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Blockchain Working Group

Annual Report

December 2020

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Blockchain Working Group

Ruth Day*

Chair

Commissioner, Chief Information Officer

Commonwealth Office of Technology

Working Group Membership

Jim Barnhart*

Deputy Commissioner

Commonwealth Office of Technology

David Carter

Commonwealth Office of Technology

Karen Wilson*

Public Services Commission

Robert Thorne*

Energy and Environment Cabinet

Josh Keats*

Kentucky Office of Homeland Security

Ashton Barger

Blox Consulting

Wesley Hamilton

Recycladata

Grace Simrall

Louisville Metro Government

James Meece

Louisville Metro Government

Senator Brandon Smith

Kentucky Senate, District 30

Anthony Ellis

Cabinet for Economic Development

Ellie Puckett

Cabinet for Economic Development

Dr. Brian Houillion*

University of the Cumberlands

Christopher Poynter*

Owensboro Municipal Utilities

Designee, Kentucky Municipal Utilities Association

Chris Hayes*

Kentucky Electric Cooperatives

Designee, Kentucky Rural Electric Cooperatives

Adam Koehler

Reversed Out

Clark Snowden*

Louisville Gas and Electric

Administrative Support Alice Lawson

Legislative Research Commission

Karen Chrisman

Commonwealth Office of Technology

* Members appointed or designated in compliance with KRS 42.747

Blockchain Working Group

Background

The Blockchain Working Group is a collaborative panel of subject matter experts defined in Senate Bill 55, and

subsequently codified in Kentucky Revised Statute Chapter 42.747, with the mission to evaluate the feasibility

and efficacy of using blockchain technology to enhance the security of and increase protection for the state's

critical infrastructure, including but not limited to the electric utility grid, natural gas pipelines, drinking water

supply and delivery, wastewater, telecommunications, and emergency services.

The membership of the working group is comprised of nine members defined in KRS 42.747 as well as an array

of representatives from state and local government, public utilities, and private sector business who were

chosen based on their knowledge and engagement with blockchain technology to ensure a broad depth of

knowledge and insight. Through spanning these various government and business sectors, the group can

explore and document those opportunities that place the Commonwealth in the forefront in the support and

usage of blockchain technology as a tool to empower business in the state.

The group convened for the first meeting on September 9, 2020 and has held regularly occurring meetings to

develop the contents within this report based on the mission as defined within the Senate Bill and resulting

Kentucky Revised Statutes. The primary goals of the initial report are to define blockchain in relation to mission

of the working group, provide short term tactical recommendations, and highlight those areas of opportunity

where a more strategic analysis by the working group will be conducted over the next reporting year.

Blockchain Working Group

Report Abstract

Blockchain technology is a highly diverse and robust technology that can empower business through the sharing,

movement and processing of data or transactions in a highly efficient and secure manner. While the most

prevalent use of blockchain technology is digital currency such as Bitcoin, there are significant ways that

blockchain technology that can enhance the integrity and security of systems that support critical infrastructure

such as transportation, public utilities, healthcare, finances, logistics and emergency services. Through the

establishment of the Blockchain Working Group, the Commonwealth is approaching this technology in a

forward-thinking manner to identify those opportunities that can draw to, or empower current business in, the

state.

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Blockchain Working Group

Report Summary

Blockchain technology is an innovative mechanism for protecting the confidentiality, integrity, and availability of data.

Blockchain is commonly known as a foundation for digital currency, but the technology is well suited for a multitude of

purposes where there is a need to share data or track transaction in a highly secure and efficient manner.

Recognizing the potential of this technology to contribute to the protection of the state’s critical infrastructure and

empower business in the Commonwealth, the Kentucky State Legislature introduced Senate Bill 55 to convene a working

group of subject matter experts to explore this technology and the various ways that it could be used within the

Commonwealth. This bill, later codified in Kentucky Revised Statute 42.747, defined a core group and a clear mission to

help move the Commonwealth to the forefront in the exploration of this exciting technology.

In response to this legislation, the Commonwealth Office of Technology, in collaboration with Senator Brandon Smith,

established the Blockchain Working Group. Using the legislation to guide the establishment of the initial membership and

expanding it to include a range of subject matter experts spanning state and local government, public utilities, private

sector business, and academia, a broad spectrum of expertise and experience was brought together to achieve the spirit

and intent of this forward thinking legislation. This group had their initial meeting on September 9, 2020 and began the

journey that has resulted in this report and set the direction of the group in the future.

Throughout the initial meetings, the group found that the challenge was not finding the opportunities where blockchain

technology could provide a positive impact, it was constraining the scope in a meaningful and manageable way. The

technology itself is so diverse and has the possibility to add benefit to any number of use cases, the group put considerable

effort and careful thought in choosing the key areas where that were the most impactful and where the business sectors

were most capable of exploring ground breaking approaches that could be empowered by blockchain. As a result, five

key sectors were chosen as areas of focus for the group.

Finance

Blockchain technology has its foundations in the financial sector, in the realm of digital currency such as the popular Bitcoin

in particular. While cryptocurrency is a core use case, the transactional and sensitive nature of personal, state, national,

and global finances make it an ideal candidate to see the benefits of implementing blockchain. Ranging from inter and

intra institution transactions to personal finance, there are a number of use cases that can be explored in greater depth.

Records Management

The security and integrity aspects of blockchain technology are well suited for various areas of records management. From

the execution of legal contracts and agreement to professional and occupational licensing, the ability to protect, track,

and validate these documents with tremendous levels of auditing and accountability through the use of blockchain

technology makes this sector another ideal candidate.

Public Utilities

Public utilities such as water and power are the backbone of modern society and represent a sector that is at the very

heart of critical infrastructure. The model for the delivery of these services continues to grow in complexity and relies

increasingly on geographically diverse and disparate technology. Through the efficiency and security gains available with

the integration of blockchain technologies, the delivery and protection of these critical services can be greatly enhanced.

Logistics and Supply Chain Management

The Commonwealth is well positioned centrally to serve as a logistics center for the eastern United States making this a

highly intriguing use case and a potential draw for businesses within this sector. Modern logistics requires the close

collaboration of suppliers, shippers, and receivers makings effective cross communication a vital need to ensure success.

Through blockchain technology, these workflows and communications paths can be streamlined with enhanced integrity

to ensure smooth operations.

Healthcare

The Commonwealth is already home to some of the most progressive and leading healthcare providers and research

entities in the country. The need to share data among facilities and providers is key to facilitate effective and responsive

treatment. In addition, as the nation works through the impacts of a global pandemic, the need to actively share data on

a large scale for trending and research is more apparent than ever. Blockchain can serve as an empowering foundation

for these use cases.

In the report, the working group expanded on the use cases that align to these five areas of focus, with the full knowledge

that they represent the tip of the proverbial iceberg of what can be achieved through the creative use of blockchain

technology. As the technology matures and adoption increases, it is expected that the use cases will evolve and grow

exponentially. While these areas of focus are most prevalent today, the working group will continue to maintain monitor

the larger picture and explore new avenues that arise.

As part of the larger perspective, also included in the report is a summary of the state of blockchain today that covers

initiatives and legislation, pertaining to blockchain technology, at a national level. Combining the use cases in the report

with the knowledge of the benefits and pitfalls experienced by others, the Commonwealth can be well prepared to step

to the forefront and help participate in the business revolution that could be spurred by this technology.

Lastly, while there are tremendous benefits to blockchain, the benefits do not come without risk. The working group has

put thought into identifying those risks. While difficult to quantify, the risk can be considered at a conceptual level while

looking at the efficacy of the technology.

In closing, the initial working group report should be viewed as one of vision and direction. Blockchain technology, while

in existence in some form beginning in 1982, remains a technology in its infancy. Over the coming year, the Blockchain

Working Group will continue the research needed to identify the more tactical and immediate opportunities for the

Commonwealth while maintaining a longer-term search for more strategic opportunities on the horizon. There are

recommendations included throughout the detail report, most of which are exploratory in nature, but one overarching

recommendation is that the Commonwealth should continue this investment and exploration of blockchain technology to

provide real benefit to Commonwealth citizens and to the potential to drive business growth in the state.

Blockchain Working Group

Annual Report – December 2020

Table of Contents

Introduction to Blockchain …………………………………………………………………………………………………………… 1

Potential Use Cases ……………………………………………………………………………………………………………………. 3 Finance ……………………………………………………………………………………………………………………………………………… 3

Cryptocurrency ……………………………………………………………………………………………………………………………………………. 3

Recommendation 1.0 ……………………………………………………………………………………………………………………… 3

Banking ………………………………………………………………………………………………………………………………………………………. 4

Recommendation 1.1 ……………………………………………………………………………………………………………………… 4

Payment Systems …………………………………………………………………………………………………………………………………………. 4

Recommendation 1.2 ……………………………………………………………………………………………………………………… 5

Public Finance ……………………………………………………………………………………………………………………………………………… 5

Recommendation 1.3 ……………………………………………………………………………………………………………………… 5

Records Management …………………………………………………………………………………………………………………………… 6

Contracts …………………………………………………………………………………………………………………………………………………….. 6

Accounting/Auditing …………………………………………………………………………………………………………………………………….. 6

Recommendation 1.4 ……………………………………………………………………………………………………………………… 7

Legal Records and Documents ……………………………………………………………………………………………………………………….. 7

Recommendation 1.5 ……………………………………………………………………………………………………………………… 7

Recommendation 1.6 ……………………………………………………………………………………………………………………… 7

Recommendation 1.7 ……………………………………………………………………………………………………………………… 8

Licensing …………………………………………………………………………………………………………………………………………………….. 8

Recommendation 1.8 ……………………………………………………………………………………………………………………… 9

Public Utilities …………………………………………………………………………………………………………………………………….. 9

Logistics and Supply Chain Management ………………………………………………………………………………………………… 10

Healthcare ………………………………………………………………………………………………………………………………………… 10

Data Analytics ……………………………………………………………………………………………………………………………………………. 10

Recommendation 1.9 ……………………………………………………………………………………………………………………. 11

Medical Research ……………………………………………………………………………………………………………………………………….. 11

Controlled Substances ………………………………………………………………………………………………………………………………… 11

Recommendation 1.10 ………………………………………………………………………………………………………………….. 11

Blockchain Risks ……………………………………………………………………………………………………………………….. 12 Cost …………………………………………………………………………………………………………………………………………………. 12

Lack of Standardization ……………………………………………………………………………………………………………………….. 12

Lack of Centralization …………………………………………………………………………………………………………………………. 12

Regulation ………………………………………………………………………………………………………………………………………… 12

Garbage In, Garbage Out …………………………………………………………………………………………………………………….. 13

Over Exuberance ……………………………………………………………………………………………………………………………….. 13

Recommendation 2.0 ……………………………………………………………………………………………………………………. 13

Environmental Impacts ……………………………………………………………………………………………………………………….. 14

Increased Cyber Threats ………………………………………………………………………………………………………………………. 14

Blockchain Working Group

Annual Report – December 2020

Legislative Analysis 2015-2020 …………………………………………………………………………………………………….. 15 Legislative Summary …………………………………………………………………………………………………………………………… 15

Recommendation 3.0 ……………………………………………………………………………………………………………………. 15

Legislation: Working Group, Study Group, or Task Force …………………………………………………………………………. 15

Legislation: Establishes/Allows Blockchain for Electronic Records, Transactions, and/or Signatures ………………… 16

Legislation: Productive Emerging Tech Economy Act………………………………………………………………………………. 16 Legislation: Defines Cryptocurrency/Blockchain Transactions ………………………………………………………………….. 17

Legislation: Comprehensive Blockchain Acts ………………………………………………………………………………………… 17

Blockchain Working Group

Annual Report – December 2020

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Introduction to Blockchain

Blockchain is a highly diverse and secure technology with far reaching potential to enhance and empower business and

government. For the purposes of this report, the Blockchain Working Group has adopted the following core definition of

blockchain:

‘Blockchain is an encrypted, secure distributed ledger (decentralized database) system that maintains a digital

record of transactions. Individual records, called blocks, are linked together in a single list, called a

chain. Blockchain is a scalable technology used for recording transactions made with cryptocurrencies, such as

Bitcoin, and it has many other applications such as supply chain and logistics monitoring, data sharing, digital

voting, real estate and auto title transfer tracking, equities and energy trading, and much more.’

Blockchain technology is purposely built to protect the integrity and confidentiality of data used in transactional systems.

In addition to the security benefits inherent in the technology, there are efficiency and trust gains that help foster data

sharing as well as improve the effectiveness and speed of business. Some of these key features are:

• Decentralized Digital Ledger

By design, blockchain does not rely on a single central ledger for the documentation and validation of transactions.

That role is shared among the participants in the blockchain enabled system. This allows the system to be highly

secure, redundant, and robust. Without a single point of failure and with common knowledge of the transactions

across the participants in the blockchain, business continuity and trust in the integrity of transactions can be

assured.

• Industry Standard High Levels of Encryption

Industry standard encryption is inherent to blockchain technology and ensures that data in the system is highly

protected from exposure or alteration while in transit throughout the system and among the participants in the

blockchain.

• Transactional Trust and Nonrepudiation

The design of blockchain imparts an inherent trust between the participants and helps ensure the integrity of the

transactions by preventing the interception, alteration, or injection of transactions in the blockchain that cannot

be validated by the decentralized ledger. Any alteration of any block of the chain will invalidate the entire

blockchain.

• Low Latency Peer to Peer Transactions

Without the requirement that an intermediary server or authority validate the transactions, and with the ability

of participants to communicate directly with each other, the flow of data is greatly improved. This simplifies the

data flow and removes additional steps in the data path while maintaining the integrity and trust of transactions.

• Public and Private Options

Public blockchains do not rely on a central authority to grant permission to participate in the blockchain to read,

write, or proof transactions in the blockchain. One of the most common uses of public blockchain is digital

currency such as Bitcoin but can be ideal for any public use system where broad public participation is needed.

Private blockchains are restricted networks that require a central authority to grant permission to participants to

Blockchain Working Group

Annual Report – December 2020

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read and write transactions in the blockchain. This would be most applicable to use cases such as critical

infrastructure where the security and efficiency of blockchain is needed but requires high levels of control over

who can participate in the blockchain.

Blockchain Working Group

Annual Report – December 2020

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Blockchain Potential Use Cases

The efficiency and applicability of blockchain can be realized across any number of business and government sectors.

Many public and private sector entities are exploring the efficacy of blockchain. The Commonwealth has taken the bold

first step in establishing the Blockchain Working Group setting a path to explore the opportunities that this technology

may offer. Some of these possible opportunities are:

FINANCE

The world of finance is entirely transaction driven. This is the ideal environment for blockchain to have a positive im

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