I’ve shared my scepticism about blockchain and charities again today in Third Sector magazine – you can read it here if you’re a subscriber (it’s behind a paywall).
A glut of new cryptocurrencies and blockchain products has emerged that are being marketed to charities and donors as the answer to all of our problems. I’ve explained in my first post why I don’t think they are a silver bullet.
Moreover, I don’t believe that donor trust is indeed at the heart of these products. There are other agendas behind this recent push, and they’re not difficult to find if you’re prepared to delve into the detail.
Here are some details from two products that I think are worth sharing more widely.
Alice.si openly promises to “punish”charities
Alice is a “decentralised social impact network built on the Ethereum blockchain”. Its white paper begins with a very convincing argument about the global decline in donor trust. Alice is, obviously, the solution to this problem.
The white paper goes on to explain how blockchain technology will increase transparency and improve trust. It includes a mechanism to ensure charities only receive their next payment after meeting the reporting deadline. There’s nothing wrong with that, and I’ve seen similar conditions in countless grant agreements.
What I haven’t seen before is this particular wording:
“[social organisations] are paid for each update report submitted, and punished if they miss deadlines.”
“Progress reports may also engender punishments“
Now, the only type of genuine trusting relationship I can think of that makes use of “punishment” is a niche that is beyond the remit of this blog.
Punishment certainly does not belong in a healthy donor/charity relationship. I think this choice of words says a great deal about how Alice views charities. Is this really the type of relationship that we want to encourage?
Alice wants to parcel up charity impacts as “tokens” and sell them to speculators
Alice claims that its “raison d’être is to help social organisations produce transparent , publicly accessible and reliable impact data.” The first few pages of the white paper explain how this will solve all problems that donors and charities have.
On page 19, we begin to understand why this reliable impact data is so important to Alice. The white paper acknowledges that some impact takes years to realise, before going on to explain that:
“Alice solves this issue by tokenising impact investments and making them tradable as securities on a secondary market. This means that impact investors no longer have to worry about fitting deals with their investment horizon, as the secondary market allows them to exit investments before they have run their course. As this is run within the Alice platform, potential acquirers have perfect visibility on how these investments have performed, and how likely they are likely to continue performing, before buying them, which facilitates price discovery. The automatic re-routing of interest payments to the new owner of an impact investment security further reduces transaction costs.”
Social impact bonds and impact investing already exist, but are we comfortable with taking this concept a step further? Would a secondary market for trading impact really benefit the charity sector? This is probably an area that is ripe for debate – but we should consider it properly, rather than dive into partnerships where we may not have realised that it’s part of the agenda.
Giftcoin doesn’t want us to convert our cryptocurrency into cash
Giftcoin is “the world’s first charitable cryptocurrency for charitable giving and good causes.” Similarly to Alice, it is about “creating transparency and trust in the giving process”.
The white paper has an attractive diagram showing how a donor pays in Giftcoin. This is transferred to the charity, which then spends it on goods and services. The blockchain technology enables all transactions to be accurately tracked.
I saw one glaring omission: how does the charity exchange Giftcoin for goods and services? As a charity worker, I’m not prepared to receive my salary in Giftcoin, and I don’t know any who would be.
I asked Giftcoin this question via Twitter and received no response. However, their response to another Twitter user was revealing:
So Giftcoin wants charities to keep their cryptocurrency and not convert it into pounds or dollars.
Why? I can’t think of any reasons that benefit the charity sector. If there were compelling reasons, I’m sure Giftcoin would have covered these in the white paper, or at least taken the time to respond to my tweet.
What is the charity sector for? What is your charity for?
Charities exist to improve the world. Personally, I don’t believe that charities exist to make money for investors. Nor do I agree that they should gamble their money on high-risk investments. If a charity accepts cryptocurrency donations, it’s in their best interest to convert them to fiat immediately.
I’m sure others may disagree with me, but let’s have an open debate and consider these issues carefully. I’m not sure how feasible the above goals are (probably not very) but we need to ensure that charities are entering these types of partnerships with their eyes open.
Charities need to read the small print
There’s nothing wrong with having your own agenda: everyone has one. However, where the agenda is at odds with the charitable interests that the cryptocurrency is claiming to support, I suggest proceeding with extreme caution.
At least they’re being upfront about it. In the small print.
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.