The California Lottery

A Blockchain Transformation

Service Design & Digital Transformation Proof of Concept

Role: Service Designer

Team: Christine Lee

Timeline: 1 week

Scope:

  • Blockchain Technology

  • New Use Cases Exploration

  • Service Design

  • Customer Journey Mapping

  • Information Architecture

  • UX Design

The California Lottery Blockchain Transformation is a course project done over 1 week while enrolled at UCLA Extension’s Blockchain Technology Management Certificate Program.

As a designer with an entrpreneurial and startup mindset, I thrive in ambiguity, seeing the holistic overview and pinpointing strategic opportunities for innovation.

Background and Context

The California Lottery’s Mission

We are dedicated to maximizing supplemental funding for California public education.

Currently, state lotteries are operated in 48 jurisdictions and 45 states. These lotteries fund public programs from education, environmental conservation, veterans' programs, and social services.

The Stakeholder System

Problems and Challenges

Current legal issues, operational innefficiencies, and system flaws

The California Lottery has faced several controversies and legal disputes in recent years, highlighting issues ranging from prize claims to systemic concerns:

1. Prize Denial
Faramarz Lahijani sued the California Lottery, over breach of contract by not honoring the full prize. Ward Thomas sued the California Lottery and a local liquor store after the store failed to verify his son’s (ticket purchasers) age and that the lottery improperly denied his claim.

2. Stolen Tickets & Rightful Claims
A lawsuit was filed by Jose Rivera, who claimed the $2.04 billion Powerball jackpot ticket was stolen from him, adding to the lottery's legal and operational challenges.

3.Systemic Racism & Bias Allegations
Critics, including Les Bernal of Stop Predatory Gambling, argue that the lottery system disproportionately targets low-income communities, particularly people of color, by promoting gambling as a solution to financial struggles. This has been described as a form of "systemic racism" and "consumer financial fraud”

4. Underfunding of Public Schools
An audit revealed that the California Lottery owes millions to public schools, it recommended repayment of $36 million and stricter oversight to ensure funds are maximized for education.

5. Improper Spending
An audit revealed over $305,000 in improper or questionable spending, including $21,666 on branded swag and $131,832 on unnecessary employee travel expenses.

6.Unclaimed Jackpots
Unclaimed jackpots, such as a $200 million ticket, have also diverted funds to public schools, highlighting inefficiencies in the system.

Blockchain’s solutions and new opportunities

The following chart lists the problems, provides examples of blockchain’s offerings for advantagesm, and forecasts new opportuniites for innovating user experiences.

The Larger Issue

Through desk research, I found various new headlines that gave me more context into current events and problems.

Trump's executive order on Department of Education leaves local school districts in dark - USA Today

Public school districts share concerns over cuts to the Dept. of Education - MSN News

American Students’ Math Skills Slide Down World Rankings - Wall Street Journal

Trump’s cuts to the Department of Education is causing instability in public education funding. Currently public education relies heavily on federal & state funding with the lottery making up a small percentage.

Given the shifting dynamics and uncertainties in traditional funding structures, it may be time for states to explore alternative funding models and strengthen their state sovereignty to ensure more stable and sustainable support for public education.

Market and Growth

Since its inception in 1985, the California Lottery has seen much growth in revenue. From 2015 to 2023, we saw a compound growth rate of 5.46%.

Current projections anticipate $11.7 B in revenue for 2030. This would be a compund growth rate of 3.44%, much less than the 8 years prior.

What if?……

What if we revamped the lottery games, implementing blockchain technology to build the player experience while creating more brand trust and accountability.

Could we boost the success and bring in a revenue of $15B, almost doubling the expected compund growth rate?

Accessing the fitness of Blockchain

The California Blockchain Working group created a framework for assessing the fitness of Blockchain in various applications.

A. Lottery winnings are fungible tokens, and cryptocurrency is currently very successful.

B. Governmental & public services require a degree of transparency. These financial records are used in audits and can allow for more centralized/accessible information. A digital record can increase operational efficiency and resolve slow bureaucratic processes/silos.

C. This is a gray area. Since the Lottery is controlled by the State it is exempt from the CCPA. On the other hand, the Lottery is profit driven. The Lottery also involves various retailers that are for profit and public facing.

D. Regulators would be willing to participate as governments adopt more transparency measures.

E. The tangible touchpoint is a key player in the lottery experience, so retailers remain players in this system. Intermediaries that could be removed would be inefficient processes and systems.

F. Players will write and contribute to the ledger with their plays & wagers. The system will write and determine winners and share this with the California Lottery Commission. The public may be able to read with limited permissions, based on state government’s commitments to transparency.

G. Creating more trust will enhance public perception. This in turn will attract new customers and increase game popularity. More transparency also will reduce the amount of legal disputes.

Here’s how it works

Players access games by purchasing tickets with their digital wallets, while encryption ensures their personal data remains secure.

Distributed Ledger Technology maintains immutable, automated records, with retailers serving as nodes to validate purchase receipts and player wagers.

Once winnings are claimed, funds are distributed to designated recipients. Players can track how their purchases support public programs. This fosters more participation through offering transparency, creating trust, and a sense of contribution to the greater good.

System Design

Key System Players

Gamers/Players

Players face a variety of challenges when participating in lotteries.

Key concerns include:

  • Privacy risks, as malicious actors may target players.

  • Poor money management, leading to financial instability.

  • Tax complications that arise from unclear reporting or winnings.

  • Frauds and scams, often disguised as legitimate lottery offers.

  • Personal safety concerns, especially in high-stakes wins.

  • Legal disputes due to unclear terms or cross-jurisdictional issues.

Blockchain-based lotteries offer enhanced security by increasing player anonymity and reducing reliance on centralized systems.

The Games

There is more emphasis on digital games, though retailers are an important touch point.

Digital games are easier to implement and can be updated over time.

Winnings can be cashed out in different offers (fiat or cryptocurrencies of the player’s choice), incorporating more levels for gaming.

  • Cash out incentives/offers allow players to choose options that reduce their total taxation and proceeds can further fund programs.

The Distributed Ledger

This solution operates on a hybrid blockchain protocol. Some options include:

  • JP Morgan Quorum

  • IBM Blockchain

  • R3 Corda

Who has access: Stakeholders in the system. The public (non players) can have limited permissions just to read, but not write.

Consensus

  • KYC for digitial identity verifcation

  • Proof of Authority as trusted retailers secure the network

  • Verifiable Random Function for randomness and decreasing bias

The Retailers

Being keyed into the growth of physical locations is important to seize opportunities and secure contracts. 50% of lottery ticket sales come from convenience stores, especially those with gas stations attached.

  • Example: 7 Eleven has plans to increase their product offerings to fresh high quality food. They have a strong digitalization initiative to increase their operational efficiency. The retailer also plans to decrease emphasis for tobacco sales, creating an opportunity for lottery games to occupy the space.

The Recipients

Recipients such as education or public programs are always in need of funding. With new generations, more technology is being implemented, and schools are battling underfunding and understaffing issues.

Distribution of funds can be defined by AI algorithms to determine need based on shifting population demographics.

Recipient confidentiality is also important in transparent system. To protect recipients from facing backlash, it’s possible that we choose how much information we share.

  • Example: Sharing districts rather than specific locations

interoperability & Scalability

Currently, state lotteries may rely on computing power from other sources in other states.

By implementing a blockchain solution, this also triggers a standardization between all state lottery systems.

Additionally, the California Lottery has a contract with the International Gaming Technology PLC (IGT). This global gaming corporation provides point of sale and cloud based solutions to clients worldwide.

A combined effort to adopt blockchain will create opportunities for more decentralization.

Conclusion

Risks & Challenges

Challenges lie mainly in the transition and digitalization of government entities. This is a slow process, especially for a state run program.

Transitioning to this new system is also costly and requires buy in from stakeholders to collaborate on designing a system that serves all players.

Opportunities

Political shifts are driving the increased interest in new technologies in order to stay ahead of the curve.

Governor Newsom Signs Blockchain Executive Order to Spur Responsible Web3 Innovation, Grow Jobs, and Protect Consumers - Gavin Newsom

With a more open perspective, governments will want to adopt new systems and processes to drive economic and social progress.

The scope of the California Lottery is relatively small, making it an excellent pilot to inform future government implementations of blockchain