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March 13, 2017
Blockchain: How and when should revenue agencies join the conversation?
By: David Regan

Blockchain, or distributed ledger technology, is attracting a lot of interest (and excitement) in the financial services community. And it’s easy to see why. It promises, for example, to transform how transactions and trades are recorded and settled, cutting out many of the manual and slow processes that clearing and settlement require today. It could save the industry billions, and at the same time considerably enhance transparency and security.

Clearly, blockchain is potentially transformational. So how should revenue agencies be preparing for its impact? That was the subject for discussion at a session at the European Centre for Government Transformation roundtable that I recently moderated. CIOs from major financial services businesses joined senior figures from government revenue agencies and policy bodies to examine the potential impacts of the technology for revenue agencies.

One thing was clear: Revenue agencies need to make sure that they keep themselves informed about developments and, where appropriate, get involved in discussions with industry to understand blockchain’s likely evolution. Those discussions are likely to center around three main topics: blockchain’s maturity in enterprise settings; the opportunities it presents for businesses; and what the impacts could be for revenue agencies as the technology develops.

Adoption of blockchain is still at an early phase. Private sector firms are carrying out pilots, largely within their business’s internal systems. Moving beyond those internal pilots to broader commercial deployments raises a number of issues. The challenges from a revenue agency point of view that struck me as particularly pertinent are the lack of natural governance structures and, longer term, the potential data security vulnerability.

Blockchain enables a number of different parties, including financial competitors, to add value to the exchange of data in a distributed ledger. That raises considerable governance issues that will require the creation of new standards. That process will, in turn, need to involve industry and regulators in, among other issues, agreeing the owners of the distributed ledger, standardizing use cases and resolving issues of, for example, competition.

Security is another area that will need close attention. Blockchain’s inherent cryptography means it’s currently very secure: “Unpicking” more than one record is more or less impossible. However, the consensus is that by 2020 advances in quantum computing will be able to “crack” single blockchain records. And, of course, the cracking of even one taxpayer record on a distributed ledger raises issues about the security of tax records in the long term, as well as the need to comply with data protection and other data standards.

But the reason for the huge interest in blockchain is the scale of opportunity it presents. Potential use cases—among many—include trade finance, notarization and reinsurance. One example that’s particularly relevant for revenue agencies is identity. Being able to share accurate, consistent and timely identity information offers potentially significant value to taxpayers, government and industry, enhancing their ability to cooperate securely and transparently. But to take advantage of that potential will mean resolving key issues of data protection and identity.

So, given the challenges and opportunities blockchain presents, what should revenue agencies do next? Two foundational steps occur to me. First, increasing the use of APIs to exchange data with taxpayers and other government agencies will enable revenue authorities to reinforce the value of electronically sharing data on a timely basis between all parties. Recognizing the value of those data exchanges will, in turn, promote the strength and viability of related governance structures. And that could be a crucial first step towards establishing the rules and processes to support distributed ledgers.

Secondly, the adoption of blockchain will involve setting governance structures within the private sector—for example, across financial institutions and banks. Revenue agencies should seek to participate in these nascent governance exchanges, in order to ensure that the standards being created take into account agencies’ requirements and make the most of the opportunities offered by revenue data.

Overall, I came away from the session with a clear sense that blockchain is a topic that revenue agencies need to pay close and careful attention. It may be relatively immature today, but it’s growing up fast. Given the pace of technology change and adoption in our world today, failing to understand blockchain’s likely impact could put revenue agencies on the back foot. The time for them to join the conversation is now.

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