How Tokenization Ensures Development Aid Reaches Those Who Need It
The conversation about blockchain adoption has evolved over time. It started off as a question of whether cryptocurrencies would replace the need for national currencies and central banks. More recently, the topic has focused on enterprise use cases for blockchain, in areas such as supply chain and trade finance. However, it’s now starting to become clear that blockchain technology also has use cases in humanitarian efforts.
Where Blockchain Is Already Making a Difference
One example of blockchain application is in the area of digital identity. In developed countries, we tend to take passports and identity documents for granted. However, in many poorer countries, individuals don’t have any identity documentation. For a refugee arriving in a new country, not being able to prove who they are is a huge disadvantage and leads to delays in accessing vital services.
One of the UN Sustainable Development Goals is to provide a legal identity to everyone, including registration of births, by the year 2030. The ID2020 Alliance convened with the aim of achieving this, using blockchain-based digital identity in partnership with Microsoft and Accenture. Combined with biometrics, it provides individuals with a self-sovereign, portable digital identity that can be recognized anywhere in the world.
The World Food Programme (WFP) has also implemented a similar project at a refugee camp in Jordan. It uses retina scans to distribute food aid directly to refugees in the camp, bypassing banks and local distributors in the process. Once they are registered to the program, an individual from the camp simply walks into the local supermarket and has their retina scanned at the checkout. The WFP settles the outstanding payment with the supermarket on their behalf.
Solving the Aid Distribution Problem
Projects like the ones from WFP are vital because charities and NGOs struggle to ensure that funds and resources reach those who need it. Aid and charitable donations are often at risk of being stolen or otherwise diverted due to corrupt government officials or contractors. One report from 2014, based on a study conducted by anti-poverty group ONE, estimated that more than $1 trillion each year is siphoned off from funds intended for poverty-stricken countries. The report stated that shell companies in developed countries are often used to divert donations. It estimated that in sub-Saharan Africa alone, the lost funds could be used to educate up to an extra 10 million children per year or fund up to 16.5 million vaccines.
In a previous article, we discussed how blockchain is revolutionizing the process of crowd financing and outlined various applications for raising capital in a business context. However, it’s also possible that charitable organizations or even individuals could apply the same principles to fundraising for developing countries. Similarly, asset-backed tokens can be used to procure supplies.
Case Study — Building a Hospital
Let’s take the fictional example of a charity based in the US which wants to build hospitals for treating AIDS sufferers in Malawi and explain at concept level how blockchain platform can be used to avoid certain problems.
In the US, the charity uses a blockchain platform to open up a token-based fundraising project for the hospital they want to build. They run a fundraising campaign and successfully secure enough donations to fund the construction of the hospital. Rather than sending money, donors can purchase tokens that match the value of their contribution on a blockchain platform. The tokens are sent to the charity, but they are locked and inaccessible until the project commences.
The charity organization assigns a local project manager who searches for local contractors and defines project milestones.
After the amount of money has been defined (plus some extra to cover uncertainties), the organization puts all the rules and milestones into a smart contract. The project has 3 key components:
1) Donated money into $Token
2) Cost of labour and building material issued in Service Token by contractor
3) A smart contract which contains logic and rules to trigger a release of money at each milestone
The local project manager has no access to Dollar Token, which is important to prevent fraud.
Based on the agreed cost of service and materials, the contractor uses the blockchain platform to issue service tokens. Each token is backed by a set amount of construction materials and manpower.
So each party has its wallet and tokens will be release and exchanged when conditions are met:
- Charity organization wallet: all $Tokens are stored here, only parts are release each time based on the progress of the project. Released $Tokens are converted to Malawian kwacha Token in Project Wallet.
- Project wallet: store Malawian kwacha Tokens from charity organization and used for purchasing service tokens from contractor and construction work can be carried out.
- Contractor wallet: used to receive Malawian kwacha Tokens in exchange for its service tokens. Service tokens are destroyed when redeemed (when work has been carried out).
The charity has a local representative who will confirm when the work has been satisfactorily completed at each milestone. Once the local representative confirms completion, the requisite tokens are automatically released by the smart contract, ensuring that the contractor gets paid for their work and no money is exchanged through the hands of a local project manager.
The token exchange in each stage of the milestone can be illustrated as the flow below:
Taking this further, the charity could even continue to use the same secure fundraising system for running the day to day operations in the hospital and they can make sure that the donation money goes to the people who performed the service and not got lost in the process due to fraud activities. For the donors, they have the transparency to see where their donation goes to. This fictional example explained at a high level of how blockchain can be used to address certain problems in the development aid area. There are still a lot of work to be done in order to implement this process. However, blockchain application is at the beginning of its phase, we can expect more improvement in the near future.
Using blockchain in this way means that nobody can siphon off any funds, and the incentive system ensures it is extremely difficult for anyone to use the tokens for anything other than the intended purpose. This system also means development projects can use local workers and resources in a more dependable way, which has the added benefit of helping the local economy compared to shipping in people and equipment from abroad.
While the use of tokenized assets in business and finance is set to bring about substantial economic benefits in terms of efficiencies and wealth creation, this case study illustrates that it offers even broader advantages to society as a whole. Using asset-backed tokens in managing development aid has the potential to circumvent corruption, ensuring resources are allocated in the way they were initially intended — to those in need.
This article is brought to you by CoreLedger.
As a prominent blockchain infrastructure provider, CoreLedger is making blockchain technology simple for businesses to use. With CoreLedger’s offerings, clients can readily tokenize their offerings with fast-to-implement resources that will allow them to modernize their services. Thanks to our in-house developed software solutions and experienced blockchain specialists, CoreLedger is ready to help you make your next move with blockchain technology.