But the larger concern here is that governments should avoid using proprietary software for "blockchain" initiatives; that's how you ensure privacy.

Representatives from the Open Data Initiative say:

Experimenting with putting highly personal data in immutable data stores is fraught with danger. To avoid undermining trust in government’s use of data, DWP should be much more open and transparent about the policy objective of these trials, the safeguards they are putting in place to limit the risks and the lessons being learnt through the trial.

And that’s a reasonable concern. As tools, blockchains are better at provably revealing truthful information than they are at obscuring information; they are engines for trustworthy agreement not privacy. Even Bitcoin lacks robust privacy or anonymity for transactions (which is why the continued development of ZCash and Confidential Transactions is so important).

But it’s not the supposed use of a “blockchain” that has me worried in this GovCoin case. I can’t find the source code for this trial tech anywhere, and have to suspect that the software is proprietary. The public can only judge the privacy of a technology if the software can be openly audited. Bitcoin and other cryptocurrencies are powered by open source software, anyone can look at every detail of its technical specification. We should expect no less from a blockchain software stack employed by a government.