Every time we have a brand new technology, we go through a process whereby the technology is in search of a problem/business use case. Blockchain is one of those technologies that has been in search of more use cases. Bitcoin is the most successful use case to date for that technology. Recently, we also are seeing promising progress in the supply chain domain. In fact, a Bloomberg blog last year stated, “Blockchain could revolutionize the shipping industry” in such a way that “documentation that takes days will eventually be done in minutes, much of it without the need for human input.”

In this blog, I intend to explore the possibility that blockchain could revolutionize public finance, specifically on federal grants and contracts. Canada and Europe are beginning to explore opportunities in this area. For example, the Canadian Government is experimenting with a public blockchain prototype for grants as a way to enhance government spending transparency. The US federal government spends over $1T each year on grants and contracts. The processes are in many ways similar to the shipping industry. The grant (and contract) paper trail begins with the pre-award stage when solicitations of proposals are published. Its lifecycle is complex and could involve many unrelated entities with disparate systems and data sources. For simplicity purpose, I will focus on the grant use case here but the same use case could be applicable to contract. The chart below illustrates the complexity of a grant lifecycle and the number of unrelated entities involved.

VOCA Grant Lifecycle (author: Christina Ho)

The flowchart above reflects the funding flow as well as the performance lifecycle of the Victim of Crime Act (VOCA) Victim Assistance Federal Grants. Starting with the awards published on usaspending.gov for FY16, the flow of funding totaling approximately $45M began with the Federal Government Department of Justice, Office of Justice Program, to State of Maryland Governor’s Office of Crime Control and Prevention which then distributed the funding further to another 100 local government and non profit entities that would be responsible for the actual delivery of the services. As illustrated, the entire lifecycle of a single grant could involve hundreds of organization with systems and data that are not connected or trusted. This highlights the challenge of reporting and agreeing on the status of both the governments and the grant recipients.

Once the federal agency awards a grant to a recipient and the recipient executes the award, the sponsor agreement relationship begins. Unfortunately, the amount of paperwork does not stop and only gets more difficult to track. In general, on the recipient side, the people in charge of delivering the outcomes of the grant are not the same people who are providing compliance, financial and administrative oversight. Similarly, the people at the federal agency overseeing the grant awards are not the same people who assess and accept the technical deliverables. As a result, over the period of performance, many people with different roles are involved in the process one way or another without access to the same information at all times. Consequently, the administrative and overhead burden could become significant because so many resources are spent on chasing down the status and get everyone on the same page.

Blockchain has the potential to solve that problem because it allows unrelated entities to contribute and maintain a single immutable record of all transactions within a designated block without any trusted intermediaries. As noted above, the provenance of information for federal awards is key in ensuring compliance and prompt payment as well as mitigating dispute resolution. This technology could reduce the ever-increasing administrative and compliance-related costs of managing federal contracts and grants by automating many of the compliance activities between recipients and federal sponsors. If we could reduce recipients’ administrative burden, we could reduce the costs of research and other services, then the public would benefit.

Another benefit blockchain has is protecting privacy data sharing without a trusted intermediaries. In January 2019, Congress passed the Foundations for Evidence-Based Policymaking Act of 2018 (Public Law No: 115–435) with bipartisan support. In our current divisive political environment, this was no small accomplishment. I know many of the people who are passionate about improving public policy outcomes and they labored for years to accomplish this legislative victory. Although most American public doesn’t know much about the technical details, we do owe them a big thank you for their public service.

One of the key challenges for implementing this law is how to collect the outcome data from various sources while protecting the privacy of the participants. As noted in my grant VOCA example above, the output and outcomes of the initial federal assistance are produced by many organizations that are not related and not trusted. Consequently, the output and outcome data are collected and stored in different organization in a variety of ways. At the same time, these data are the basis of the evidence to demonstrate the effectiveness of a particular policy. While the federal government provided much of the funding sourced from the taxpayers and has the responsibility to prove stewardship in a meaningful way, the privacy of the participants needs to be protected to ensure their freedom and long-term credibility of the research community.

Blockchain might be that solution to create a single source of truth for the various roles/entities participated in the grant lifecyle without compromising privacy and efficiency. There is much work to be done to assess the feasibility of using blockchain technology in public finance. However, it is a problem big enough for a revolutionary solution.