Estonia, a Blockchain Model for Other Countries?

The Soviet Union collapsed in 1991, and with it came independence for the small Baltic nation of Estonia. At the time, less than half of Estonia’s population had a telephone line, and its only independent contact with the outside world was through a secret mobile phone owned by the prime minister.

Cut 20 years into the future and Estonia is a digital society like no other. Named “the most advanced digital society in the world” by Wired, it’s become a startup hub and an early adopter of blockchain technology. Estonia may also be on the brink of launching its own crypto token called the “estcoin.”

As it turned out, the collapse of the Soviet Union provided Estonia with a blank slate that it has capitalized on to great effect. Collectively, Estonians ditched old analog systems and leapfrogged into a digital future at a much faster rate than any other country in the world.

If you’re curious to know the full history of how this happened, The Economist has an excellent article written about it. But that isn’t our interest per se. In the following, we’ll focus on exactly how Estonia is using blockchain technology and whether they can be considered a model for other countries.

A Digital Society

One of the key events behind Estonia’s current position as a leader in blockchain was their being the target of a cyber attack in 2007. In retrospect, this attack was somewhat inevitable. In the 1990s, Estonia rushed to join NATO and the EU, to some extent pitting itself against former Russian leadership. Following a controversial decision to remove a Soviet statue from a Tallin park, the Estonian parliament and several public services suddenly went offline in one of the biggest-ever DOS attacks.

Most concluded the attack came from Russia.

This was a wakeup call for a country already heavily invested in building/using digital infrastructure, and it made them consider more carefully the security implications of the technology they were implementing.

It also paved the way for the use of blockchain.

In 2008, the Estonian government began experimenting with and testing this new technology before Satoshi had even released his/her whitepaper. At this time, the term “blockchain” had yet to be coined, and the Estonians referred to it as “hash-linked time-stamping.” Since 2012, hash-linked time-stamping, or blockchain, has been in operational use in many of Estonia’s registries, such as national health, judicial, legislative, security, and commercial code systems.

Another Estonian response to the cyber attack was the creation of the world’s first “data embassy” built in Luxembourg – a storage building to house an entire backup of the country’s data. If another attack were to come, there would be at least one backup, as no physical copies of almost anything exist.

Fast forward to today and Estonia has essentially doubled down on their all-digital approach. “Almost all public services in Estonia are digitized and accessed through secure digital identities that are provided to every citizen and resident,” says Kaspar Korjus, managing director of the famous e-Residency program (more on that later). Since its 2012 inception, blockchain has been utilized in Estonian personal medicine and cybersecurity as well.

To fully wrap your mind around this system, you need to glance under the hood and see some of the specifics.

Estonian-Style Blockchain

The X-Road is the open-source backbone upon which the country’s entire digital infrastructure runs. First put into practice in 2001 (it’s been upgraded and altered many times since), X-Road is rooted in a blockchain called K.S.I., which was developed by Guardtime, one of the biggest blockchain companies in the world. K.S.I. is incidentally used by both NATO and the US Department of Defense.

Here is what the e-Estonia website has to say about the X-Road:

“This is the invisible yet crucial environment that allows the nation’s various e-service databases, both in the public and private sector, to link up and operate in harmony, and saves more than 800 years of working time for the state and citizens annually.”

The key innovation in the X-Road is the use of a distributed ledger that can never be erased or rewritten. If this is sounding familiar, it’s because it’s the same general blockchain principle that enables cryptocurrencies like Bitcoin to exist. In Estonia, the distributed ledger gives people more control over their data, and it disempowers a central authority to control said data.

For example, teachers can enter academic marks onto someone’s record but cannot pull up their medical history. There are rigorous filtering and restrictive processes in place that allow this to take place. If someone views or accesses another’s data without authorization, they can be prosecuted.

The X-Road holds data that relates to taxes, medical records, voting records, digital identities, residency information – almost all facets of life. Having public data stored securely in blockchain’s amber ensures (among other things) that Estonia will never suffer the same fate as Haiti (whose land records were all but wiped out by a 2010 earthquake, leaving people to contest who owns what).  

Because of the X-Road, Estonia is already partially living in the future promised by blockchain.

There are numerous reasons why other countries may want to emulate their approach, but let’s not forget there were a unique set of factors that led Estonia to this position. It may not be as easy for larger countries to seamlessly implement blockchain solutions. But if they do, they’ll need two critical factors.

Progressive Policy Frameworks

The phrase “Wild West” is often used to describe the current blockchain/crypto environment. It’s new, unexplored, unruly, and can be dangerous. This means that entrepreneurs and consumers are often operating at the periphery of the law. Sometimes they are actively held back by existing legal frameworks, and sometimes they are held back for fear of violating an ambiguous rule.

A forward-thinking and proactive set of laws provides room for blockchain development to kick into a higher gear, simultaneously allowing for greater consumer protection.

The fully decentralized future is not here yet, and there remains a real role for lawmakers to play. While this isn’t necessarily the revolution that some libertarians have dreamed of, the need for a symbiotic relationship with authorities is critical for this new technology to get off the ground. There needs to be a force that punishes improper access to data, makes sure that e-votes are counted, and sees that electronically signed agreements are legally binding.

There needs to be some real oversight, at least for now.

Digital Identities

Another thing that allows so much of Estonian life to be done “on the blockchain” is its use of verified digital identities. Nearly every one of the country’s 1.3 million citizens has an ID card, which functions as much more than simply a driver’s license or passport. This ID uses a 2048-bit public key encryption and allows a person to be verified in an online environment. This is what allows a person digital access to things such as the voting system or the ability to fill a pharmaceutical prescription.

A huge pain point for blockchain pioneers and startups is know your customer (KYC) processes. These KYC rules are intended for banks and money transmitters to help authorities combat theft, terrorism, and money laundering. In many cases, to satisfy legal regulations they must go through onerous processes to verify who they are dealing with, facing high risks if they get it wrong. Anyone with experience in cryptocurrency exchanges is probably familiar with these headaches.

If everyone already has a verified digital identity, the runway is cleared for businesses and the government has a tool to fight nefarious activity.

Creating an environment where verified digital identities are the norm makes things easier for blockchain to grow and thrive. For those wondering if these identities couldn’t be forged and misused, the answer is not 100% no – but it’s highly unlikely. Estonia has a team of security researchers monitoring issues like these, and they recently upgraded the IDs to elliptic-curve cryptography, which is more secure and faster than the SSL certificates previously used.

To date, there has been no record of misuse of a digital identity.

Virtual Residents

For those looking to Estonia as a model of blockchain usage, one problem may immediately jump out at you: everything is being done on a relatively small scale. 1.3 million people is not exactly the number that will impress an entrepreneur with a global vision.

To claim that its system has the capacity to operate with bigger numbers, Estonia needed more participants. And, with a small population and a birthrate below the EU average, they already had a need for more residents. The solution to both of these problems came in the form of their now famous e-residency program.

As opposed to organically growing the population, Estonia offered a product to the world. Somewhat like Delaware-based corporations in the US, e-residents of Estonia are privy to a group of benefits. Namely, “the freedom to easily start and run a global business in a trusted EU environment.”

While not a tax haven or a workaround for immigration, this offer has attracted quite a few people already (so far, about 27,000 people from 143 countries). Estonia’s first e-residency cards rolled out in December 2014. The micro­chips inside them are identical to those in Estonians’ digital ID cards, but an e-resident’s are a bit different from those of a native citizen.

The government has since doubled the budget for e-residency and plans to further ramp up efforts in 2018, the goal being 10 million digital residents. A study conducted by Deloitte found that it had generated $17.2 million in revenue since the program started 3 years ago. The e-residency program may very well be the beta testing of Estonia’s blockchain. Whether or not it will scale smoothly has yet to be seen, but regardless of that, it represents another unique experimental facet of Estonia becoming a “borderless” country.

A Crypto Token of Their Own

As cryptocurrency has exploded in popularity, it’s unsurprising to learn that Estonia is thinking of launching its own version. CNBC reported in August that ideas for the “estcoin” were being mulled over with input from Ethereum founder Vitalek Buterin. The estcoin is tentatively planned to go on sale in 2018 to raise money for the country’s e-residency program, and it is part of a wider strategy to make Estonia a hotbed for ICOs.

According to Kaspar Korjus, “We would want to structure the token so that it helps build our e-resident community and incentivize our own key objective, which is to increase the number of companies started in Estonia through e-Residency.”

Buterin was also positive on the idea: “An ICO within the e-residency ecosystem would create a strong incentive alignment between e-residents and this fund, and beyond the economic aspect makes the e-residents feel like more of a community since there are more things they can do together.”

The initial post by Korjus was followed by one in December re-emphasizing that the estcoin was no threat to the euro and outlining more detailed plans.There had been some pushback from the European Central Bank, who, unsurprisingly, did not like the idea of one of its member states floating anything sounding like a new currency.

Governments in China, Japan, Sweden, and perhaps most notably Venezuela are moving to introduce their own cryptocurrencies as well. Public opinion on the new token appears to be divided. Time is needed to see how these various endeavors play out, but if the estcoin succeeds, it could be the monetary glue needed to hold this “digital nation” together.

Final Thoughts

Estonia’s use of technology (generally) and blockchain (specifically) is light years ahead of most countries. A unique set of variables played out in their recent history paving the way for X-Road, KSI, Guardtime, digital identities, e-residency, and perhaps now the estcoin.

But how can other countries, lacking Estonia’s small size and its clean slate, follow their example?

It’s perhaps unlikely that other countries can take Estonia’s formula and simply cookie cutter it. But there are a lot of great ideas being experimented with, and the consensus seems to be that Estonia’s success is not so much about ditching legacy technology as it is about dropping old ways of thinking.

Marten Kaevats, Estonia’s national digital adviser was recently interviewed by the New Yorker, and he hit on perhaps the most important piece of all: “This enthusiasm and optimism around technology is like a value of its own, but it’s often missing the point. This is all really about the mindset. It’s about the culture. It’s about the human relations – it’s about what it enables us to do.”