PROPOSED INTER- AGENCY AGREEMENT (IAA) PILOT

Transcription

1 White Paper BLOCKCHAIN AND INTRAGOVERNMENTAL TRANSFERS (IGT): PROPOSED INTER- AGENCY AGREEMENT (IAA) PILOT Prepared for the Bureau of the Fiscal Service In accordance with FAR Part , this submission is provided with the intent to exchange information with the Government the contents of which are consistent with procurement integrity requirements per FAR Further, the content is not intended to be included in a future competitive acquisition

2 THE MISSION The Bureau of the Fiscal Service (Fiscal Service) has the critical responsibility of maintaining the Federal government s set of accounts and serving as the repository of information about the financial position of the United States government. The Bureau closely monitors the government s monetary assets and liabilities through its oversight of central accounting and reporting systems. The Fiscal Service oversight responsibilities include helping federal agencies use uniform accounting and reporting standards, operating financial accounting systems and assuring the continuous exchange of financial information between federal agencies, the Executive Branch s Office of Management and Budget, and financial institutions. Critical to this mission is timely and accurate reconciliation of intragovernmental transfers (IGT). WHAT IS IGT RECONCILIATION? If two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the consolidated financial statements. FY 2016 U.S. GOVERNMENT ACCOUNTABILITY OFFICE INDEPENDENT AUDITOR S REPORT THE CHALLENGE: RECONCILIATION AND IGT Despite considerable automation and process improvement, managing the financial and accounting systems and related information processes is inherently costly and time consuming for the Federal government. As it has for each of the past 20 fiscal years, the U.S. Government Accountability Office (GAO) issued a disclaimer of opinion on the FY 2015 Financial Report of the U.S. Government. In its report, GAO cited the government s difficulty to adequately account for and reconcile intragovernmental activity and balances between federal entities as a material weakness and a major impediment to expressing an opinion. In recent years, the Fiscal Service has made considerable progress in addressing this weakness. Through various initiatives and continued collaboration and commitment from all Federal entities, Fiscal Year (FY) 2016 resulted in the successful closure of two outstanding IGT audit recommendations: (1) the development of Expanded Quarterly IGT Metrics and Scorecards; and (2) the development of root cause analysis and corrective action plan implementation and monitoring. This resulted in a reduction of total raw data differences decreasing by $6.4 Trillion. However, the complexity of the IGT tracking and management system still leads to the emergence of unreconciled balances. TRILLIONS For example, as shown below in Figure 1, in Q1 of FY17, unreconciled balance had risen to $2.8 trillion. Blockchain is an innovative peer-topeer distributed ledger technology that allows for near immediate reconciliation and instant auditability of balances. With this technological Figure 1 Summary IGT Transactions TOTAL IGT DIFFERENCES TREND $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $- $4.71 $3.45 $3.47 $0.07 $2.76 Q1 FY16 Q2 FY16 Q3 FY16 YE FY16 Q1 FY17 breakthrough Fiscal Service can finally enforce federal policy for reconciliation. The use of this technology for IGT might substantially reduce outstanding reconciliation balances and reduce the effort involved in resolving these balances. TREND IN TOTAL STANDARD IGT DIFFERENCES BILLIONS TREND IN TOTAL GENERAL FUND DIFFERENCES $10 TRILLIONS $250 $200 $150 $100 $50 $- $8 $6 $4 $2 $- $ $4.51 $ $ $3.29 $3.30 $25.97 $0.05 $ Q1 FY16 Q2 FY16 Q3 FY16 YE FY16 Q1 FY17 $2.65 Q1 FY16 Q2 FY16 Q3 FY16 YE FY16 Q1 FY17 1

3 BLOCKCHAIN: A DECENTRALIZED SOLUTION TO IGT CHALLENGES Blockchain is an open source value transfer and accounting protocol that runs on a distributed peer-to-peer computer network and secures transaction records (on distributed ledgers ) through cryptography. On a blockchain every participant on the network has a copy of the transaction ledger. Ledger entries are secured by strong cryptography and each transaction must be agreed to by the most of the participants to make it into the ledger. This allows for better security, transparency, and trust while reducing costs. Table 1 shows some of these benefits. Table 1 Benefits of Blockchain Over Conventional Transaction Systems ATTRIBUTES SECURITY SPEED COST CONVENTIONAL TRANSACTION SYSTEM BLOCKCHAIN BENEFITS OF BLOCKCHAIN Transactions between parties are managed and validated by a middleman or clearing house Single node holds all data on exchanges between parties and guarantees security Middleman spends time and resources validating transformation Middleman charges for services provided Transactions are peer-to-peer basis and are validated algorithmically on a ledger shared with everyone All nodes exchange data, encrypt transactions, and validate algorithmically All nodes simultaneously validate transactions and exchanges Costs of validation are a fraction of middleman s costs Blockchain permits low-cost, fast, highly secure, transparent, and unchangeable transactions between trustless parties Almost impossible to hack all nodes must be hacked simultaneous Blockchains can validate transactions almost immediately (i.e., T+0 rather than T+3) Low or no-cost validation RECONCILIATION Middleman and parties to exchange must reconcile records Reconciliation happens immediately on shared ledger Avoids all reconciliation and thus further reduces costs TRUST Parties to exchange must trust the middleman Parties to exchange trust the algorithm and the shared ledger Permits frictionless transaction between trustless parties IMMUTABILITY Middleman controls the ledger and promises not to change Once the ledger is validated it is unchangeable Blockchain records cannot be changed increasing user trust TRANSPARENCY/ AUDITABILITY Middleman keeps transaction secret and audits them All transactions can be made transparent for all parties to see Users know they have occurred related to their assets increasing user trust RELIABILITY Central repository for reconciliation is also a single point of failure The data is reconciled immediately and the status of a transaction is recorded on all nodes automatically Reliability is improved: exact copy of all data is distributed among all nodes 2

4 Blockchain is a potential solution to the challenge of managing reconciling IGT. However, the magnitude of the potential change associated with moving Federal IGT to a blockchain system is immense and highly risky. To achieve benefits of blockchain for IGT, pilots and proof-of-concepts need to be undertaken. Piloting Shadow (Block) chains that run in parallel to existing systems of record and reconciliation processes could substantially mitigate the risks of IGT pilots while enabling an incremental and proven approach to reconciliation and auditability of transactions. Treasury Franchise Fund (Fund) and Interagency Agreements (IAA) provides a potential opportunity to explore and test the potential benefits of blockchain. The Fund is an entrepreneurial governmental enterprise established to provide to other components within Treasury and/or to outside agencies, common administrative support services, on a competitive and fully cost-reimbursable basis. Despite the Fund s efficient operations, problems can arise reconciling accounts. Reconciliation can take considerable time and resources and reduces the efficiency of its operations. Blockchain smart contracts could be used to manage transactions automatically, reducing costs and eliminating reconciliation errors. THE CURRENT IAA ACCOUNTING PROCESS An inter-agency agreement (IAA) is a contract in which the requesting agency (RA) agrees to compensate the servicing agency (SA) a certain amount for a specified set of deliverables, such as goods and/or services rendered. The IAA lays out the timeline for the delivery and other conditions in detail. It also specifies the process for resolving disagreements and penalties for breach of contract. Payments are transferred between one or more agencies and accounted under specific Treasury Account Symbols (TAS) of the RA and SA, with specific TASs explicitly associated with specific IAAs. Each agency typically has its own system of identifying and storing IAA s. Currently, there is no uniform government wide system of registering and storing IAA s, far less a common framework for interpreting or recording transactions that follow the IAA. When deliverables are furnished by the SA, it is the responsibility of both agencies to account for this transaction in their respective United States Standard General Ledgers (USSGL). It is during the entry of these transactions that errors occur, preventing reconciliation within the Governmentwide Treasury Account Symbol Adjusted Trial Balance system (GTAS ATB). There are several possible sources of error. First, the TAS, the amount of the transaction, or the identification of the deliverable could be entered incorrectly into the USSGL. Second, the two agencies could use different level of detail aggregation resulting in reconciliation difficulties. Third, the SA and RA could enter the transactions at different times and even during different reporting periods resulting in irreconcilable transactions. PROPOSED PILOT: IAA TRACKING FROM THE TREASURY FRANCHISE FUND USING SMART CONTRACTS To eliminate reconciliation errors, a blockchain-based solution will establish a trackable, verifiable, and auditable repository for IAA. In addition, the complete system will feature simpler IAA generation via a Decision Support System (DSS), automatic contract generation, and automatic accounting and payments triggered by the delivery events. Each IAA will correspond to a smart contract on the blockchain with unique complex logic and structure of the deliverables, payments, verification of delivery, and modification of the IAA conditions. For example, the contract could contain a list of designated approvers from the RA for each delivery and require that their cryptographic signatures are present to verify delivery and release payment to the SA. Another possibility is the automatic execution of penalties when delivery deadlines are missed. The internal variables of the smart contract which describe the current state of execution of the Agreement could be monitored by Robotic Automation Systems (RPA) bots at each agency. Changes in the state of the contract will be reflected in a consistent and reconcilable manner in the respective USSGLs. Lastly, a government-wide RPA bot will monitor the payments issued within all registered smart contracts and transfer cash between the agencies using the Intra-Governmental Payment and Collection (IPAC) system. 3

5 Booz Allen Hamilton will deliver a Decision Support System (DSS) based platform for the automatic generation and deployment of smart contracts from user input. Execution lifetime of the contract will be monitored by RPA agents, also implemented by Booz Allen, at each agency which will enter transactions into the USSGLs and a central government wide RPA which will execute transfers between the TAS using the IPAC when each deliverable is marked in the contract as delivered. The complete workflow of the proposed blockchain based system of executing and tracking IAAs is as follows: 1. An employee of the RA logs into the DSS and enters the IAA parameters by answering a series of questions. 2. The traditional IAA General Terms and Conditions GT&C and one or more orders are generated for review. 3. Once the parameters of the IAA are finalized, the smart contract is automatically generated and deployed onto the blockchain. 4. Upon delivery of each deliverable, authorized approvers log into the system and cryptographically sign the delivery record of the smart contract which results in the transfer of balances from the RA account to the SA. 5. Each agency s RPA agent detects the contract state change and records the transaction into the USSGL. 6. Government wide RPA detects the contract state change and transfers funds between the TAS of the RA and SA using the IPAC. 7. The RPA agents can detect other events on and off the blockchain if more complex business logic is required in the contract. Deadlines, prior deliverable fulfilment, or disputes can all be handled automatically and autonomously by the smart contract. Figure 2 Blockchain as a Solution 4

6 PATH FORWARD FOR IAA PROGRAM A BLOCKCHAIN PILOT Smart contracts could be used to track and instantaneously reconcile payments and remittances for IAA. Specifically, the pilot would be developed as a proof-of-concept Shadow Chain solution in a test environment that would demonstrate the efficiency and savings of a smart contracts-based accounting system. Specifically, the proof-of-concept would: (1) Develop an open-source, proof-of-concept IAA tracking application within a private test blockchain environment; (2) Develop high-level business case to show the value of smart contracts; and (3) Develop an implementation plan to show how the solution can be scaled and implemented for the Fund. We propose a three-phase approach that can be iterated and adapted to challenges as they arise. These phases are feasibility assessment, proof-of-concept development, and operational planning FEASIBILITY ASSESSMENT In this phase, we propose to conduct a feasibility assessment to explore the potential to use blockchain as a solution for tracking IAAs. We will launch focus sessions with those involved with the IAA process and gain access to all the programs and interfaces that the blockchain application would touch. We will examine available data and review Treasury and other requirements. We will also work with the Treasury to determine the optimal approach for stand up a development environment for the creation of the proof-of-concept. Managing scope and associated implementation risks is key and towards that end this pilot will focus on two agencies (preferably within Treasury), specific IAA and associated TAS. The end deliverable for this phase will be a feasibility/ gap assessment backed by detailed proof-of-concept plan for developing blockchain for the IAA Fund process. PROOF-OF-CONCEPT DEVELOPMENT Next, we will develop a proof-of-concept or pilot in a test environment. The pilot will show how the blockchain based solution would function and interface with other systems. It will be developed in open-source software (e.g., Ethereum) and will meet the requirements identified in Phase 1. The end deliverable for this phase will be an end-to-end proof of concept, built and deployed in a development environment, demonstrating the ability of blockchain technology to reduce the cost and time for IAA reconciliation related to Fund transactions. OPERATIONAL PLANNING If the blockchain pilot is success, we will develop a plan for moving it into operations. This will include the business case, strategy, change management, and security considerations for moving out of the development and into a production environment. The end deliverable for the refinement phase will be a plan, including the business case analysis, for moving for moving the blockchain proof-of-concept into an operational environment. 5

7 CONCLUSION Blockchain based smart contracts can radically reduce the cost and time involved in reconciling IGT. We believe that a pilot of the IAA Fund can serve as a test of this potential and help the Fiscal Service and the Treasury understand the potential of blockchain. We have successfully implemented similar pilots for other Federal agencies (e.g., NSA, FDA) and have shown the utility of blockchain in these engagements. With this experience we believe we can deliver a successful pilot test to the Treasury within 12 weeks following the phases described above. 6

8 Our Subject Matter Experts Paul Tartaglione Vice-President Ram Ravi Vice-President RK Paleru Principal Marc Weber Principal Stacey Selenfriend Principal Booz Allen Hamilton has been at the forefront of strategy and technology for more than 100 years. Today, the firm provides management and technology consulting and engineering services to leading Fortune 500 corporations, governments, and not-for-profits across the globe. Booz Allen partners with public and private sector clients to solve their most difficult challenges through a combination of consulting, analytics, mission operations, technology, systems delivery, cybersecurity, engineering, and innovation expertise. With international headquarters in McLean, Virginia, the firm employs more than 22,600 people globally and had revenue of $5.41 billion for the 12 months ended March 21, 2017 Booz Allen Hamilton Inc.

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