Using Blockchain to Improve Regulatory Analysis and Reform

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Blockchain could provide essential data on the effectiveness of regulations.

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Blockchain technology could be used to change the Code of Federal Regulations (CFR) from static documentation of regulations into a dynamic source of reliable information on regulatory impact. With a simple search, anyone could determine how long permit approvals take, which firms or industries are most affected, which regulations require the most paperwork, and any data available on the benefits of regulation.

A blockchain is simply a distributed ledger of any type of information—not just financial types like Bitcoin—known as a “block.” In an important respect, it is similar to a Google Doc in read-only mode. All of the members of the chain can view the block, but, once created, the blocks cannot be changed without consent of the majority of members of the chain. Unlike a Google Doc, however, all members of the chain hold copies of the blocks, so that there is no single storage source that is susceptible to hacking or tampering.

To see how blockchain technology might transform regulation and improve public understanding of regulatory impacts, consider a recent paper by the University of Connecticut School of Law’s Richard Parker, who has criticized an asserted statistic that regulation costs the economy $2 trillion each year—a statistic often relied upon as justification by the Trump Administration and Republicans in Congress to justify their current movement to roll back regulatory protections. Parker notes that the $2 trillion cost figure can be found in a National Association of Manufacturers (NAM) study that based the figure on the opinion of business executives in 34 member countries of the Organization for Economic Cooperation and Development.

The NAM study identified the timing of regulatory permitting and the complexity of regulatory compliance as major factors contributing to the cost of regulation. But the NAM study never had any direct measures of permitting time or regulatory complexity. If regulations were linked via blockchain to permitting, there would be data on the actual turnaround time for all permit approvals for all regulations. Likewise, regulatory complexity could be evaluated by analyzing all of the transactions executed for a single permit application or the number of permit applications filed under different regulations for a single project.

Recent pilot projects around the world also reveal the promise that blockchain technology could be used to reduce the cost and complexity of regulatory compliance, in addition to enabling better evaluation of the impacts of regulation.

For example, the Irish Funds, a mutual fund trade association, created a pilot blockchain program to improve the process of creating complex financial reporting documentation and securely communicating compliance documentation to regulators.

The auditing and consulting firm Deloitte, which ran the Irish Funds pilot, found that the blockchain structure was effective in the “secure exchange of data” and that it was shown to “improve data quality and integrity, and increase efficiency.” Even more importantly from a regulatory assessment context, Deloitte concluded that the pilot created “a rich and trusted data set to which analytics can be applied.”

There are several pilot projects worldwide using blockchain technology for property records. Verifying land transactions is a tedious and expensive process. Multiple participants, both public—such as land registries and tax offices—and private—such as the buyer, seller, and insurance companies—need access to the information, which has historically been paper-based and difficult to find. In addition, land transactions can be loci for crime and fraud, so security is paramount.

To address these challenges, the town of South Burlington, Vermont is piloting blockchain technology to register land transactions. The country of Georgia and the Indian state of Andhra Pradesh are pursuing similar projects. 

Govtech reported that the South Burlington property deed is “the same as any other property deed, except that at the end of the legalese there’s a long string of letters and numbers followed by a QR code, both of which any person can use to find the property deed’s location on the Ethereum blockchain.” According to Govtech, the goals of the blockchain pilot include increasing transparency by making the transactions publicly available online, increasing efficiency, and protecting against fraud.

But blockchain-enabled deeds could also surface other interesting data for evaluating regulatory effectiveness. For example, determining the number of public entities executing transactions related to the same piece of property could identify opportunities to consolidate approvals and pinpoint bottlenecks.

President Donald Trump and the majority in Congress appear to be interested in making a complete overhaul of the U.S. regulatory system. They aim to reduce economic costs and eliminate unnecessary bureaucracy. But without serious and careful analysis, their efforts also have the potential to negatively affect the health, safety, and environment of all Americans. To ensure that any regulatory reforms can maximize net benefits to society, it would be wise to gather as much actual data as possible.

To achieve greater precision in the pursuit of regulatory reform, the federal government should consider establishing blockchain pilot programs for some of industry’s “most hated” regulations. Data collected in these pilot programs could be compared with data from more traditional channels like Freedom of Information Act requests, cost-benefit analyses, and existing regulatory databases to get a sense of whether existing data are consistent with actual experience.

In addition, blockchain pilot programs would help determine whether the technology could be beneficial in reducing regulatory costs and complexity more generally and could establish a framework for evaluating the regulations to change and how to do so. Over time, the use of blockchain data would only become more comprehensive and robust, providing just the type of hard data that Parker and others rightly suggest is needed to understand better the true impacts of government regulation.

Shari Shapiro

Shari Shapiro is a senior research affiliate with the Penn Program on Regulation.