The Treasury Department and the National Science Foundation are using blockchain to tokenize the details and payments found in letters of credit sent to grantees.
The Treasury Department’s Office of Financial Innovation and Transformation (FIT) and the National Science Foundation have teamed up to explore how using blockchain could add value to NSF and its hundreds of grant recipients.
The build, which uses a permissioned version of Ethereum’s distributed ledger technology, will be complete by year’s end. The idea is to tokenize the details and payments found in letters of credit sent to grantees to improve transparency and reduce labor costs.
Currently, the process between NSF and universities that frequently receive grants is convoluted: A university receives a letter of credit, which notifies grantees that they have been awarded funds for research, and then passes it on to the department or team actually conducting the study. That multitiered process makes it tough for an awarding agency, such as NSF, to ensure the money is being spent according to the terms of the grant. NSF must rely on regular reporting from the recipients and sub-recipients, which takes a significant amount of time, said Craig Fischer, supervisory program manager at FIT. Adding to the complexity is the fact that the federal government has numerous letters-of-credit systems, NSF Deputy CFO Mike Wetklow said.
Respondents to a recent NSF survey of universities about their pain points with the systems said they wanted a way to reduce that complexity. That’s how this proof-of-concept project came about.
The idea is to pay the first-tier grantee with a token that represents the money and has all the grant information baked in, rather than send actual money. When the token makes its way to the end recipient, that person can redeem the token for money.
“With all the grant information buried within the token, we now hopefully will reduce a lot of that reporting burden on the recipients and sub-recipients," Fischer said. "There would be no need to report on a lot of this stuff because the reporting actually takes place alongside the transactions when they’re occurring,” he explained. “Conceivably, you would have real-time acknowledgment any time that that token would travel throughout an ecosystem.”
A lot of the grant disbursement mechanics would remain the same. NSF would upload the award information into a system like it does now, but all the information would be tokenized.
“Instead of having all these major letter-of-credit processes, we’d be moving more toward a wallet, token-based system that … would capture all that information so we could spend more time on the mission and the actual research,” Wetklow said. “We would have a lot less manual work and less exceptions and less people working on these things, so it could reduce costs.”
Once the build is complete, Fischer and his team will take it to NSF and universities to find out if they can derive value from it. If they do, they will expand the user community. If not, they will go back to the drawing board, he said.
“The way I like to think about it is we’re really looking at the wiring right now, and [if] by rewiring things by using blockchain does improve value, we want to add the additional layers of complexity onto this,” Fischer said.
Wetklow is optimistic, in part because of the development process. “This is a new way of thinking about innovative payment solutions with shared services,” he said. “They’re really putting the customer up front in the exploratory process vs. an old way of things of building systems and then going to the customers. This is a really innovative approach.”
What’s more, it fits with the Cross-Agency Priority Goal of shifting away from low-value work that’s part of the President’s Management Agenda. “If this works out, this could be a seismic shift of low-value work across the government, across universities, and enable us to shift to more high-value things like data analytics and service and mission delivery,” he said.
This proof of concept is not Treasury’s first foray into blockchain. FIT also tested the technology to track and manage cellphones and software licenses. Those proofs of concept gave Fischer and his team a foundational understanding of distributed ledgers they needed to move forward with something more central to financial management -- moving and transferring value.
“It really did give us the comfort that this isn’t that scary of a technology and that it really does enable this peer-to-peer connectivity and really allows for this degree of this transactional transparency that we’ve never really had before,” Fischer said.
Editor's note: This article was changed Dec. 10 to correct a reference to the number of letters-of-credit systems at NSF.