United States: Bringing The Blockchain To The Federal Government Contracting Workspace, Part I
To print this article, all you need is to be registered or login on Mondaq.com.
The U.S. Government is actively seeking to utilize the power of the blockchain (or, as it is more formally known, distributed ledger technology or DLT) to enhance government systems across various platforms and agencies. This does not mean that the federal government wants to buy your NBA top shot package of LeBron James dunking in the 2020 NBA Finals. Instead, the federal government wants to leverage the distinct and unique technological capabilities of the blockchain and DLT. Overall, the government’s foray into the world of blockchain is still very much in its nascent stages. As such, there is a world of opportunity in the coming years for contractors looking to do business with the federal government.
The Senate removed language from the 2021 National Defense Authorization Act (NDAA) that would have required the Undersecretary of Defense for Research and Engineering (USD R&E) to brief the congressional committees about the potential uses of distributed ledger technologies for defense purposes. However, although the language was removed from the final bill, the Congressional conference report surrounding the NDAA still directed the USD R&E to “provide, not later than 30 days after the date of the enactment of this Act, to the congressional defense committees the briefing required on the potential use of distributed ledger technology for defense purposes as directed in the conference report.” All signs point to increased government spending on blockchain solutions and technology in the next few years.
Meanwhile, major federal defense contractors, who were reticent to enter the blockchain/DLT arena back when Bitcoin first dominated the headlines in 2017-18, have now set up entire divisions dedicated to blockchain and distributed ledger technology. IT focused contractors such as Microsoft have homed in on the possibilities of blockchain for the government since at least 2017, with the addition of blockchain services to Azure Government.
But the beauty of blockchain is that it is not only for major businesses. Knowledgeable tech savvy organizations can and often do disrupt the status quo in the world of blockchain and cryptocurrencies. For instance, a recent Phase II Small Business Innovation Research (SBIR) award from the U.S. Navy to SIMBA Chain highlights the government’s interest in working with government contractors big and small to solve its blockchain problems. Similarly, Constellation ($DAG ), a publicly traded cryptocurrency, was recently granted a Phase I SBIR award to streamline the Air Force’s use and management of data.
This series of articles will hopefully serve as a primer to any government contractor looking to do business with the federal government or expand its business into the blockchain world, as well as a primer for government agencies and businesses looking to enter the world of blockchain and DLT.
The Digital Gold Rush
Over the past 12 years, the headlines on blockchain technology and distributed ledger technology have centered on two primary subjects: Bitcoin ($BTC) and the myriad of alternative cryptocurrencies that followed in Bitcoin’s wake. The basic concept of Bitcoin and other cryptocurrencies is this: the creation of an immutable digital asset that can be electronically transferred from person to person with the trust and assurance that nothing was added or subtracted in the transaction, thus avoiding the double-spend problem. In other words, Bitcoin acts as digital cash, with the primary difference being there are a limited and specific set amount of Bitcoin in existence (the max supply of Bitcoin is 21 million, 18,649,312 of which have already been mined).
The implications of this technology are most readily applicable to financial transactions, in particular large financial transactions. Currently, most transfers of large amounts of money are conducted on the dated and ponderous Society for Worldwide Interbank Financial Telecommunications (SWIFT) network. While the SWIFT network is undoubtedly slow, its security vulnerabilities have also been recently exposed. And while cryptocurrencies do come with their own unique security concerns, there are a myriad of safeguards available to protect one’s cryptocurrency. The transaction speed as compared to SWIFT, however, is exponentially faster and cheaper than your typical large wire transfer, and while ACH payments might be slightly cheaper than Bitcoin, they too suffer from a 3-5 day lag period. It is important to note that cryptocurrencies have not taken over the payment realm from SWIFT (as many thought would occur back in 2017). Even SWIFT recognizes it needs to change the way it operates and does business. But the basic premise remains the same- cut the banks out of the system by allowing for verifiable and decentralized transactions, quickly and cheaply. Cryptocurrencies achieve that goal.
But cryptocurrencies as currency is just the tip of what DLT and the blockchain can accomplish. Take for instance the Ethereum ($ETH) blockchain, which at the time of this article was the second largest utilized cryptocurrency in the world. Founded in 2013, the Ethereum blockchain introduced the concept of “smart contracts” to the world of cryptocurrency. A smart contract is essentially a preprogrammed and automated set of promises that are captured in digital form and in which form the parties perform on their promises. So, for example, a particular cryptocurrency could be programmed to automatically release funds from buyer to seller upon receipt of goods. Or an RFID chip is imbedded in a product, and when scanned immediately generates immutable data showing that product’s location and status in the supply chain. Ethereum in particular made programming and utilizing the Ethereum network easy and accessible, and as a result many cryptocurrencies exist as “Decentralized Applications” or “dapps” that are built on top of Ethereum compatible tokens (most commonly known as ERC-20s). The rush to build dapps and cryptocurrencies like Ethereum has led to numerous other Ethereum-like (or “Platform”) projects on which a sprawling network of dapps is being built.
Potential Blockchain and DLT Uses
Banking & Finance
“Decentralized Finance” or “DeFi” refers to a variety of blockchain products wherein users borrow and lend against their cryptocurrencies as collateral. DeFi products became the rage in the Summer of 2020. The underlying concept behind many DeFi products is to take the bank out of the financial market, thus lowering transaction costs and fees and making funding more available. Mark Cuban has recently become a strong advocate of DeFi products, as seen in this interview.
Tokenizing stocks and other securities by “wrapping” traditional securities and assets on to the blockchain, allowing for easier trading and liquidity. FTX is a crypto platform that has taken the lead in this type of technology.
Blockchain allows for data and transactions to become immutable and more easily auditable.
One of the most promising use cases for blockchain technology is in improving inadequacies in the supply chain. For instance RFID sensors can be placed on items to track movement, temperatures, and integrity of a product as it moves through a given supply chain. SIMBA Chain is making a name for itself by tracking items in the Aerospace and Defense sectors.
Similar to supply chain use case, RFID and the blockchain can ensure that certain medicines, for instance the more temperature-sensitive of the COVID-19 vaccines, are kept at correct temperatures throughout the entire supply chain.
Government and Public Records
Blockchain can be used to create immutable government records that are kept on the public blockchain. The National Archives and Records Administration drafted a report on the use of blockchain in the realm of public records that was generally hopeful about blockchain’s prospects for the government in the future. I think back to my Navy career and the hassle of transferring from one duty station to another and making sure all adjoining paperwork made the trip with me and was in the format that each PSD wanted. With the blockchain, these records could be digitized and tied to individual personnel members, easily transferrable from one duty station to the next.
Votes can be registered and kept on the blockchain and captured in real time, digitizing elections and helping to ease fears of election corruption. There is currently debate about the actual capabilities of blockchain elections, but the idea is being experimented on a small scale with one Utah county utilizing the technology in the 2020 presidential election.
Cloud Computing and Storage
One of the problems with cloud computing is that is still reliant on a few points of failure because it relies on server farms of some sort of variety. Decentralized cloud computing on the blockchain allows for data to be stored in a decentralized manner rather than a central network or server.
This is just a small sampling of what blockchain and DLT can and is doing for various industries.
Bringing Blockchain to the Government
Blockchain and DLT technologies exist and are not going away. Ward & Berry is establishing this Crypto Contracting Initiative to keep its clients and friends abreast of the rapid developments in this field. While there are a myriad of stumbling blocks that stand in the way of the government adapting to this new technology, all signs point toward government adoption and adaptation. At the same time, there is a giant gap in knowledge between those in the blockchain and DLT industry and government agencies looking for answers to their blockchain questions and needs. There is a tremendous opportunity for growth and dialogue that Ward & Berry hopes to broker between industry leaders and the federal government.
The following topics are just some of the areas the Ward & Berry Crypto Contracting Initiative looks to explore:
SBIR/STTR Awards– Everyone in the blockchain and DLT world was rightfully excited when Constellation ($DAG) was awarded a SBIR Phase I award in the Fall of 2019. It was momentous because the Air Force recognized the need for a truly decentralized blockchain project. However, most observers mistakenly called the Constellation SBIR a government contract. The SBIR/STTR program functions more as a government grant rather than a contract. And while an SBIR/STTR award can often lead to a future government contract, there is no guarantee of future performance. Ward & Berry has experience guiding small businesses through the SBIR/STTR process.
AFWERX– The Air Force established its AFWERX program to help rapidly expand the Air Force’s technological capabilities in conjunction with private industry. The AFWERX program is very similar to the federal government’s SBIR/STTR program. Again, Ward & Berry has three former military JAG Corps officers who understand the military’s needs and how private industry can help our forces effectively complete the mission.
Bid Protests and Procurements– For a business that does not have a lot of experience working with the federal government, the world of bid protests and procurements can be a challenge to navigate. Ward & Berry is a boutique firm specializing in helping businesses do business with the federal government, especially when it comes to bid protests and procurement actions.
Compliance– Unfortunately, sometimes blockchain and DLT projects and businesses have less than pleasant interaction with the federal government. This is most recently seen by the SEC’s enforcement action against Ripple, where the SEC sued Ripple and two of its executives for selling the Ripple XRP Token ($XRP) as an unregistered security. The case is ongoing and will be important in setting a precedence for how the SEC views blockchain and DLT projects in the future. But SEC compliance is only the tip of the iceberg. Contractors doing business with the federal government must abide by numerous rules and regulations that vary from agency to agency. Again, Ward & Berry has seasoned compliance specialists that can help your business continue a positive relationship with the federal government.
Centralized vs. Decentralized Projects– Not all blockchains are created equal. The Ward & Berry Crypto Contracting Initiative will explore types of blockchains and what they mean for doing business with the federal government.
Current Blockchain Initiatives– Ward & Berry will attempt to keep everyone in the know as to what’s happening in the government contracting world of blockchain and DLT. We’ll highlight projects and opportunities for businesses looking to get into the business of government blockchain.
Resources– If you have ever done research on government blockchain projects, you know that there’s a score of different resources and information out there. The Ward & Berry will attempt to centralize (a dirty word, yes) and keep up to date resources and information that will benefit the industry and help bring more blockchain to the federal government.
Originally published March 18, 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
POPULAR ARTICLES ON: Technology from United States
Kelley Drye & Warren LLP
The recent ransomware attacks on Colonial Pipeline and JBS led to a flurry of calls to ban Bitcoin (and cryptocurrency generally) as enabling and incentivizing these attacks.
As we move forward into 2021, beyond the rise of cryptocurrency and decentralized finance, non-fungible tokens (NFTs) have also gained in popularity. Digital creators are utilizing NFTs to monetize digital creative works.
Oblon, McClelland, Maier & Neustadt, L.L.P
A question that is often asked is why there are so many lawyers? The question is often paired with questions about why lawyers spend so much time on seemingly insignificant tasks…