At a glance
- Charities continue to face systemic challenges relating to transparency and efficiency.
- Proponents of blockchain technology suggest that, if implemented well, it can help address these issues and play a positive role in the future of the charity sector.
- One of the main arguments for the use of blockchain is its ability to decentralise transactions, which can enhance accountability, decision-making and overall efficiencies.
By Sonakshi Babbar
Every now and then, a charity makes headlines for all the wrong reasons, often relating to governance failings.
“Charities struggle with inefficient, underfunded administration, and often can’t direct aid adequately and frequently to the most vulnerable,” says Dr Jana Schmitz, policy research analyst at CPA Australia. “Donors are concerned about where their donations end up,” she says.
Dr Sanjaya Kuruppu, senior lecturer in accounting at the University of South Australia, has done extensive research on corporate social responsibility and the governance of non-government organisations. Kuruppu says blockchain’s ability to decentralise transactions can transform accountability, decision-making and auditing in charities.
Blockchain was released in 2009 as the underlying platform for the cryptocurrency Bitcoin, and is now used by the financial services, telecommunications and insurance sectors, and other companies. Gartner estimates blockchain will generate US$3.1 trillion (A$4.3 trillion) in new business value by 2030.
Understanding blockchain solutions
“Blockchain is a distributed ledger system in which transaction records stored in blocks are maintained across several computers,” Schmitz says. “This allows all network participants access to the distributed ledger and its unchangeable record of transactions.
“A public blockchain network is completely open, and anyone can join and participate,” explains Schmitz. “Bitcoin is one of the largest public blockchain networks in production today. “A private blockchain works based on access controls,” Schmitz says. “Only those participating in the private blockchain network will have permission to read, write or audit the blockchain.
“If a charity uses a private blockchain, the charity can decide who is allowed to participate in the network. Depending on the use case, this can significantly boost trust and confidence between participants, in this case, the charity and donors,” Schmitz says.
Blockchain's value in the charity sector
1. Greater transparency and accountability
“One of blockchain’s most attractive features for donors is that it enables highly visible and traceable transactions, allowing donors to track donations throughout the supply chain, from the beginning to the end and verify where their funds went,” Schmitz says.
To encourage transparency, organisations such as the UN World Food Programme have started to incorporate blockchain into their funding and distribution model, says Schmitz.
2. Responding and adapting to project needs
All charities are expected to measure the effectiveness of grants and investments that seek to benefit communities.
“In a typical charity setting,” says Kuruppu, “projects undergo a mid-term and end-of-project performance review, by which time it is usually too late to substantially alter activities based on the needs of the beneficiaries.”
“Charities can be more responsive to the needs of the vulnerable through blockchain’s instantly verifiable nature that provides real-time performance insights and reporting about the effectiveness of charitable projects,” Kuruppu says. “Another benefit is that it enables funds to move between charities quickly and efficiently when they come together as a consortium on a large project.”
3. Improved trust
Blockchain allows the development of “smart contracts” – software applications that can enforce an agreement or action without human intervention if pre-defined conditions are met.
“Making each donation or investment dependent on the achievement of specific project goals allows charities to transparently demonstrate their ‘proof of impact’,” Schmitz says.
“For instance, a smart contract could provide donors interested in education in developing countries the power to donate after verifiable enrolment and/or completion of education courses,” she adds.
4. Greater efficiency and compliance
When charities receive a grant, they go through a time-consuming and laborious grant acquittal process to explain where the money was spent, says Ram Subramanian, policy adviser – reporting, at CPA Australia.
“Blockchain can allow automatic verification of where money was spent. This would save the manual effort required on data capture and record management, and save some of the money spent on independent verification.”
5. Reduce admin and operational costs
Katrina Donaghy, CEO and co-founder of Civic Ledger, an award-winning blockchain company, says that, for charities, conducting background checks on staff, volunteers and humanitarian workers is a significant burden in terms of paperwork and compliance.
“In mid-2018, the Australian Red Cross worked with TypeHuman, a Melbourne-based blockchain company, to explore how blockchain technology can streamline the background check processes and increase the sector’s capacity to take humanitarian action,” she says.
“As this inefficiency has duplicated across the sector,” explains Donaghy, “a growing coalition of organisations [the Trust Alliance] has come together through TypeHuman to shepherd the emergence of an open credential ecosystem and to address the digital coordination problem.”
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The way forward
“Blockchain is still largely elusive within the Australian charity sector,” Donaghy says. “Charities are by nature slow to adopt new technologies for several reasons – namely resources, and, ironically, a lack of operational funds to invest in technology.”
“It is still early days,” says Subramanian. “Until a new ecosystem is developed with support from regulators and is tried and tested with larger charities, the majority of charities in Australia won’t have the knowledge and resources to explore blockchain.”
Kuruppu believes charities and regulators evaluating blockchain solutions should look at existing blockchain powered platforms. “For example, charities can raise funds in a cost-effective and faster way by using ready-made platforms like AidChain.”
Schmitz adds, “IBM and other technology giants have already built ‘off-the-shelf’ blockchain solutions for charities.”
According to Donaghy, the biggest impact blockchain technology can have on the charity sector lies with the charity regulator – the Australian Charities and Not-for-profits Commission (ACNC).
“Rather than individual charities exploring the potential of blockchain technology and carrying the costs for this discovery activity,” says Donaghy, “the ACNC has an opportunity to lead the digital transformation conversation and develop an overall strategic roadmap for the adoption of this emerging technology.”
As with any new technology, there are possibilities and reservations. If blockchain is going to disrupt the charity sector, then this may be how it begins.