Member Spotlight: Civic Ledger, Digitally Transforming Water.

“Whiskey is for drinking, water is for fighting over”  —  Mark Twain.

The allocation of water rights in Australia has recently been the subject of media attention, particularly surrounding the Murray-Darling Basin, where an over allocation of water rights in the second half of the 20th century has led to a water shortage. Since water rights are regulated by the states, the systems are far from unified. There are four state registries, seven regulators, around 300 water products, and over 15,000 business rules that government water trades. Each register also attracts a fee to gain access and perform searches.

What is a water licence?

Generally, a water licence specifies things such as which individuals can use water, the volume of water that can be used, the location and time of use and whether the rights under the licence are transferable. There are two types of licences in Australia; allocations and entitlements. An entitlement is an ongoing right to a yearly share of water from a particular water source, whereas an allocation is a volume of water that is allocated in an entitlement in a given year. The way these are traded also differ. A trade of an entitlement is a permanent transfer of water access rights, whereas a trade of an allocation is a temporary transfer of water within a given time period. 

Water trading

The most active water trading market in Australia is the Murray-Darling Basin market (“MDB”), where 97% of all allocation trades, and 77% of entitlement trades are made. The MDB market, however, is only for the Murray-Darling Basin. Other water resources have their own independent markets. This, coupled with the various state registries makes for an opaque system that would be subject to friction that would slow transactions, increase costs, and reduce transparency. Generally, these markets have received criticism for a lack of reporting as to who is trading what resources, and who is ultimately benefiting from these trades. Some of these issues have been identified in MDB market by the Australian Competition and Consumer watchdog (“ACCC”) who are undertaking an inquiry into the market to assess, among other things, market transparency, regulation and market participation and behaviours. 

Water Ledger

Naturally, as technology advances, new market solutions develop. Blockchain has been one such development that, as of late, has seen greater and greater application to improving the transparency of markets, record keeping and lowering cost through a reduction in systemic friction. To solve the above problems in the water market, Civic Ledger has recently announced a collaboration with the Government agency, the Cooperative Research Centre for Developing Northern Australia (“CRCNA”) to develop a pilot blockchain water trading platform for the Far North Queensland region called the Water Ledger. Water Ledger is a public blockchain, with the public network being responsible for the nodes. “Like all public blockchains, no one owns the blockchain which in this instance is desirable meaning that all users can participate in the water market equally and at a vastly reduced cost,” says Civic Ledger CEO, Katrina Donaghy. “The role of the government is to ensure fit-for-purpose regulation to enable the water markets to function – is not their role to operate the water markets.”

Water Ledger is built on the Ethereum blockchain, and utilises the ERC 1753: Smart Contract Interface for Licences standard to handle the issuance of licences and permits. An ERC 1753 Licence can be:

• granted personally to the licencee, and may be transferable; 
• confers a temporary right to the licencee to own, use or do something that would otherwise be prohibited without giving that person a property interest; 
• allows a government authority to amend, revoke, renew, suspend or deny issuance;
• Is generally only issued after payment of a fee or some other criteria is met; and
• A licence may be issued in respect of certain information, such as a registration number. 

“To assess, grant, issue, monitor and revoke a licence is largely a manual, paper-based process with data from these processes held in disparate databases across multiple entities – it is a costly exercise and consumes many resources in verifying information, rekeying this information and then issuing the paper-licence to the licencee,” explains Ms Donaghy. “We hope that by using our smart contract interface for water licences it will automate the process of confirming and issuing the licence (digital format) – who is entitled to take how much water – and those who have an interest in this state will have that information updated into their respective systems automatically – saving time and costs, reducing errors and improving the overall user experience – and increasing confidence and trust. 

Katrina Donaghy, CEO of Civic Ledger

Using blockchain technology and smart contracts, Water Ledger will be able to provide a peer-to-peer market without a need for intermediaries. The platform will be able to capture and publish all trades in near real time, with an ability to easily accrue and publish trend information. Additionally, the use of smart contracts will allow for most business and trading rules to be built into the system, which will reduce friction and uncertainty for market participants. “If the water authority has to update the business rules associated with the water allocations, these rules can be amended or revoked in real time and again, all systems which have an interest in this information are updated automatically – one truth or consensus of who has what and who can trade what,” says Ms Donaghy. This effectively allows market operators to roll out changes to rules immediately and transparently to all participants. Trades will also be published simultaneously to state registers. As a result, trades will become faster, cheaper and simpler than ever before. An immediate example of the benefit of this system would be its application in trading of water allocations between irrigators. Currently, these trades can take weeks to settle. However, using Water Ledger, settlement time would be reduced to a near instant.

Water market accessibility may also be improved either through an amalgamation of State-based regulated water markets, or consistent regional deployments. Ms Donaghy explains that “one of the features of water markets particularly in the Murray Darling Basin States, is that each State Government – Queensland, NSW, Victoria and South Australia – is the regulator and owner of the water registries.  This means that we do need to consider the manner to which these jurisdictions function and the business rules as each vary greatly.  There is an opportunity to revisit the idea of a national water market and how it could be designed using advanced technologies such as blockchain where each jurisdiction is recognised and not absorbed into a one size fits all approach.  We are aware that there was an attempt to build a national water market in 2009 that ended up blowing out to a cost of $56M yet was never finished.”

In their development of Water Ledger, Ms Donaghy notes that Civic Ledger encountered significant challenges, namely bringing their solution to the market too early. “We solved the problem of lack of transparency in the Australian Water Markets at the end of June 2017 however at the time the Four Corners broke the story on the corruption in the NSW Government and its water markets so all of a sudden water came into focus with the Australian public.  Another challenge was education – that blockchain technology was the underlying data structure to cryptocurrency – so we had many doors closed on us in the early days. But like anything, it is always about timing.”

Learning from the challenges that Civic Ledger encountered, Ms Donaghy has a key tip for startups and fintechs that want to bring a blockchain solution to market. “My key tip is to focus on the problem first and the technology second.  It is not simply as putting blockchain into the solution and then calling it a “blockchain solution”.