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Observations Regarding The Use of Blockchain by the Brazilian Public Administration

October 27, 2020

Laura Isabelle Guzzo - Souto Correa Advogados

In recent years, there has been a notable rise of technological developments in a wide range of areas of society. In addition to these developments, we have been adapting to this change have increasingly perceived a strengthening of the Digital Era. Discussions about the Internet of Things, Smart Cities and Industry 4.0. are constantly in the spotlight and Governments and the Public Sphere are being forced to follow this evolution. Thus, it is extremely important to assess and highlight the impacts of one of these technological developments, which may become permanent in our society: the Blockchain technology.

Straightforwardly, according to Wright, A., De Filippi, P[1], “a Blockchain is simply a chronological database of transactions recorded by a network of computers”. In a similar way, Ølnes, S., Ubacht, J., & Janssen, M. (2017)[2] express that “Blockchain Technology (BCT) stores the same information at different nodes and the information will only be added when the nodes have consensus. New transactions can be added, but previous information cannot be removed enabling all nodes to track the history. Storing transaction information in different nodes is called a distributed ledger”.

In short, Blockchain is a system which records transactions in blocks and transfers encrypted information without the need of a central authority to validate them. This system offers key features such as: transparency, privacy, decentralization, security, immutability, trust and absence of conflicting information.

The beginning of this technology dates back to 1991, when scientists Stuart Haber e W. Scott Stornetta published the paper: “How to Time-Stamp a Digital Document”, which discussed the creation of a network with blocks cryptographically protected, in which no one could change the data and time records of documents.

The second period that deserves to be highlighted occurred in 2008, when the paper “Bitcoin: A Peer-to-Peer Electronic Cash System” by the alias of Satoshi Nakamoto was published. This document revolutionized the concept of payment methods, due to the fact that Satoshi introduced (and created) the virtual currency Bitcoin. Moreover, it was explained in this document that transactions using this currency would occur in a network which registers times of transactions, inserts into a continuous chain and creates a record that cannot be modified.  Satoshi also offered details of how this technology is well equipped to improve digital security, from the decentralization aspect.

The third period worth noting occurred in 2013, when the programmer Vitalik Buterin published the paper “Ethereum - A Next Generation Smart Contract & Decentralized Application Platform”, which innovated the system for Blockchain. This resulted in the creation of Ethereum one of the main platforms deploying Blockchain, which covers many transactions with virtual currencies and records the ‘smart contracts’.

Taking all of the above into consideration, it is necessary to emphasize that there are two kinds of Blockchain networks: public or private. In summary, public networks are those in which there is an open platform, where any interested person can perform or audit transactions and have the overview of all activities. The peer-to-peer (P2P) process of approval occurs in this network. In other words, in a public network, in order to be added to the other blocks in a chain, the operations and transactions must be validated and approved by multiple nodes.

The main examples of public networks are the Ethereum and Blockchain platforms. By using them, it’s possible to periodically verify all operations made, access recent transactions made with virtual currency, see which hash follows them and who are the individuals related to it (although identification is encrypted).

On the other hand, private networks are created to be privately owned. In order to access them, it’s necessary to receive an invitation from the owner or a registered member. The existing members can decide who are going to be the new members. Also, the private network can be managed by a single authority. Another important feature of private networks is the possibility of restricting the access of certain pieces of information to some members.  Due to these, private networks are commonly used by companies and corporations. Common examples of Blockchains’ private networks are Hyperledger and Ripple.

Differentiating public and private networks is important to our analysis. Both kinds of networks can be used by the Public Sector: among others, for governance, for in-house organization of information, document sharing between entities, as a mechanism for transparency and provision of relevant data for citizens and as an instrument of democracy.

The use of Blockchain in the Public Sector is extremely well-known and has been discussed by several authors. In general, these authors understand that using Blockchain in the Public Sector provides more transparency to public data, improves data storage, reduces bureaucracy, allows a higher efficiency to public services, helps to reduce corruption and therefore might be a great tool for improving a democratic society.

As will be seen later, in the last few years an increase in the use of this technology in Brazilian Public Administration in various areas has been noticed. The following examples demonstrate how this technology is used and which are the advantages related to it.

In the civil aviation sector, in order to substitute paper records, the National Agency for Civil Aviation of Brazil (“ANAC”) published Resolution No. 458/2017, regarding the introduction of computerized systems for records and storage of data by regulated entities. Another goal of the new rule as to promote environmental sustainability by reducing the volume of paper. Recently, in 2019, the Resolution was modified to state that data record may occur in a private Blockchain network developed by ANAC. The ‘Digital Logbook’ is the first prototype under implementation being tested by the Agency, which is the first domestic official system to record flight information and status of the aircraft.

Another innovation in the Public Sector was implemented by the National Bank for Economic and Social Development (“BNDES”), the ‘BNDESToken’. This project aims to track the use the credits granted and funds transferred by the Bank to public or private entities. The operation is triggered when the funds are released by virtual currency in the Ethereum platform, which will register all operations performed by the recipient entities with these funds. The pilot project was initiated with the release of tax incentives to the National Film Agency (“ANCINE”), for film productions.

Regarding to customs area, the Federal Data Processing Service (“SERPRO”), a public entity of the Brazilian IRS, created ‘BConnect’. This is an electronic data exchange system formed by Mercosul members (Argentina, Brazil, Paraguay and Uruguay). BConnect uses the private Blockchain platform Hyperledger. In the first instance, information was shared regarding the international transportation of goods.

Another relative example are the tests for a Distributed Data System (“SCD”). The project involves SERPRO, BNDES, Banco do Brasil and Caixa Econômica Federal. In this project, Blockchain is used for managing all phases of public procurement, as well as to audit government contracts. It is a useful tool for public entities since it enables them to reuse documents, assess which strategies were successful and which were not and facilitates the pricing of certain items by using records consultation.

Blockchain is also applied in the public health sector. Recently, the Brazilian Ministry of Health developed the technology solution ‘RNDS’. This Blockchain system allows the access and sharing of patient records. Thus, the tool stores past interactions between the patient and doctor, as well as the descriptions of each service (for example, medical consultation, hospitalizations, vaccines, among others). According to the Ministry, the first phase of the project has been initiated with COVID-19’s examinations performed in any place throughout the country. Currently, it is mandatory that the laboratories share this information on the system.

One final experience, related to court decisions, is the one launched by Brazilian Public Finance Court (“TCU”). In 2010, the TCU published a decision as a result of an audit process carried out to identify opportunities and evaluate risks of adopting Blockchain in the Public Sector. The Court acknowledged the need to carry out a feasibility study about using Blockchain, including the implementation of a pilot project, if necessary.

As a consequence, in September 2020, an executive summary was published in order to assist public administrators and national organizations to develop new projects using Blockchain. The document informs how Blockchain functions, how it can be used by the public administration and which are the successful examples in Brazil and in the world to use as a benchmark.

With reference to legislation issued with the purpose of increasing the use of technology by the Public Sector, it is important to highlight the Federal Decree No. 10.332/2020, which involves a strategy for implementing a ‘digital government’, from 2020 to 2022. One of the aims stated in the Decree is to apply emerging technologies in the rendering public services in the future. According to the Decree, up to 2022, the Federal Government has the target of (i) using Artificial Intelligence in at least 12 federal public services, (ii) creating nine groups of datasets deploying Blockchain solutions; and (iii) launching initiative to create a federal government Blockchain network.

The number of examples shows the relevance of the technology and its disruptive potential. The significance of technological development (by Blockchain or another technology) increases exponentially. The pandemic COVID-19 showed the importance of a digital strategy for many areas of life (such as e-commerce, public policies, etc). For governments the reality is not different and the technological agenda should be a top priority.

Nonetheless, in Brazil, there is still an outdated view by society that the Public Sector is directly linked to slowness, bureaucracy, more use of papers and not enough use of technology. This view should be overcome or at least should be seen a reality in transition. It is not possible to reach the aim of an efficient public management without the vast implementation of technological features. Therefore, a lot of change will still be expected and it is necessary to provide a flexible and fast-forward institutional environment to respond quickly to need of change.