Contributing to local government digital transformation by applying blockchain technology to the digitalization of contract-related operations

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In the past few years, Japanese business practices and administrative procedures have changed significantly. Due to revisions to systems and practices by the national government, along with amendments to existing laws and the enactment of new laws, local governments are relaxing or eliminating requirements for the use of physical seals and printed documents. Operations are being made more efficient through digitalization. The use of electronic contracts by local governments is becoming feasible thanks to the preparation of laws and operating environments.
In this issue, we will look at a Toshiba Digital Solutions electronic contract system that uses blockchain technology to provide greater reliability and security, improving the efficiency of local governments' contract-related operations.

The shift to electronic contracts is being accelerated by revisions to related systems

Business practices have undergone major changes as a result of the COVID-19 pandemic. Teleworking is being promoted by many companies, so the principle of "on paper, with a physical seal, in person" that has been so common in administrative systems and practices, along with the mentality behind that principle, is becoming societal problems. To make new business approaches more productive and to stimulate the economy, the national government is aiming to digitalize society as a whole with the aim of solving societal issues. It is taking the lead in making sweeping changes to systems and practices.

Revisions to regulations on the enforcement of the Local Autonomy Act in January 2021 relaxed the requirements that apply to the electronic signing of contracts with local governments. With these changes, electronic contracts, which have been electronically signed to indicate their creator and the fact that the contract has not been tampered with since it was concluded, have the same legal force as a printed document with a physical seal. Furthermore, the digital reform laws enacted in September 2021 relax or eliminate many requirements for affixing seals to documents or using printed documents for various administrative procedures. The enactment of these laws has made it possible to contract with local governments electronically, which was previously difficult. The number of local governments which have introduced electronic contract systems and services is on the rise.

For example, Nagasaki City is working to create a framework that offers a high level of reliability and security when concluding contracts with operators while reducing the amount of labor and cost involved. It is working to improve the overall efficiency of contract-related operations. To accomplish this, Nagasaki City and Toshiba Digital Solutions worked together for a year from September 2021 to verify the improvements and practicalities of contract operations with our electronic contract system. The result confirmed that the system reduced the amount of time required for administrative processing, reduced the amount of revenue stamps that needed to be purchased by business operators, and helped improve the teleworking environment. The city began full-fledged operation of the system in June 2023.

* News release regarding the full-fledged operation of the system by Nagasaki City (Japanese website).

Before looking at our electronic contract system in depth, let's briefly go over electronic contracts themselves.

In general, there are two types of electronic contracts. “Contract party” type contracts are electronically signed by the parties concluding the contract. “Witness” type contracts are signed by an electronic contract service provider as a proxy for the parties concluding the contract, specifying the electronic contract service users as the contracting parties. For many of these systems, the files must be PDF files. Although contract party-type contracts have a high level of identification, they are costly and troublesome for the contracting party. Witness-type contracts place less of a burden on the signatories to the contract, but are said to involve a higher risk of impersonation.

We provide an electronic contract system that uses electronic signatures with a high level of identification reliability but which minimizes the burden placed on signatories. The system achieves this with blockchain technology. The blockchain can be used to prevent tampering and ensure that accurate data is recorded and maintained, so the data can be managed securely. Let's look at how this technology is used in our electronic contract system.

* See the DiGiTAL T-SOUL technology explanation running feature for a more detailed explanation of blockchain and our technologies.

Using the blockchain to create a secure, highly reliable, and highly transparent electronic contract system

When local governments place a great deal of importance on identification and wish to use contract party-type electronic contracts, the approach that is most commonly used today is for the party signing the contract to receive an electronic certificate issued by a certification authority and use it to sign the contract. This is both a costly and laborious process for the contracting party.

We use blockchain encryption technology to produce electronic contracts with a high level of identification while reducing the burden placed on the signatories. Specifically, an IC card with an embedded electronic certificate used for electronic bidding, or a user ID, password, and associated private key, are used to verify the signer's identity and conclude an electronic contract. A hash value for the electronic contract and the fact that the contract was signed are recorded in the blockchain. This system makes it possible to detect if the contents of the contract are changed after the contract is signed. It enables the secure management of records of agreement to contracts with a high level of reliability and transparency. Furthermore, this blockchain-based mechanism can also be applied to electronic documents in conventional file formats other than PDFs, such as the various documents that are attached to contracts and documents appended after contracts are signed (drawings, photographs, etc.) (Fig. 1).

In this way, the blockchain is used to create electronic contracts that specify their signatories, eliminating the need for signatories to procure electronic certificates. It also flexibly handles different file formats, reducing the burden placed on signatories. Under the system to eliminate regulatory gray zones* established in accordance with the Act on Strengthening Industrial Competitiveness, our system has been confirmed to comply with both the Construction Business Act and the Act on Electronic Signatures and Certification Business.

* The system to eliminate regulatory gray zones: A system that allows businesses to confirm in advance whether regulations will be applied to their specific business plans. Even if the scope of application of the current regulation is unclear, business operators can engage in new business activities with peace of mind. We have confirmed that this system meets the requirements set forth in Article 13-4, Paragraph 2 of the Construction Business Act Enforcement Regulations and Article 2, Paragraph 1 of the Act on Electronic Signatures and Certification Business.

The three features of our electronic contract system, which provides assistance with all kinds of contract-related operations

Our blockchain-based electronic contract system supports not only electronic contracts, but also all kinds of other contract-related operations that are involved both before and after electronic contract signing. Specifically, it offers functions that support the exchange of contract-related documents between the contracting and contracted parties, the sharing of contract information, the contents and progress status of work such as construction work, the registration and management of deliverables after work is completed, and the issuing of billing statements. This digitalizes overall contract-related operations and makes them more efficient.

Our electronic contract system has three key features.
The first is that it is designed in such a way as to keep operations flowing. As mentioned earlier, electronic contracts can be signed with IC cards used for electronic bidding and with user IDs, so the process from electronic bidding to electronic contract signing can be performed with a single sign-on (SSO). Both contracting and contracted parties can see contract projects, so they can confirm the progress status of individual contracts.
The second key feature is that it enables the sharing of documents and consensus formation in line with individual business types. The electronic contract system organizes and shares the documents necessary for contracts based on business categories such as construction work, construction consulting, and merchandise sales. The system makes it possible for the local government body placing the order to designate the forms it requires and for the operator receiving the order to obtain those forms, reliably, accurately, and quickly. Another convenient aspect of the system is that it enables the flexible setting of processes such as contract signing and revision processes in alignment with the decision-making standards of individual local governments. Furthermore, the documents such as notices, drawings, and reference documents that are attached to contracts can be electronically signed and recorded in the blockchain, linked to the contract, to manage them securely. This eliminates the need for the operator to submit paper documents bearing their seal, contributing to going paperless.
The third key feature is that the system provides the functions needed for contract-related operations. The electronic contract system provides various functions to be used in situations that could arise during the contracting process. For example, it has functions for sending back submitted documents, and for handling contract declines by operators and contract terminates with operators. Furthermore, in addition to contracts with single operators, the system also supports three-party contracts, joint venture contracts, and the like, in order to enable contracts that are in line with the actual situation.

Improving the overall efficiency of procurement operations through integration with electronic procurement systems

This electronic contract system can be integrated with the electronic procurement systems we have provided to local governments for years to promote even greater operation efficiency improvements. This is because contract-related operations are positioned as one type of procurement operation.

Electronic procurement systems are centralized management systems that cover all procurement operations for local governments, from order placement to contracting, inspection, and receiving, for construction work and construction consulting, merchandise sales, operation contracting, and the like. It is composed of subsystems for supporting operations such as applying for bid participation qualifications for operators (order recipients), managing operators who have participation qualifications, publicly disclosing bidding-related information, performing electronic bidding, and managing bids and contracts (Fig. 2).

One of the procedures within these processes is the concluding of a contract between the local government and the operator once bidding has been completed and the operator that will handle the project has been decided on. The electronic contract system used when concluding contracts can be linked to the electronic procurement system to enable the use of the electronic contract system with a single sign-on, as mentioned above, to confirm the list of contracted projects and the progress status of individual contracts, and to acquire information about operators and contracts registered in the electronic bidding system.

In addition, after confirming an electronic billing statement, billing information can be provided to accounting or document management systems. This helps with the digitalization of entire contract-related operations through integration with related systems, it improves the efficiency of entire procurement operations while eliminating paperwork, and it promotes the digital transformation (DX) of local governments.

Future potential for community currencies, crop traceability, and more

We want to use our blockchain platform, which is vital to this electronic contract system, to assist local governments with promoting DX and creating new services for residents.

For example, it could not only be used to verify that electronic documents are authentic and have not been tampered with, but also in community currency and volunteer points, full-fledged traceability for local crop and industrial goods supply chains, new real estate registration, electronic voting from anywhere, efficiency improvements for disaster support and disaster victim certificate operations, the simplification of furusato "hometown" tax system operations, and other initiatives for the smartening of society as a whole. We will continue to use this foundation in efforts to address the issues faced by society (Fig. 3).

  • The corporate names, organization names, job titles and other names and titles appearing in this article are those as of September 2023.
  • All other company names or product names mentioned in this article may be trademarks or registered trademarks of their respective companies.
  • Our electronic contract system is not currently available for purchase outside Japan.
  • The translations of Japanese laws and regulations are not the official text and include some laws and regulations that have not been last revised. Please note that it is the Japanese laws themselves that have legal force, and that the translations in this article are for reference purposes only to aid understanding.

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