FARGO — Blockchain could be coming soon to the North Dakota state government.
In January of 2019, the House of Representatives' Information Technology Committee commissioned a study to research the potential for incorporating blockchain, the peer-to-peer, distributed ledger which supports cryptocurrencies such as Bitcoin and Ethereum, into the state government.
Rep. Nathan Toman, R-Mandan, spearheaded the efforts to bring forth the study in the 66th Legislative assembly.
"What I came up with when I decided to propose the study was 'How can we track the state of North Dakota’s finances and also provide a service to the taxpayer?'" Toman said.
Blockchain could be used to provide services to taxpayers and constituents, he continued. "You could go onto a single portal with your identity and the blockchain network would make sure that everything is tied into whatever those services would be," he said.
Rather than relying on the state's IT department, the blockchain could track communications between state agencies and track funds in budgets on its own.
"Since the blockchain network is a self-governance kind of thing, even if it were a private one and not owned by the state government, it would still validate all of those transactions without having to have a third party do it," Toman said. “As long as your programming is sound and it’s all tested and vetted, it runs itself at some point."
A key security vulnerability the state's blockchain network would face would be its location.
In a public blockchain, servers could be located anywhere from an individual's basement to a vast corporate operation. The state’s blockchain would reside in North Dakota.
"Any hacker, political or otherwise, would know those servers reside in the state of North Dakota," Toman said. Still, Toman believes there are cybersecurity benefits the blockchain would provide because the network would have the capability of verifying millions of transactions per second.
'North Dakota coin'
Beyond government efficiencies and taxpayer services, Toman envisions the state taking blockchain one step further, using it to establish its own state token.
The token, which Toman dubbed "North Dakota coin," would be used to shield the state from the type of economic downturn the COVID-19 pandemic prompted.
"That was my hope, but we're a little bit late to the game on doing something like that," he said.
The token would not be a form of currency but rather a store of value tied to state assets such as the state’s gold holdings or the state mill in Grand Forks, Toman clarified.
The state could then either leverage the token to borrow U.S. dollars or supply it to taxpayers, who could purchase the token and hold it in their portfolios as they would a stock or other cryptocurrency, he added.
"Let's say it becomes a stable value because of North Dakota's assets or investments, you could hold that as a stable investment in your portfolio," Toman said.
Toman ran into a road-block when he broached the subject with the Securities Commission and Bank of North Dakota, which he said had "no interest" in creating a state token. Still, Toman is hopeful the pandemic will serve as an eye-opener for those in Bismarck since the state is heavily reliant on oil and gas taxes for revenue. According to Pew Charitable Trusts, oil and gas severance taxes accounted for 53% of the state's tax revenue in 2019, the most of any state in the United States.
"Maybe this will actually prompt us to study some of that and see how North Dakota — since we have the only state-owned bank and a pretty good IT department — could create a token of value that insulates us against economic crash or a Wall Street crash," he said.
James Caton, an assistant professor in North Dakota State University's College of Business, said the state could quickly find itself in "tricky territory" when it comes to creating a state token.
"I couldn't say exactly what the benefits of that would be given that other companies could do that in the marketplace and face less constraints," Caton said. "I'm not so sure the state wants to be the innovator on that front."
A safer strategy, Caton proposed, would be to observe what is done in private industry and attempt to replicate it in the government. "You want the market to do that work for you," he said.
"States, if they make a mistake, the mistake can perpetuate," Caton said. "The nature of state development of this doesn't put it in the position to be the innovator because the market tends to select the lowest cost innovators."
Alternatively, Caton suggested the state could consider creating an ETF which is tied to state commodities such as gold or oil.
Another key component, Caton said, would be for the state to create a favorable regulatory environment that is inviting for private investment.
"I think the state is better positioned in terms of providing an accommodating regulatory environment," he said. "If you can set up a regulatory apparatus up front that tells investors 'We're here to support your development of this system' … that’s easier said than done, but I think that is a path forward." Caton referenced Arizona and Wyoming as states which have enacted laws to welcome cryptocurrency into their borders.
'The sky's the limit'
Both Toman and Caton agreed that "the sky's the limit" for blockchain and cryptocurrency in North Dakota.
"With any crypto, the sky's the limit," Toman said. "If our Securities Department and our bank are behind it and we follow federal rules, we could make it whatever we wanted it to be."
While studying the possibilities to implement what is called decentralized finance, referred to as DeFi, Toman sought advice from Wyoming's Securities Division, which had considered allowing banks in the state to create their own cryptocurrencies.
North Dakota is better positioned than the Equality State to implement a state-created token, Toman said, because the central bank is already in place. The largest hurdle would be for the legislature to ensure the proper language is in place in the Century Code.
According to Rep. Corey Mock, D-Grand Forks, the chairman of the IT committee, the Uniform Law Commission is working on the Uniform Money Services Act (UMSA), which would broaden states' ability to legislate cryptocurrency. The committee met July 1, briefly discussing the legal hurdles the Securities Department and Department of Financial Institutions would face regulating cryptocurrency.
While the UMSA is yet to be completed, the DFI estimated that it would require roughly two-and-a-half full-time employees to implement and enforce.
Toman is optimistic that Gov. Doug Burgum’s background in technology will help the push to bring blockchain to the state government.
"I've had ad-hoc discussions with him in the past about blockchain technology and security," Toman said. "We've been focused on cybersecurity, and blockchain can solve some of that as well."
"I think he’s been open to it, he just hasn’t been a strong vocal pro-blockchain advocate, last session anyway."
For businesses, Caton said the opportunities to implement blockchain are endless. "You need large teams of people who are going to be collaborating, but the sky's the limit in terms of what you could accomplish," he said. "Any business that you can imagine, you can probably find a way to use blockchain or build it being mostly supported by blockchain."
Blockchain could find its way into North Dakota's agriculture industry through either large corporations or local co-ops, Caton said.
In 2018, Walmart began using blockchain in its agricultural supply chain, which forced its smaller suppliers to adapt quickly.
Corporations such as Walmart are in a "prime position" to drive the proliferation of blockchain, Caton said, because they can implement the technology at a lower cost than others and can force smaller businesses to adapt. Co-ops could follow Walmart’s lead and integrate blockchain into their supply chain as well, he said.
Blockchain, along with radio frequency identification (RFID) can also be used to track the conditions crops and other goods were raised.
In 2018, the Louis Dreyfus Company, a Dutch agricultural firm, completed the first sale of a commodity exclusively using blockchain, relying on RFID and smart contracts to complete the sale of American-grown soybeans to a buyer in China.
With blockchain and RFID, recalls could be more precise, Caton continued. Using spinach as an example, "the solution we had before was for everyone to throw away all their spinach, which wasn’t good for anybody," he said. RFID could more accurately pinpoint exactly which products have been implicated in a recall.
'The devil is in the details'
While blockchain would provide security and efficiency benefits, the cost to incorporate the technology in an existing business is a major downside.
"If you own a business in North Dakota, the challenge of using blockchain is start-up cost," Caton said.
Businesses would first need to identify how blockchain would be beneficial. "A lot of businesses a couple of years ago were very interested in blockchain, very quickly realizing the costs of integrating blockchain are relatively high," he said. "You need to have some idea of how blockchain would benefit you."
To be effective, blockchain relies on what is called a 'network effect,' meaning the usefulness of the network is dependent on the number of users.
"The devil is in the details in any of these blockchain systems. They are complex and require a significant amount of people using the network in most cases to function well," Caton said.
'Veil of uncertainty'
Toman has yet to request a bill draft to allow the Bank of North Dakota to produce its own token, but it’s possible a bill could be on the table as soon as the next session. Still, if a proposed bill were to fail, it would push the project back two years since the state’s legislature only convenes every other year.
"In the near-term, it's going to be more for tracking," he said.
Education was the "biggest struggle" Toman faced in the last session. "It's not that they didn't trust me, they just didn't know (what it is)," he said.
Caton said that NDSU is working to incorporate blockchain into its curriculum. The College of Business is slated to add a course on the subject soon taught by Fred Riggins, director of NDSU's Center for Enterprise Business Analytics.
"The big thing is getting students acquainted with the idea," Caton said. "From there, it’s making sure they can build the connections which would allow them to use and develop their knowledge."
In all likelihood, blockchain will continue its integration into private life before the state implements it. "North Dakota doesn't have any state-owned farms, but there are farms that are using it to track their farm-to-market and farm-to-table (products)," Toman said.
While blockchain is a quickly developing technology, "it's going to take a while to see large, successful blockchain systems become commonplace," Caton said. "We're still behind this veil of uncertainty concerning exactly how it’s going to integrate into our existence."
Beyond blockchain, Toman envisions North Dakota becoming a national "leader in all things technology," emphasizing the potential for artificial intelligence, deep learning and unmanned aerial vehicles. His hope is to get NDSU, the University of North Dakota and even the University of Mary on board to help create programs which will retain graduating students in the state.
"We have the key components," he said. "We just have to fit all the pieces of the puzzle together."