Bhutan, the tiny nation sandwiched between India and China, with a population below 800,000 and one of the smallest economies in the world, is pioneering a blockchain-based digital identity system that could underpin an equally ambitious stablecoin.
These and related projects make this remote Himalayan kingdom one of the most advanced countries in the world of digital finance.
Following a proof of concept earlier this year, the government’s commercial arm, Druk Holding and Investments (DHI), is about to deploy its National Digital Identity, built atop a Polygon layer-2 blockchain.
“National Digital Identity is a self-sovereign wallet for edge devices,” said Jacques Von Benecke, chief technology officer at DHI in Thimpu.
DHI, a Temasek-like vehicle established in 2007 to own and manage the government’s corporate assets across many sectors, has recently taken a turn toward digitalization and crpyto.
Its projects include a bitcoin mine, meant to be powered by hydropower, and a carbon market, based upon Bhutan’s status as the world’s only carbon-negative society (its emissions are less than the country’s natural resources that consume carbon).
One of DHI’s companies, Bank of Bhutan, is the largest commercial bank in the country. During the Covid pandemic, it launched a virtual bank, with its app used for payments and basic financial services in a country where most people don’t have a bank account – or even an internet connection.
Von Benecke took DigFin through the next phases of DHI’s digital strategy: the national identity and its path toward stablecoins and, eventually, a central-bank digital currency based on blockchain.
The challenges of inclusion
These, along with the other initiatives, are aimed at financial inclusion, increasing prosperity for the Bhutanese, and helping connect the landlocked kingdom to the outside world without disrupting its local culture.
But how does financial inclusion work if it’s based on smartphones, and people don’t have smartphones?
“There’s a big question of accessibility,” Von Benecke said.
There’s no simple technological solution to the problem of how to reach the majority of the population, which is rural and often migratory.
DHI is looking to work with a vendor, KaiOS Technologies that makes smartphones that run on a web-based operating system, more accessible to Bhutanese.
But the government has realized it needs to follow the people, rather than expect to them to go out of their way to get digital services. Many farmers move around, so even if they have a phone, they can’t keep the battery charged.
DHI is laying fiber optics that connect schools, making these local hubs for Wi-Fi. It is also organizing teams of people to make periodic trips into rural areas and bring with them the hardware to enable people to get temporary online service.
Digital on paper
On top of this, DHI is printing out biometric cryptographs – a denser version of a QR code that contains a person’s photo, biometric details and other information such as a birth certificate, a driver’s license, or employment details. The information is not kept on a central database; it resides on that paper cryptograph.
This is the most visible “edge” of the National Digital Identity project. Each identity exists in tandem with an electronic wallet. A citizen with their NDI code can use it any time they are near someone with a connected device to establish their identity. “This paper-based digital ID lets you bring the wallet down from the cloud to the device,” Von Benecke said.
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Whether on a household smartphone, at a school, at a roaming team’s phone or a neighbor’s connected device, people can now use their NDI to access government and financial services – from requesting a micro loan to applying for a passport.
“NDI is self-sovereign,” Von Benecke said. That means the individual controls what data to share, with whom – and has the means to digitally sign every transaction or agreement before any data is shared.
This isn’t a complete solution to challenges of inclusion. Many people are illiterate. For those who can, they may not understand what’s on the screen: DHI apps are in English and in Dzongka (Bhutanese), but citizens speak two dozen languages. Nor does the NDI help people with certain disabilities. But it’s a start.
After access, the big challenge is education. For businesses and urbanites, the NDI should be a welcome convenience. They will be able to source government services much more easily. They already rely on cashless payments, so it will be natural to use NDI to verify electronic payments. But to many rural and uneducated people, this might as come from Mars. The DHI is planning ways to teach farmers, in particular, about the basics of bank accounts and connecting to financial services to run their shops.
These realities will inevitably put the brakes on DHI’s ambitions, but the group is moving quickly on the aspects of digital transformation it can control.
For Von Benecke, decentralization has been the keystone to make this work in a way that dovetails with the kingdom’s “gross national happiness” mandate.
By using a format that brings decision-making and responsibility down to the individual user, the NDI is going to be more private and secure than alternative systems. That will help make win wider acceptance.
In July, the country’s parliament accepted the National Digital Identity Bill, legislation that mandates the rollout of NDI and the establishment of an independent regulator to oversee digital identity.
“It’s freestanding, independent of the government or any single authority, and operates like a not-for-profit,” Von Benecke said of the new supervisor. “It builds software for us and has a mandate to sell our technology or services abroad…We’re the first nation to do this, we’re five or six years ahead of countries in Europe, and there are a lot of other less-developed countries that are interested in our experience.”
The big difference between Bhutan and other countries with national ID projects is decentralization. Bhutan has close relations with India. It relies on India for funding and trade. But it decided not to copy Aadhaar, the government’s biometric database that citizens must sign up to.
“In the NDI system, the individual is the source of truth about who they are and what they approve regarding their data,” Von Benecke said.
There’s also a security aspect to decentralization. Should someone hack a centralized database, they might gain access to all the information. While an individual Bhutanese person is probably easier to hack than a government database, an attacker would only get access to that person’s data. To get access to 10 people’s data would require 10 separate hacks.
Although there are traditional database technologies to support decentralization, Von Benecke pushed for DHI to use blockchain. Initially it used Sovrin, an open-source project that enables online self-sovereign identity solutions. But DHI recently switched to Polygon, a layer-2 blockchain based on Hyperledger Aries, a toolkit for identity solutions and digital trust.
The switch was both to use a project with a vibrant developer community – which means more security, and ultimately lower gas fees – as well as one that was more in line with emerging international standards.
“We could have relied on a traditional database, but blockchain brings an extra layer of trust,” Von Benecke said.
The wallet is not onchain. The wallet encompasses the issuer (such as Bank of Bhutan or the individual, requesting a service) and the verifier (the counterparty that establishes the issuer is who she says she is). Rather, the blockchain is used to write the code that determines how to verify credentials.
“The blockchain tells me if DHI is asking for someone’s data, that they’re allowed to ask, and that the person’s signature is valid,” Von Benecke explained.
The data itself – the interactions between issuers and verifiers – doesn’t get recorded. Otherwise someone could reverse-engineer the traffic and work out who’s doing what. Such information remains within the wallet.
This is important for the basic features of NDI, including verifiable credentials, digital signatures on legally binding contracts, and eKYC. But it will also be vital as NDI is extended into financial matters.
The government and the Royal Monetary Authority of Bhutan (the central bank) are exploring a central-bank digital currency. That’s likely to take a few years to emerge, Von Benecke says. But the authorities are also keen to introduce a stablecoin pegged to the ngultrum (which is also tied to the Indian rupee).
This is already being tested within the DHI group, with Bank of Bhutan minting the stablecoin. Group CFOs and employees can use tokens to buy government-related services (such as electricity). The stablecoin doesn’t provide a yield, but the government is offering people extra tokens as a reward for using it.
The virtual bank developed by Bank of Bhutan, which already enables people to make payments with a QR code, is piloting token use tied to NDI, so people don’t need to sign into the bank’s app with a username or password. With stablecoins and, eventually, CBDCs, people don’t need a bank’s app to do any financial transactions – they will just use the NDI wallet.
Von Benecke acknowledges that the executives at Bank of Bhutan aren’t happy with this. No one has a clear picture of what long-term impact stablecoins and CBDCs will have on commercial banks.
But the government is keen on tokens because it can levy consumer taxes at the point of sale. The central bank is eager because it can get rid of a lot of paperwork around interbank transactions or cross-border transactions, which currently can take a week or so to manually process and approve. The central bank is also giving citizens bonus tokens if they convert foreign currencies into ngultrum.
Move fast, preserve things
The government’s biggest concern is what to do with surplus labor in banks – people who help customers fill out forms in branches, or who work in the back office. Von Benecke says DHI has to ensure automation doesn’t lead to unemployment, which would violate some of the codes of gross national happiness. Retraining or replacement jobs remains a work in progress.
But the government, especially the monarch, King Jigme Khesar Namgyel Wangchuck, is pushing to have NDI fully rolled out within the next 12 months. This is to ensure commercial banks are profitable enough to expand their services, and be able to catch up to global norms.
The king also wants the NDI to serve as an example to other countries – not just to other developing countries but also to business partners in Switzerland, Canada, and other advanced economies that are experimenting with their own digital-identity solutions.
For tiny Bhutan, wedged between Asia’s biggest powers, digital identity and finance are not just cool tools. They’re part of the tiny nation’s ongoing work to retain self-sovereignty.