A Blockchain System for Azerbaijan’s Digital Economy

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.