas aid. "We're excited to explore any and all possible use cases for Blockchains in government," he said.

Tax collection

Perhaps the Blockchain potential of most interest to governments, however, is in the tax collection area. The OECD published a report in May 2016, Technologies for Better Tax Administration, which explored how emerging technologies could best be used by tax administrations.

Blockchain could be one of the most valuable technologies because of:

  • its ability to deliver high-quality, reliable information rapidly.
  • its ability to deliver information to a wide group of interested parties
  • it can deliver data in an interpretable format
  • it can look across a transaction and the tax treatments associated with it—which tax data systems today cannot do

For tax departments today, the scale and detail of data that is required by the tax authorities is a real challenge. Front office systems are generally set up from the point of view of information that is useful to the organisation—not necessarily from the point of view of compliance. It is transaction rather than compliance-based information.

The new technology, however, will allow the capturing of information from multiple perspectives—information that is verified by everyone using it. The result is more detail, more useful information and more certainty by all parties involved.

As the traditional provision of financial and banking services becomes increasingly irrelevant and the increase in FinTech-based self-service solutions becomes more prevalent, once the regulatory aspect is sorted out, we will probably be a lot closer to the implementation of Blockchain than we think.

Although some feel that Blockchain is a t least 5 years away from being widely used by the tax authorities, some jurisdictions will be able to move faster than others—particularly those in less developed countries which are less restricted by legacy systems and red tape.

They will simply leapfrog over the existing tax systems and catapult themselves into the Modern Tax Age.

Considering the pace at which organisations and governments are beginning to explore and test Blockchain, once the remaining challenges are tackled, the new technology could take off very rapidly.

* By Laurent Lamothe, president and founder of LSL World Initiative.