Co-authored by Dr Jane Thomason, Decade of Women Quantum Impact Award recipient and CEO of ABT Associates Australia, and Lauren Weir, leader in partnership development, management and health services in Africa and South Asia, and Corporate Global Engagement Advisor for ABT Associates.
Approximately $177.6 billion is provided by donors to developing countries annually. (OECD, 2017) Remittances are estimated at over double this amount, with US$574 billion in 2016. (Pew Global, 2016)
Donors distribute their funds through systems that are costly, cumbersome, and porous. It can take nine months for money from the US Government to reach the field, and funds typically go through multiple intermediaries, each of which takes a sizeable fee. Add on auditing costs, and aid shrinks by double-digit percentages before it reaches beneficiaries. (Blockchain: Economic Model: A Pitch to Governments) Estimates vary that this may be as much as $15 billion USD in lost funding. And that’s before what the UN estimates is a 30 percent loss due to fraud and corruption. (Jenny, Ravelo, “30 percent of aid lost to corruption- Ban Ki-moon”, Devex, July 12, 2012/ July 5, 2017)
The cost of remittances varies from 10-30%, even taking the lower estimate, that equates to over US$ 5 billion annually, that is taken by intermediaries. The international development community can and should increase the impact of the vast dollars it spends on aid.
How can Blockchain improve speed, transparency and efficiency in donor fund flows?
Blockchain technology can enable more money to reach beneficiaries faster by increasing system efficiency. Bitcoin is the best known example of a blockchain use case. Transfers are fast, seamless, and inexpensive. Blockchain improves cost efficiencies in two areas–verification and networking–by bypassing traditional middlemen who provide both services and charge fees for doing so.
Blockchain technology provides a digital solution that enables participants to validate transactions without traditional intermediaries. Participants rely instead on sophisticated algorithms to create unbreakable codes and consensus rules for a distributed ledger—a file much like a database–that reflects transactions or assets (blocks) in chronological order (the chain).
Costs for this process are low: “Digitization has pushed verification costs for many types of transactions close to zero,” Christian Catalini of MIT and Joshua S. Gans of the University of Toronto noted in a 2017 article. “Blockchain technology completes this process by allowing for costless verification.”
Donors can reduce verification costs if they can authenticate transactions without a full-blown audit or paying an intermediary to verify transactions. Donors can cut networking costs by bypassing traditional intermediaries. Blockchain enables donors to establish the rules on their own platforms and the encrypted currency or tokens they use for payment to contractors or ultimate beneficiaries. The encryption secures transactions and limits creation of new units of the currency. As the number of users grows, costs for each user decline and participation in the network becomes more attractive or even a necessity (the networking effect).
Smart Contracts Facilitate Targetted Payments
Donors can cut costs and improve targeting with digital smart contracts.
Smart contracts are computer programs that act as pre-programmed agreements with the ability to self-execute and self-enforce. Take, for example, a contract for a company to reduce emissions of a pollutant. When a sensor connected to the Internet of Things detects that the target area has reached contractual emission reduction targets, the sensor’s reading automatically activates the transfer of funds to the company.
Donors can use smart contracts to ensure that donor funds reach intended recipients such as healthcare providers without middlemen and leakage along the way. They can track aid delivery by showing the location in the supply chain and ultimate delivery. A smart contract could unlock a delivery payment to a healthcare provider when the provider notes in an existing national health data base (health management information system) or electronic medical record that it has delivered the service, and the patient confirms receipt of the service. The patient would use a blockchain-enabled identity for the confirmation. The blockchain also can provide a record of care achieved through the funding.
Transparency and Traceability
Innovators are starting the bring blockchain applications to help international development. Disberse.com, for example, is a fund management platform designed for the global development sector built on blockchain technology. It enables donors, governments, and non-governmental organizations to transfer and trace funds through the whole chain from donor to beneficiary. It has potential for use for social cash transfers to enable mobile money transfers and voucher schemes for the most vulnerable.
A Disberse pilot in Swaziland partnered with a UK charity, Positive Women, which supports vulnerable women and children in Swaziland who are infected or affected by HIV/AIDS. Positive Women raises funds in the UK from individuals and foundations and then distributes the funds to partner non-government organizations (NGOs) in Swaziland. This pilot focuses on school fees and a wider personal development support program. The pilot enabled Positive Women to reduce its transfer fees and trace the flow of funds down the chain, resulting in zero losses at the points of delivery. Funds went from the UK to four Swazi schools via a local NGO.
Blockchain’s distributed nature and rapid verification of transactions makes it a valuable resource for many government and organizational functions, including accelerating programs to improve women’s and children’s health. The Estonian Government has its citizens’ health identity data on a blockchain to ease access to services by tracking pharmaceuticals from manufacturing to consumer adherence. A recent example from the US demonstrated that a blockchain solution reduced the time to complete a procurement from 100 days to 10 days.
The technology world and the business world are putting large sums into startups because they expect blockchain to be transformational. In 2016, the World Economic Forum released a report calling blockchain technology a “mega-trend” that will shape society in the next decade and predicting that blockchains could store as much as 10 percent of global gross domestic product by 2027.
Interest in use of blockchain for global development and the transfer of donor funds is growing, but many remain cautious. If donors get in on the ground floor, they can piggyback on innovations that are already taking place with little upfront investment and shape the technology to add value to their programs. If savings in verification and networking costs came to just 10 percent, that would mean an additional $15 billion that donors can spend on services—and the figure likely will be far larger. Combined with the increased speed of disbursements, blockchain can mean more money more quickly to vulnerable populations that desperately need it.