The economics behind adopting blockchain

India must harness blockchain through progressive regulation and ensure this tool plays an important role in transforming the way the public sector works and delivers services to citizens.

Published: 29th October 2021 02:53 AM  |   Last Updated: 29th October 2021 02:53 AM   |  A+A-


Image used for representational purpose only.

As countries and organisations contend with the effects of the COVID-19 pandemic, the space for disruptive technologies has emerged. The concept of blockchain has attracted attention over the past few years primarily through the discourse around cryptocurrency. In layman's terms, blockchain refers to a kind of database that stores data in blocks of information, which are linked together to form a permanent chain. Even simpler, it is like a distributed ledger of entries/data. Considering its nature as a decentralised and distributed technology with peer-to-peer protocol, it inherently enhances traceability and transparency in real time and is almost fraud-proof.

A PwC report estimates that blockchain will add USD 1.76 trillion to global GDP over the next decade. While cryptocurrency is the primary use case associated with blockchain, it has a wide range of other applications across a variety of industries, from finance and banking to healthcare and education. To my mind, its best possible use cases are in the government sector with its complex problem statements in various domains like land records management, health, education, pensions, etc. An illustrative example of the same can be found in Georgia where the government was able to enhance efficiency in its land titling process by replacing the back-end software of the existing system with blockchain.

The economic reasoning for adopting blockchain at a global scale is plentiful. To demonstrate this, we can look at the tracking and tracing of products and services for companies' supply chains. The aforementioned PwC report values the contribution of blockchain to this sector as around USD 962 billion over the next decade, since it will help cater to the needs of companies ranging from financial services to mining to textile.

If we take the insurance sector as a use case, we can see how blockchain mitigates various issues around information asymmetries. One fundamental concern in the insurance sector is the principal-agent problem, which stems from conflicting incentives amidst information asymmetry between the principal (insurer company) and the agent (of the company). Some adverse outcomes of this include unprofessional conduct, agents forging documents to meet assigned targets as well as a misrepresentation of the compliances, often leading to misselling of insurance products. These problems occur primarily due to the absence of an integrated mechanism to track and prevent fraudulent conduct of the agent. In such a scenario, blockchain has the ability to bridge the gaps and enhance the customer experience by virtue of providing a distributive, immutable and transparent rating system that allows agents to be rated according to their performance by companies as well as clients. When an insurer wants to check the rating of a particular agent, they will provide their hash-based address and a smart contract will be executed, fetching the required rating. This mechanism incentivises agents to conform with company procedure and align with the interests of the principal. The principal-agent problem arises in several other sectors as well, particularly in government, in areas like land governance, registrations, payment of property taxes, administration of food subsidies or payment of minimum support prices to farmers.

Another economic issue that crops up often is that of adverse selection. In the insurance sector, this refers to the problem of the asymmetrical flow of information between the insurer and the insured (end client). For example, in the case of health insurance, blockchain can be used to introduce Electronic Health Records (EHRs) that store all the patients’ information in one system in a distributed fashion. Patients will be able to share this information with insurers via a system of consent and these EHRs will allow the insurance company to take a more informed decision since they will have access to the insurer’s track record. Similar application lies in a large number of beneficiary-oriented schemes of the government where there are regular accusations of both type-I (ineligible beneficiaries included) and type-II errors (eligible beneficiaries excluded).

Similarly, blockchain is also effective in mitigating the problem of moral hazard, particularly in the insurance sector. Moral hazard in such a scenario refers to a case where an insured individual deliberately acts against the interests of the insurance company after a coverage is attained. For example, in the case of a car insurance use case, all the transactions related to the car in terms of its wear and tear can be noted in a blockchain-based electronic ledger. This ledger cannot be manipulated and is accessible to the insurance company. This will force the insured person to proactively eschew negligence on his part.

Looking into the manner in which blockchain can be utilised to address inherent challenges in the insurance sector, the adoption of this technology has the potential to unlock similar benefits not just in the private sector but in the government itself. Its decentralised nature helps deal with problems relating to conflicts of interest, as well as power and information asymmetries. It makes eminent economic rationale to adopt blockchain to further boost the digital revolution by strengthening transparency, efficiency, decentralisation and immutability in the ecosystem. India must harness this tool through progressive regulation and ensure blockchain plays an important role in transforming the way the public sector works and delivers services to citizens. The government itself has the best problem statements for its adoption but is unfortunately bogged down by hubris and path dependence.

(The writer is a BJD Rajya Sabha MP, ex-CAG bureaucrat with a PhD in management and now an advocate. He can be reached at amar_patnaik


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