Blockchain and cryptocurrency will not solve the charity sector’s problems

Blockchain is probably something you’ve heard about, but you’re not quite sure what it is and you haven’t got round to digesting its workings and its implications for the charity sector. Perhaps you find your mind switching off a little when these terms are mentioned.

Stay with me: I’ll do my best to summarise it and then offer my opinion. In short: I don’t think it’s the right answer to any of the sector’s problems.

What does it all mean?

Blockchain is a “distributed ledger technology” which provides an anonymised ledger of financial transactions. It’s a decentralised system which purportedly removes the need for “middle men” like governments and banks.

Blockchain is the technology that underpins cryptocurrencies such as Bitcoin, which you’ve probably heard of.

Why it’s not going to help the charity sector

I’ll now explain why I don’t think it’s going to be very helpful for us. Several people have written articles explaining why it’s a good thing. Perhaps they’re right, but unlike some other writers on the subject I’m not trying to sell you any blockchain technology. Hopefully this can provide some balance.

(Hackernoon has written an excellent, if somewhat technical, piece on this subject, which has informed much of my summary)

Reason 1: it’s very hard to convert your money from cryptocurrency to cash

Bitcoin can handle seven transactions per second. Visa, on the other hand, does 60,000.

For various technical reasons, explained here, it’s difficult and expensive to convert cryptocurrencies. This isn’t good for charities or donors.

The creators of the proposed charity cryptocurrency, Giftcoin, do not explain in their white paper how charities can convert and spend their giftcoin on actual, real goods and services. This is a red flag to me.

Reason 2: it’s terrible for the environment

An article by Emily Atkin in the New Republic explained that just one bitcoin transaction uses as much energy as an entire household does in a week, and there are 300,000 transactions every day. Visa transactions are far, far more efficient. This is directly leading to increased fossil fuel consumption, and the problem is intensifying with the increased interest in cryptocurrency.

I can’t see how environmental charities could possibly justify their involvement in this, given the conflict with their mission. Any charity, or individual donor, with a strong environmental policy, or ethical investments policy, may also need to think twice.

Reason 3: if you cut out the government, you have no recourse if someone nicks all your money – and there are big security problems with cryptocurrency

Cutting out slow, clunky old bureaucrats from transactions sounds great at first. It could reduce costs and speed things up. That’s all fine, until someone hacks into your system and steals all your money, as has happened frequently with cryptocurrency. No government backing means there’s no recourse.

Given the extreme high risk that comes with cryptocurrency, could trustees claim that they’re acting responsibly if they invest in bitcoin? At least if someone steals your cash, you have a chance of clawing it back through the courts.

Reason 4: Evidence suggests that it’s useful to have people read contracts, not just computers

“Smart contracts” are a way of instigating automatic payments via the blockchain, when pre-arranged conditions are met. Giftcoin’s white paper gives the example of a well being constructed with charitable funds: when an independent verifier confirms that certain construction stages are reached, they update the smart contract and the charity receives the next instalment of funds. It’s being claimed that this can improve donor trust and remove the need for middle men such as lawyers.

There are several problems I can see with this:

  • You still need to draw up a contract in advance, so lawyers won’t be out of a job any time soon
  • Hackernoon gives examples of where this has gone horribly wrong – it turns out it’s still necessary to have humans verify contract conditions (and it’s clear that Giftcoin won’t get around this)
  • Many of the smart contract providers claim that charities will only receive the money once their objectives have been met. Firstly, this is already possible, and done, via government payment-by-results contracts. Secondly, it has terrible implications for charities’ cashflow if it becomes more commonly expected that all payments should be in arrears. Thirdly, it leaves no room for healthy failure – not all charity projects will be successful, and there need to be opportunities to learn and improve.

Reason 5: it won’t solve our problems with donor trust

Giftcoin claims that blockchain technology will increase donor trust by showing how their money is directly making an impact.

Any charity worth their salt should be doing this already, through bespoke reports, informal updates, photographs, case studies and project visits. As far as I can see, blockchain and cryptocurrency contribute nothing except increased risk and expense.

For any charities not already proactively communicating impact to their donors, their problems aren’t going to be solved by blockchain technology.

 

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