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  • Writer's pictureChaitu and Wendy

Towards a Secure Future: Harnessing Blockchain for Citizen Identity and Taxation


Introduction

As the world becomes increasingly more digital, our data needs to be stored securely, where it cannot be tampered with. One increasingly popular and innovative solution is a blockchain. A blockchain is a data structure consisting of blocks of information that are linked together in a chain. Because each block contains information about the previous block, blocks cannot be modified without modifying the entire chain. This is important, as the data will be irreversible. In most cases, blockchains will be managed by a peer-to-peer network. By using consensus algorithms, the blockchains can be stored across a network of systems and remain validated. Given that blockchains provide a secure and decentralized means of storing information, they prove valuable for safeguarding specific data, such as citizen identity verification and tax information.



Citizen Identify Verification

The world’s population has recently grown to 8 billion. Recording all these new births is difficult especially in poorer and rural areas. According to the World Bank, 850 million people have no proof of identity. This prevents citizens from accessing school, healthcare, the workforce, and passports. This is especially prominent in South Asia and in Africa. According to the Indian National Family Health Survey (NFHS), 20.3% of Indian children under 5 do not have births registered with the civil authority as of 2021. As of 2018, only 42.2% of Pakistani children under 5 have their births registered. It is especially difficult to register births in these countries due to complex documentation processes, costs, and centralized identification systems. In the case of the Rohingya, they were ethnically cleansed from Myanmar and forced to seek refuge in Bangladesh. As they are now stateless, they have no easy way of proving that they are indeed Rohingya. Through using a blockchain database, once a Rohingya person proves that they are Rohingya, they can be issued and individual ID, which will be added to the blockchain database. Since there is not centralized database, individuals’ IDs will not be tampered with.


Blockchain in Taxation

The integration of blockchain technology into taxation processes stands as a powerful catalyst for transparency, revolutionizing how governments worldwide manage tax-related transactions. A notable example lies in the European Union, where a comprehensive value-added tax (VAT) standard and protocol, utilizing blockchain, unifies all VAT accounting transactions across the continent, offering tax authorities immediate access to real-time VAT transaction information. In Estonia, the government pioneers the "Keyless Signature Infrastructure" (KSI) using blockchain, allowing citizens to effortlessly verify the completeness of their information records and control data access securely. China, recognizing the potential of blockchain, established a research team in 2017, leading to the debut of the first blockchain electronic invoice in Shenzhen by August 2018. Luxembourg, too, embraces blockchain, initiating trials for tax declarations and audits.

China, recognizing the potential of blockchain, established a research team in 2017, leading to the debut of the first blockchain electronic invoice in Shenzhen by August 2018. This demonstrates the country's commitment to integrating cutting-edge technology into tax administration.

Within transaction activities, blockchain provides a transparent and tamper-proof record-keeping system, consolidating logistics, funds, and information flows. A potential solution involves establishing a "tax private chain" for each entity, recording every financial transaction with smart contracts ensuring mutual verification. This fosters an environment discouraging manipulative activities, enabling seamless integration between transactions and tax reporting. While the future promises digitization of assets on the blockchain, it's crucial to recognize that blockchain won't immediately replace regulatory bodies. Instead, startups can assist taxpayers in developing tax systems, preventing adjustments once data is input, and allowing for automatic and instant audit processes.


Drawbacks

Although blockchain is an incredibly helpful and promising technology, it is not the be-all and end-all method for storing and verifying data. While some proponents of blockchain hope for it to be used in voting, to provide reliable access to suffrage, especially in marginalized communities, it adds the risk of election interference. And because of the decentralized nature of blockchain, it will be incredibly difficult to detect when these interferences occur. Even the Digital Currency Initiative (DCI), a research community from MIT advocates against blockchain in elections. “Online voting systems are vulnerable to serious failures: attacks that are larger scale, harder to detect, and easier to execute than analogous attacks against paper-ballot-based voting systems.” [4]

Blockchain is most widely used currently as part of cryptocurrency to make rapid untraced transactions between individuals. El Salvador, a nation plagued with hyperinflation in the 20th century, uses the United States Dollar as their main currency. However, they are unable to control their own monetary policy as they use a foreign currency. In 2021, El Salvador made Bitcoin legal tender and began purchasing Bitcoin. However, due to the 2021-2022 cryptocurrency crash, El Salvador reportedly lost $22 million of Bitcoin. Bitcoin and virtually all other cryptocurrencies are very volatile; they can gain and lose value incredibly quickly. Alternatives to normal cryptocurrencies include stablecoins—a type of cryptocurrency pegged to another currency—have been proposed, but in practice, the lack of financial reserves to back the coin cause it to quickly fail.

In addition to these challenges, current laws and regulations directly associated with blockchain are fundamentally lacking. This presents a significant obstacle to using blockchain as a basis for tax administration. As blockchain continues to infiltrate the economic sector at an accelerating pace, the increasing contrast with the absence of clear legal regulations becomes apparent. Foreseeably, this will pose a long-term challenge for tax administration.


Conclusion

In the rapidly evolving landscape of technological innovation, the integration of blockchain technology into citizen verification and taxation processes emerges as a transformative force for transparency and efficiency. The potential benefits, from reduced collection costs to enhanced economic planning, make blockchain a pivotal player in the quest for a more efficient and prosperous government. As we navigate this transformative journey, balancing the advantages with the need for vigilant oversight will be crucial to realizing the full potential of blockchain in taxation and citizen verification.

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