Blockchain Technology: Possibilities for the U.S. Postal Service
At its core, blockchain technology is a way to transfer any kind of data or information in a fast, tracked, and secure way without the need for an intermediary institution. Initially developed to allow peers to directly exchange digital currency faster and at lower cost, blockchain is now yielding a variety of promising new solutions beyond financial services. It is difficult to understand the full potential of these new applications at this formative stage, but they include property transfers, the execution of contracts, authentication services, device management, and records management.
Despite their novelty, these applications are beginning to gain traction with major companies and government entities, from Citibank and JPMorgan Chase to the Estonian government and Australia Post. These organizations are researching or experimenting with blockchain technology in order to keep better records and provide new and more efficient services.
The U.S. Postal Service Office of Inspector General contracted with Swiss Economics in order to better understand blockchain technology’s features and capabilities, as well as identify potential areas of interest for the Postal Service.
One major area is financial services. The Postal Service could use blockchain technology to improve the back-end of its financial products, such as international money transfers and money orders. A blockchain-based financial platform could digitize and streamline the services, making them faster and cheaper for both the Postal Service and its customers. In the long-term, blockchain technology could also be useful to the Postal Service in other areas such as identity services, supply chain management, and device management.
While blockchain was originally developed as part of digital currency, people are realizing that at its core, it is a way to transfer any kind of information in a fast and private way and that it can be useful for any kind of information or value transfer that typically involves an intermediary. This realization has spurred intense development activity in the market. In fact, people in the field are comparing it to the early stages in the development of the Internet, and there are similar levels of capital investment in startups related to blockchain services and applications as there was in the development of the Internet in the mid-1990s. Just as the Internet relies on services such as browsers and email clients to help consumers access its capabilities, blockchain technology’s utility and continued development will rely on innovation by new service providers.
Since the blockchain mechanism was originally conceived as a financial exchange tool for Bitcoins, much of the innovation activity so far has been in financial applications. It is important to note, however, that a coin on a blockchain could easily represent more than Bitcoins or money. It could represent a house, a car, a stock, or even a vote or an identity. Arguably, a coin could represent any kind of information or any piece of data. It is this realization that is sparking growth in this sector, including the development of new applications and increased interest in this technology by major players.
New Applications and Services
Developers are beginning to create and market novel uses of blockchain, which has the potential to disrupt any sector that uses intermediaries to verify or track the transfer of information. Some of the major application areas include financial services, the transfer of property, the execution of contracts, authentication services, network and device management, and records management. This has led the Institute of Electrical and Electronics Engineers to suggest that “the possibilities are endless and that money is only the first, and perhaps the most boring, application enabled by Bitcoin technology.”
Strengths and Weaknesses of Blockchain Technology
Blockchain transactions are quite different from typical transactions. They have unique attributes that offer users a number of potential benefits. These benefits are what have sparked the interest in this technology and innovation in this area. On the other hand, as with any new technology, there are still many challenges associated with blockchain that are important to consider.
The OIG collaborated closely with Swiss Economics to outline the benefits and shortcomings of blockchain technology. These strengths and weaknesses emerged within the context of financial applications of blockchain, but they also apply to other application areas.
Strengths
Lower Cost of Transactions
Due to the decentralized nature of blockchains, users have the ability to make online transactions for a fraction of the fees charged by current intermediaries such as financial or legal institutions. Credit card companies charge a fee per transaction for processing, which is a cost that is usually borne by merchants but which can also be passed along to buyers through higher prices or an additional fee for purchasing with a credit card. Remittance service providers charge senders an average of 8 percent to transfer money to family overseas. In the financial services sector alone, Spanish bank Santander estimates that blockchain technology could save banks around the world $15-20 billion annually in settlement, regulatory, and cross-border payment costs. Outside of the financial services sector, IBM has suggested that blockchain can help reduce infrastructure and maintenance costs of scaling the Internet of Things by allowing connected devices to “share computing resources without dependency on a central cloud or server, thereby optimizing resource utilization and cost.” Other cost savings of the technology are only just beginning to be investigated.
Faster Transactions
Blockchain transactions are processed much more quickly than most traditional data transfer systems, usually in a matter of minutes. With blockchain, time is saved by the elimination of intermediary institutions such as clearinghouses that make sure banks or others parties have matching records. This feature is especially significant when it comes to payments, which can take hours, days, or even weeks to process. For example, when trading stocks or bonds, it usually takes 3 days for a transaction to settle and for the participants to have their funds available.35 This is true even for electronic transactions where the information exchange may be immediate, but it may take 3 days to receive payment. Real estate sales are also costly and time-intensive, often taking weeks to schedule a time for closing with thousands of dollars in closing costs. With smart property, selling a house could be as simple as transferring a coin. Other applications, such as not having to present yourself in-person to vote or notarize a document could save time and increase the convenience of these processes. Blockchain allows for faster, more efficient, and more customizable transactions.
Geographical Freedom of Transactions
Transactions across a blockchain are not bound to geographical limits. Given the virtual nature of the system, it does not matter whether an individual sends data to a neighbor or to someone on the other side of the world. In addition, as blockchains do not use intermediaries, which are bound by country-specific regulations, transactions can cross national borders with less friction. This makes blockchain well suited for international transactions.
Irreversibility of Transactions
Blockchain-based payments are irreversible; once a payment is issued, it can only be reversed by asking the receiver to pay the same amount back in another transaction. This feature is ideal for lowering transaction risk for a payment recipient, allowing merchants to be sure that buyers cannot cancel a payment after the sale of a good or service (the way they can with credit card purchases). This alleviates fraud risks and payment security costs for merchants. On the other hand, buyers may not view this as an advantage. This is because conventional card- and bank-based payment providers, acting on behalf of the buyer, can reverse transactions in order to protect buyers against fraud, such as being overcharged or if a good is defective. However, the irreversibility feature is not only beneficial to merchants. It applies to other application areas as well; including the transfer of property where there would be no way, for example, for someone selling a house on a blockchain to reverse the transaction and get the deed back after receiving payment. This feature would also mean that records could not be tampered with, altered, or undone after they have been created, making blockchain a highly transparent and auditable records management tool.
Increased Privacy of Transactions
Currently, completing an ecommerce transaction or enacting a legally binding contract requires participants to disclose their personal information to another party, such as an ecommerce platform. Transferring information across a blockchain is similar to paying with cash: there is no need to disclose any personal information such as a person’s name, address, credit history, or credit card number. Individuals only disclose their wallet information, which is an alphanumeric “address.” In addition to protecting user privacy, blockchain transactions greatly reduce the risks of identity theft and fraud that are common with other forms of transaction or payment, such as credit cards.
Weaknesses
Technological Barriers
Blockchain is new and very different from most of the traditional technologies that people use. As such, in its current form, it requires above-average computer literacy to use properly, which acts as a barrier to entry for businesses and individuals that are interested in applications but do not know where to begin. This can limit access to the new technology for non tech-savvy users, and can expose them to fraud risks. Further, blockchain’s decentralization means that there is no central customer care resource if users need assistance.
Security Concerns
Although the Bitcoin blockchain has so far not been compromised, service providers (such as wallet providers or exchange services), are vulnerable to attacks. Furthermore, the privacy of transactions seen as a benefit to many is also a security concern. Not knowing the identity of the individual on the other side of the transaction makes it difficult to resolve issues that may arise and can place users at risk for fraud.
Limited Access
At present, access to blockchain applications is provided by online exchanges. Physical touchpoints, such as Bitcoin ATMs and other physical service locations, are scarce and scattered. Service platforms are mostly new start-up firms with little reputation and lack physical exchange points.
Regulatory Uncertainty
A lot of progress has been made in recent years, but there is still no international — or even interstate — agreement about how to regulate blockchain applications. Current regulations focus on financial applications of blockchain technology. It remains to be seen how applications such as smart contracts, smart property, and records management will be regulated. Up to this point, some government entities have emphasized instituting consumer protections while letting innovation continue to develop, but others have imposed more restrictive regulations. For example, the state of New York requires a “BitLicense” for businesses operating in this space, causing many startups to leave the state. This regulatory uncertainty, coupled with speculation, has led to other problems, such as exchange rate volatility in the cryptocurrency applications such as Bitcoin.
Potential Postal Blockchain Applications
Many of the novel applications that the blockchain community is currently exploring are in service areas where the Postal Service is already active, which might make blockchain a worthwhile technology for the Postal Service to consider. The following applications could be of particular interest to the Postal Service:
Financial Services
The Postal Service currently offers some basic financial services, including international electronic money transfers. To provide these services through a digital format that could be cheaper and more efficient for both the customers and the Postal Service, Swiss Economics suggests leveraging blockchain technology through the creation of a financial platform, that they term a Postcoin platform. Although financial applications on the blockchain do not need intermediaries to function, having a trusted entity like the Postal Service acting to facilitate its fair, affordable, and transparent use may help address many of the challenges that currently prevent individuals and businesses from taking advantage of this technology.44 For example, the Postal Service could provide multichannel access and assistance online at USPS.com, through the USPS mobile app, and in-person through carriers or at post offices. Postcoin could not only benefit users but the international postal network, for example, by allowing for faster, direct transactions between posts. Furthermore, embracing new payment technologies and adapting to the changing wants and needs of customers could help the Postal Service remain relevant in a market where the use of electronic money increasingly dominates.
Creation of a Postcoin Platform — Two Options
The creation of the Postcoin platform could follow two different paths. One option is to “buy in” to an existing, public blockchain.
A postal operator would first have to acquire some coins. Once the post owns the coins, it could add an additional layer of information to each coin, or fraction of a coin, to mark it as representing a specific and distinct asset — in this case, a Postcoin.
After exchanging money into Postcoin, users can exchange them freely and directly over the existing public blockchain. The advantage of buying into an existing and already widely used platform is that the post does not have to foot the bill for the costs to maintain the validation system or to secure the payment network.
The other option would be to create a brand new blockchain altogether. The Postal Service could use the Bitcoin protocol, another open source software, or create their own.46 Through the creation of such an enterprise blockchain platform, the Postal Service could maintain control over the platform and its features. This would help avoid many of the shortcomings listed above, addressing security and access issues while still bringing the benefits of speed, low cost, and auditability of the blockchain.
A Global Postal Payment Platform
Although the Postal Service could develop its own platform, Postcoin would be strongest as a global postal money transfer and payment platform. Postal operators around the world have an unmatched physical presence that extends across more than 600,000 post offices worldwide, including areas where rates of financial exclusion are higher. Since a global Postcoin system would need national postal operators to interoperate, the Universal Postal Union (UPU) could be the governance body for a global Postcoin platform, setting standards, determining regulations, providing support for settling accounts between posts, and setting the value of the Postcoin. The UPU is well-positioned for this because it already manages a global money transfer and payment platform that is used by many countries and coordinates payments between operators for settlement of terminal dues.
Benefits of Postcoin
The Postal Service currently has a steady money transfer business, but use of blockchain could help improve and expand that service. For example, the Postal Service currently offers international money transfers. However, these services are currently only cashable in a limited number of countries. The flexibility and convenience associated with the Postcoin could potentially allow the expansion of electronic money transfer services to anyone in the world. Postcoin would not only allow these services to be conducted at a lower cost to both the Postal Service and its customers, but it might also help the Postal Service modernize and expand the reach of its financial services. Additionally, the Postcoin could be used for transactions directly between posts.
These enhancements to existing financial services are actionable in the short-term, and over time, the Postal Service could naturally expand into new product areas. For example, the Postal Service could offer blockchain-based escrow services, acting as the trusted and neutral third party for transactions that take place both in the real world and online. This type of service would be especially beneficial for peer-to-peer commerce. Additionally, the Postal Service could offer currency exchange services. This service could allow the traveler to obtain foreign currency at ATMs or post offices at lower transaction and exchange rate fees.
In the long-term, the Postal Service’s experience with blockchain technology in financial applications could further expand into nonfinancial application areas that would be enabled by the technology. In the following sections, we outline three other blockchain applications of potential interest to the Postal Service.
Identity Services
In order to facilitate safe and transparent financial transactions across a blockchain — either a postal or a nonpostal blockchain — the Postal Service could offer identity verification services. The lack of verified identities presents a security issue, a weakness of blockchain discussed above, and places users at risk for fraud. A verified digital identity would allow users to know that the peers they are transacting with are real and have proof of ownership.
The Postal Service could verify identities in-person at a post office by using an identification card, such as a driver’s license, or a biometric ID, such as a fingerprint. The Postal Service could further link that virtual identity used by the customer to operate within a blockchain system with real-world identifiers, such as a person’s postal address. Customers could use these verified identities to login to secure websites, notarize documents, or participate in smart contracts.
The Postal Service already has experience identifying customers for its own services and for services that it offers to other agencies. For example, many post offices process passport applications for the Department of State, an identification process that involves verifying both proof of identity and proof of U.S. citizenship.52 The Postal Service is also familiar with managing login information for secure government sites through the Federal Cloud Credentialing Exchange (FCCX) program.
Identity services are one of the biggest areas of opportunity in the blockchain community, and the Postal Service, as a highly trusted government agency, would be well-suited for a role in identity verification.
Device Management
Another potential application of blockchain technology is using it to secure and maintain the Internet of Things — the network of connected devices sensing the environment and acting upon collected data. Blockchain may be a viable way for the Postal Service to build and manage an Internet of Postal Things at a lower cost than traditional, centralized methods. As the Internet of Postal Things scales and thousands of more devices are brought online, blockchain’s decentralized control and verification system could potentially allow devices to more securely record and transfer data. This would also help increase the security of the overall network by removing the risks associated with single points of access, as exists in centralized networks.
In addition, device management through a blockchain could strengthen the ability of devices to actually act upon the information
they collect.57 With blockchain technology, peer networks of devices would be able to “negotiate” directly with internal and external stakeholders or even other connected devices to, for example, share power resources or contract for maintenance services and part replacement. This could help reduce the infrastructure and maintenance costs of managing the whole system and increase its efficiency.
Imagine if postal vehicles and sorting equipment could manage their own tracking, monitoring, and maintance. For example, a vehicle could monitor the performance of its brake pads, determine when one is about to wear out, find out if that part is still under warranty, create a contract with the manufacturer to install a replacement part, and then pay for the brake pad and service — all autonomously. In general, “predictive maintenance” of vehicles has already demonstrated cost savings in other industries, and would help to reduce both regular and overtime hours at postal Vehicle Maintenance Facilities. Predictive maintenance alone could potentially help the Postal Service save 7 percent of current fleet costs, and increasing the level of automation through use of blockchain could create further efficiencies.
Supply Chain Management
A final application that might also prove useful for the Postal Service is better supply chain management: using blockchain to identify packages and mail in the same way individuals can be identified. As mentioned previously, blockchain removes the need for trust between parties, allowing it to coordinate the activities between parties more efficiently. The Postal Service has a number of customers, partners, contractors and other stakeholders that it coordinates with, including: other posts, customs agencies, shipping partners (UPS and FedEx), long-haul trucking drivers, mailers, and recipients. Using blockchain to manage interactions between these different entities could speed up shipments, particularly international ones.
Imagine if each mailpiece was embedded with a sensor that could keep track of its own chain of custody while executing smart contracts for payment and customs clearance. Each mailpiece, whether a parcel or letter, could be uniquely identified on a blockchain and have the ability to create transactions, allowing for the timely sharing of information and processing of payments.
It would currently be prohibitively expensive to tag every piece of mail with a sensor. However, it may be possible that the Postal Service could initially use the blockchain approach on high-value shipments in its early adoption stages and then rely on downward pressure on the cost of sensors to expand the feasibility of wider use over time.
This application would allow the Postal Service to keep an auditable chain of custody and embed additional shipment and tracking information to facilitate customs clearance and faster delivery. Furthermore, payment processing could be integrated directly into the shipping process — and paying in a digital currency would lower costs for online merchants and facilitate ecommerce while also allowing people without bank accounts to participate.
This approach is already being tested in the private sector: one of the current experiments on the Ethereum blockchain involves invoices that are automatically paid when a shipment arrives.61 There could be great potential for such an application in the cases of dropshipping, worksharing, or settlement of international terminal dues.
In essence, blockchain technology allows for close linkages between the financial, logistics, and delivery parts of commercial transactions with the power to unify payment and delivery in one seamless experience. Posts could become a single intermediary between merchants and customers, allowing them to reduce coordination needs, offer more efficient ecommerce solutions, contribute to the growth of ecommerce (particularly cross-border ecommerce), and increase their market share and revenue.
Blockchain, as a decentralized information and value transfer platform, has the potential to disrupt sectors that rely on intermediaries to perform verification or tracking activities. It is currently gaining a lot of buzz as developers apply it to more and more use cases and as global companies and governments explore its possibilities. Blockchain technology could prove to be beneficial in specific applications that cross national borders or require the interaction and agreement of multiple untrusted parties. In addition, benefits could rise from the technology’s ability to help lower costs, speed up transactions, and introduce a level of automation into processes.
The Postal Service could benefit from blockchain technology in the short term by studying the technology and possibly experimenting with blockchain-based solutions for financial services. The Postal Service already offers some financial services, including money orders and international money transfers, where blockchain could be an enabling tool, allowing the Postal Service to offer these services more efficiently. Over time, this experience and experimentation with blockchain could naturally expand into other areas, such as identity services, device management, and increased control over the ecommerce supply chain. Because this technology is likely to be a disruptor in areas of the Postal Service’s business, monitoring the development of this technology and beginning to experiment with its possible applications could benefit postal operations and customers.
Source: https://www.uspsoig.gov/document/blockchain-technology-possibilities-us-postal-service/