A Proposal for a Federally Sponsored Blockchain

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Guest Post By Jon Normile, Horizon’s SVP Exchange Compliance

Note: Please note that the opinions in this piece are his own and do not necessarily reflect those of the company.

Blockchain technology will revolutionize how we manage our data and how we empower users. It will streamline processes, remove operational friction and eliminate the inefficiencies of middlemen. Major sectors such as banking, securities trading, insurance, healthcare, and real estate all could be transformed for the better by moving to a common decentralized ledger, thereby eliminating the countless middlemen that are currently required for these different industries.

However, aside from a few high-profile, but niche, applications such as crypto-currency, full adoption by major-sectors of the economy is still only proposed, and there are significant hurdles to overcome before we achieve any of these aspirational goals. One of the primary problems with large scale adoption of blockchain technology is that there is not a universal standard for how a blockchain should be constructed and operated. We are therefore left with innumerable competing proposals from different industry players, all with their own vested interests.

This wide-open approach is a hallmark of our free-market capitalist system and has historically led to better outcomes, as different players in the market create their own versions and the superior products rise to the top. However, even in a free market there is still a place for regulators and governments to ensure fairness (i.e. the rule of law) and to manage risk (i.e. build expensive infrastructure). We may be at one of those rare occasions when government has an opportunity to enable a new technology that will benefit everyone.

A Federally-sponsored blockchain would have many advantages. Most importantly, it would have the full-backing of the U.S. government which would give certainty that this blockchain will exist and be maintained into the future. This measure of certainty would eliminate the risk that a blockchain used to store critical data for an enterprise could cease to exist, causing that data to be lost.

Also, all data written onto a Federal blockchain would have full protection of the 4th amendment, which prohibits unreasonable searches and seizures and recognizes Americans’ right of privacy. While some may view this claim with suspicion, notwithstanding anything else, if the U.S. Government runs a Federal blockchain, then the U.S. Government becomes responsible for protecting that data. Given a choice between an ephemeral and distributed network of computer enthusiasts and the U.S. Government with its checks and balances and vested interest in maintaining the rule of law, one may prefer to keep one’s data with an entity that will at least pick up the phone if you need to call them. Furthermore, having a Federal blockchain would remove a major issue that private blockchains have with existing regulations; that the government is reluctant to endorse these private blockchains out of fear that it will not be able to subpoena, for legitimate law-enforcement purposes, the information written onto that blockchain.

Also, financing the physical infrastructure of a blockchain designed for mass-adoption, the servers, switches, etc., would be a very small line item on the Federal budget, but a very large item for a private enterprise.

Finally, and perhaps most importantly, a Federal blockchain, could be designed to minimize the outrageously high energy requirements used to support the proof-of-work validation calculations that are necessary for the operation of a public distributed blockchain. Some of the more common blockchains (e.g. Bitcoin) already consume more electricity than many medium-sized countries. This is clearly not sustainable. With a Federal blockchain, upper limits to proof-of-work algorithms could be established that would bring this power consumption down to reasonable levels.

What would a Federal Blockchain look like? Just as we already have government-sponsored agencies to influence various markets deemed critical for the nation’s economy (i.e. FNMA, FDMC, and SLMA), a new agency could be created with a mission to create and maintain a blockchain. This Federal Blockchain would be available to all and would have all of the benefits described above. The proposed corporation would be established as an independent government-sponsored agency and its product, the Federal blockchain, would be introduced onto the marketplace to compete with the other existing blockchains. U.S. Government business could adopt the Federal blockchain by decree, but private users would be free to adopt it or not. If the advantages listed above are real, then more and more private users would decide for themselves to make use of it. Otherwise, it would fail to gain traction and would ultimately fail (of course only until after an orderly migration of data off the platform was arranged. Remember that Federal guarantee!) But unlike similar projects in the physical world, this cyber-world project would have much lower up-front costs, so much less would be risked.

Is there a precedent for this type of government mandated-industrial policy? Yes, quite a few, notwithstanding the underlying free-market orientation of the United States. One example is the creation of the Interstate Highway system. Starting in the 1950’s the U.S. Government funded and directed the construction of our current system of highways, which have been a key factor in the growth of the national economy. Just like the proposed Federal blockchain, the Interstate Highway System created by fiat, a very large, very expensive, but very useful system that was available to everyone as long they followed the same set of sensible guidelines (e.g. speed limits, driving on the right-hand side, etc). Even before it was finished, the Interstate Highway System paid for itself many times over in the economic wealth that it fostered.

Another, even more fundamental example; the market for U.S. Government debt. U.S. Treasury Bills, Notes and Bonds serve as the foundation of the international capital markets system. Because these securities are backed by the credit worthiness of the U.S. Government, they are viewed as essentially free from the risk of default. All other capital markets look to U.S. Government Treasuries when setting their own interest rates. The guarantee that would back the proposed Federal blockchain would have a similar impact by supporting a much larger system of economic activity resting on its foundation.

And lest we forget, the Internet itself was born from ARPANET, a project within the Department of Defense that explored ways to guarantee communication during times of national emergency. The innovations that arose from this effort (i.e. TCP/IP) led directly to the creation of the modern Internet and all the benefits thereof.

Granted, setting industrial policy is a risky game to play. The few examples of successful outcomes have at least as many opposing examples of attempts that ended in spectacular failures. However, the examples of those failures don’t prove there is never a time to take such a risk. Weighing the pros and cons, perhaps now is one of those times when it makes sense for government to play a role. With so much to gain, and so little to lose, the creation of a Federal blockchain would be a very wise strategic move on many levels. If this proposed Federal blockchain were to succeed, the benefits to the United States would be extraordinary. By defining the rules of the digital economy, U.S.-based companies would be well-positioned to lead that future growth into the future. And by ensuring the Federal blockchain be designed according to principles of fairness, transparency, and the rule of law, it would further promote U.S. values in a world in which it is not clear that those values, as important as they may be, will prevail.

Among those that are focused on blockchain technology in industry, academia, and elsewhere, there is feeling of tense expectation. Radical changes are poised to happen, but because of the risks and uncertainties of taking the next few steps, things are not happening as quickly as they might. With just a nudge in the right direction, such as creating a reliable, durable and legally acceptable blockchain, this creative potential energy could be released in a torrent, like the breaking of a dam.

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Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities.

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