Solving $2.6 Trillion Corruption Problem with Blockchain and Smart Contracts

Solving a $2.6 trillion problem with Blockchain…This can be big!

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Corruption (source: BMI-System)

As we all know, Blockchain technology has been popularized with the Bitcoin. Pretty much everyone knows Blockchain because Bitcoin relies on Blockchain.

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Blockchain in Cryptocurrency Schemes

But, we should not limit Blockchain use cases to cryptocurrencies or fin-tech applications. Blockchain has a lot to offer in non-financial fields. One of these fields is the public sector and one of the most significant problems in the public sector is -as we all know- corruption due to lack of transparency, accountability, and integrity.

In its simplest sense, we can describe corruption as “using public office for private gains” [Bardhan]. Corruption may be in the form of bribery, embezzlement, nepotism, or influence peddling [The IMF] and its total cost is estimated to exceed a whopping US $2.6 trillion every year, which accounts basically for more than 5% of the global GDP) [CleanGovBiz Initiative].

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Corruption is not a Third World Problem | The Cost of Corruption in the EU Nations [The Greens]

Corruption is a significant factor that reduces economic growth and also an indicator of bureaucratic inefficiency [Mauro]. Decreasing corruption and maintaining bureaucratic efficiency -without a doubt- increase the wealth of nations. However, governments often use corruption as a tool to maintain political stability and the status quo in the short run [Shah]. However, for sustainable growth, nations must combat corruption and increase bureaucratic efficiency. Therefore, sound politicians and government institutions in many countries are actively working on eradicating corruption [Kim & Kang]. However, stronger mediums are required to minimize the devastating effects of corruption.


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A Blockchain Visualization

The anti-corruption assessments routinely mention themes such as integrity, transparency, accountability, oversight, and international co-operation as part of successful policies against corruption [Cain]. Blockchain technology is a medium that may reduce corruption if used adequately within the scope of these themes. The financial industry is one of the leading sectors in adopting Blockchain solutions to its business line. However, blockchain technology is a general-purpose technology that may also be used effectively in socio-political fields such as e-democracy and e-governance [Davidson]. The primary function of the blockchain technology is to ensure the security and integrity of information in a lack of a central trusted authority. Thus, the data in a blockchain system is stored in a transparent and decentralized manner and may easily be authenticated. The storage of the data is ideally automated and may be traced back [Santiso].

When combined with the other prominent technologies, blockchain technology may offer significant features for designing very secure systems for verifying identity, registering assets, and tracking transactions [Santiso].

Smart Contracts

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Life Cycle of a Smart Contract

One of these prominent technologies is smart contracts. Nick Szabo first described the concept of smart contracts in 1994 as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”[Szabo]. Smart contracts contain genuine digital protocols triggered by the performances and acts of parties. Smart contract powered with blockchain technology may decrease the involvement of public servants in the sensitive state activities and reduce corruption.

How to Combat Corruption with Blockchain and Smart Contracts

We are in a very early stage of Blockchain and smart contract technologies. From the technical perspective, researchers must conduct extensive research with regards to the algorithmic logic behind the different forms of distributed ledger technologies (not limited to Blockchain) and smart contracts.
A comprehensive examination of distributed ledger technology and smart contract protocols can help to choose efficient and scalable models.
On the social sciences side, researchers must analyze and summarize the types of corruption and bureaucratic inefficiency. Information exchange and extensive collaboration between researchers in computer sciences and social sciences may help to propose solutions to reduce the cost of corruption -worths over $2.6 trillion every year.

Public Procurement and E-Government Solution

Among many potential Blockchain applications to reduce corruption, due to the easiness of monitoring with IT solutions and the involvement of budget and legal constraints, public procurement is a very promising subsection of public economics where Blockchain applications can be put into use. A blockchain-based auction system where the stages of the projects and procurement processes may be tracked by the taxpayer and reviewed by the public inspectors might be a good starting point to reduce the cost of corruption. Another application may be the utilization of Blockchain in the e-government solutions in which the citizens may typically receive the public services if only they pay corrupt civil servants.

Governments Against Transparency

There are countless potential Blockchain applications in the public sector. However, adopting Blockchain means giving up power and secrecy. Therefore, threatened by political pressure, many governments are unwilling to adopt Blockchain solutions. This may be understood in fields such as national security or public health, but not in areas like public procurement where transparency is sought by the public. Apart from the individuals, there are three leading powers forcing governments to adopt anti-corruption policies: (i) Opposition parties, (ii) international organizations such as the IMF and World Bank and (iii) media (traditional and social). With their support, every government can be persuaded into adopting transparent public sector IT solutions that utilize Blockchain technology.

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1) Bardhan, P., Journal of Economic Literature, Vol. 35, No: 3 (Sep. 1997).

2) Cain, P. & Doig, A. & Flanary, R. & Barata, K., Filing for corruption: Transparency, openness, and record-keeping, Crime, Law & Social Change 36 (2001).

3) CleanGovBiz Initiative, The Rationale for Fighting Corruption, The OECD (2014).

4) Davidson, S. & De Filippi, P. & Potts, J., Disrupting governance: The new institutional economics of distributed ledger technology (2016).

5) The IMF, Ch. 2. Curbing Corruption, IMF Fiscal Monitor (Apr. 2019).

6) Kim, K. & Kang, T., Does Technology Against Corruption Always Lead to Benefit? The Potential Risks and Challenges of the Blockchain Technology, OECD Anti Corruption & Integrity Forum (2017).

7) Mauro, P., Corruption and Growth, 683, The Quarterly Journal of Economics, Vol. 110, No. 3 (Aug. 1995).

8) Szabo, N., Smart Contracts: Building Blocks for Digital Markets, University of Amsterdam (1996).

9) Santiso, C., Will Blockchain Disrupt Government Corruption?, Stanford Social Innovation Review (Mar. 2018).

10) The Greens/EFA in the European Parliament, The Costs of Corruption Across the EU (2018).

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