Azerbaijan
has been a hotbed for a series of ambitious fintech-related
announcements over the past several months, as the nation’s authorities
were apparently moving to implement a series of innovative technological
solutions in banking and e-government systems.
Repeated
statements by government representatives suggested that at least part of
the program relied on blockchain infrastructure. Most recently, as
Cointelegraph reported,
the chairman of Azerbaijan’s State Customs Committee revealed plans to
implement blockchain technology to build an online-accessible cargo
transportation database. Earlier in May, a high-ranking official for the
Central Bank of Azerbaijan (CBA), speaking at the Fintex summit in Baku, mentioned
the forthcoming implementation of a “blockchain system and artificial
intelligence in the banking sector.” How are these disparate elements
supposed to work together, and what is the scope of these
blockchain-based solutions’ intended uses?
Early announcements
The
snippets of news about a massive government initiative involving
blockchain technology being underway in Azerbaijan began to pop up here
and there back in October 2018. Farid Osmanov, CBA’s chief information
officer, first announced the five-year program for the digital transformation of the economy — including a partnership with IBM
on a distributed ledger system to be used in the banking sector — at
the Azerbaijan-Germany Business Forum on Energy and ICT. In November,
chairman of the Azerbaijani Internet Forum, Osman Gunduz, told
the press that a few other state agencies were on the course to
implement distributed ledger-based solutions in areas such as housing,
utilities and even the court system to facilitate record-keeping and
notary services.
While it became clear from early statements that
the pilot blockchain system was to be built in collaboration with IBM on
Hyperledger Fabric, it was not until April 2019, when media reports
began to surface, that a branch of another big-name technology firm —
Lenovo Professional Services — was also involved in the project on the
hardware side. With two major industry players on board, it became clear
that a comprehensive state program is at work here.
Government services hit X-Road
According
to Nijat Asadli, manager of Azerbaijan’s Digital Trade Hub (DTH), there
are three main areas in which the government seeks to boost innovation
by deploying digital infrastructure: the DTH itself, the e-Government
portal and central bank operations. The DTH is an electronic
public-private partnership platform designed to facilitate the
development of e-commerce in Azerbaijan and the broader region. It
connects a number of governmental agencies, banks and private companies
to provide a range of domestic, international and electronic services
for businesses and private citizens alike.
One of the solutions
available on the DTH platform is called the Single Export Application.
It allows local producers to obtain all the documentation they need to
hit the international markets — including licenses, permissions, customs
declarations and even to apply for a government export subsidy. Another
unique service available through DTL, Asadli told Cointelegraph, is
electronic and mobile residency:
“Azerbaijan is the
second country in the World after Estonia to offer electronic residency
and first ever to offer a mobile residency. This service allows
non-residents to establish a company online within a day in Azerbaijan
and use all of the e-Services in the country. All they require is a
smart phone — and they can start a location-independent business in
Azerbaijan.”
The e-Government portal, integrated with
all the user-facing government organizations, provides online access to
more than 400 additional governmental services.
It has to be
noted that both the DTH and the e-Government portal are built on
open-source X-Road technology, a data exchange layer (DXL) solution that
enables organizations to communicate over the internet and offer online
services. Originally developed in Estonia in the early 2000s, X-Road
underpins the Baltic country’s e-government infrastructure, as well as integration with neighboring Finland’s data exchange layer.
While X-Road developers describe
it as a “distributed integration layer between information systems,”
which led to speculations that it relies on blockchain technology
internally, it is, in fact, not the case. As the Nordic Institute for
Interoperability Solutions (NIIS), the organization responsible for
developing the X-Road core,went
on to explain, both blockchain and X-Road use cryptographic hash
functions for linking data items to each other, otherwise they “serve
very different purposes and use cases.” Each X-Road server maintains its
own message log archive and stores it locally; other participants of
the ecosystem, unlike the nodes on a distributed ledger network, do not
have access to those archives.
Blockchain for digital identification
Right
now, the only digital infrastructure initiative of the Azerbaijani
government that relies on blockchain technology is the one that the
nation’s central bank is overseeing. As the CBA’s chief information
officer, Farid Osmanov, told Cointelegraph in an email, the government
enacted a document in September 2018 entitled the State Program on
Expansion of Digital Payments for 2018-2020 — a roadmap for coordinating
technological advancements in digital banking. According to Osmanov:
“By
implementing new financial technologies in the market, they believe
they can boost the cashless economy and extend digital services, making
them transparent and available for citizens.”
As a
key condition to enable digital banking services, the program outlined a
“private blockchain framework with trusted nodes, permissioned access
and consensus services” for user identification.
The pilot project
that the CBA embarked on to advance the goals of the state program has
three prongs: the development of a strategic digital innovation plan,
the creation of the blockchain-based digital identification system, and
the deployment of the blockchain hardware. Lenovo was summoned to
advance the latter goal in October 2018. According to Osmanov, the
infrastructure that they put up relies on some of the company’s most
innovative tech:
“The solution uses Lenovo ThinkAgile
HX7820 Appliance software and hardware, which is the first 4-socket HX
system installation in the world. The solution operates on the latest
Intel Xeon Scalable processors from the Skylake generation and Acropolis
OS from Nutanix is chosen as the virtualization platform. This solution
is based on the RDMA technology, and this installation was the first in
the world, where RDMA configured in productive environment.”
The open-source Hyperledger Fabric protocol,
hosted by the Linux Foundation, serves as the software foundation for
the identification system. Having used Hyperledger extensively to
develop numerous corporate blockchains, IBM is now contributing
expertise to the Azerbaijani government’s initiative. Its sponsors
expect that the system will see full operational implementation by the
end of 2019.
The main use of the prospective identification system
will be in enabling citizens and businesses to deliver their personal
data to banks and credit organizations in the form of digitally signed
documents. Essentially, the blockchain system will automate the Know
Your Customer (KYC)
process, all the while dramatically decreasing processing time. The
digital identification system will be incorporated into the e-Government
system, and the open API architecture will allow banks to integrate it
with their digital infrastructures through a standardized process.
Another
remarkable efficiency that the system is expected to introduce will be a
high level of user control over what data — and how much — they would
like to share with financial organizations, Osmanov noted:
“Banks
will have access to required personal data only after customer’s
confirmation, so individuals and legal entities can personally control
and authorize data sharing.”
The central bank’s CIO
also mentioned that the authorities recognize the need for an improved
legislative framework that comes with such massive technological
developments. The CBA is already doing its research on international
best practices and benchmarks, and is engaging with other state agencies
in a conversation regarding regulatory improvements that the new
system’s advent could evoke.
Limited use
With the new
digital identification system on the way, Azerbaijan is about to take
its place among the ranks of countries that have implemented
permissioned blockchain solutions to improve the efficiency of a certain
aspect of government operations. The expansion of this effort might
well see the state’s performance in other domains of record-keeping —
like the customs database announced recently — benefit from the
introduction of distributed ledger technology. Still, yet another
adherent of the “blockchain before crypto” approach, the nation is only
ready to go so far: According to a November 2018 statement by the CBA’s first chairman, issuing a state-backed digital currency is out of the question for Azerbaijan.
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