Do governments need their own regulated blockchain?

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Whether you like it or not, government involvement in blockchain technology is increasing.

There are examples of it occurring across the world and it is not just a one size fits all. In the US, the focus on blockchain technology increased in 2019 as Facebook revealed the Libra digital currency initiative just around the same time as Congress was hearing testimony from the blockchain industry about cryptocurrencies. In China, we can’t tell for sure exactly what is going on but we do know that the government is advancing blockchain initiatives in many different areas.

One of these initiatives, which is also being investigated by a whole range of leading nations, is the issuance of a Central Bank Digital Currency or CBDC. Everyone from the US Federal Reserve to the European Central Bank and the Bank of Japan has signalled its intention to explore the possibility of CBDC and how blockchain might underpin it.

How would that actually work though?

It seems unlikely that a central bank would choose a public network like Ethereum to issue a CBDC, even though most of the blockchain-based innovation so far has occurred on this network. After all, a central bank is unlikely to choose a politically decentralized network where anonymous actors can operate. One solution that has been put forward is the regulated blockchain at the heart of L3COS.

But what is a regulated blockchain?

According to L3COS, it can be thought of in the following terms:

“A regulated blockchain is a distributed network of nodes with an authority at its top. These nodes, in different contexts, could be devices, individuals and/or organizations. By setting and executing rules, the authority regulates relationships between the nodes.”

This sounds a lot like a permissioned blockchain, which L3COS admits are very close in meaning. The difference, it says, centres on the power of the superseding authority. In the case of a regulated blockchain, the authority can manage permissions but it can also create new entities, rules and regulations.

Of course, permissioned blockchains are already common, with established technology providers such as IBM and Microsoft offering these solutions. These platforms are mostly used by corporations as they experiment with sector-specific blockchain technology in areas like finance, logistics and insurance.

Some governments have also built their own permissioned blockchain, such as Estonia and Sweden, for various types of government registry. However, these are also relatively niche and not necessarily designed for the vast requirements of a CBDC.

A blockchain for a CBDC would need to be fast and extremely secure, of course, but it would also need to be decentralized, in order to ensure transactions take place efficiently without going through a centralised body. Therefore, the question of regulating a decentralised blockchain becomes key and this is where L3COS claims to solve an important question.

It is organised into a distributed network of participants at three levels, one for government, one for business and one for individuals. Each has its own consensus mechanism that logically unifies the participants and all participants can communicate without intermediaries. The key difference is that a government sets the rules for the relationships between the participants in each level, while individuals at level three can also regulate the government.

According to L3COS, the advantages of this system are that it can be controlled by a democratically elected government, is suitable for global adoption and is capable of automating compliance in order to significantly reduce bureaucracy.

Whether this global adoption occurs, we will just have to wait and see. What is clear is that governments are moving into blockchain technology in a big way and initiatives like CBDC are not well suited to the decentralised blockchain networks that exist today. How that circle ends up being squared is anyone’s guess but the idea of governments having their own regulated blockchain certainly has its merits.

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