Bitcoin Doesn’t Fix This
A popular (and troll-fueled) trope in Bitcoin Twitter culture is to respond to any stated challenge with, “Bitcoin fixes this.” The years-long Ebola outbreak in the DRC? Bitcoin apparently can fix it. Hurricane Dorian devastated the Bahamas? Bitcoin could have fixed that. Creating a brand new cryptocurrency and app for incentivizing school attendance (an actual idea non-satirically pitched at the 2017 World Bank Youth Summit)? Bitcoin could fix that too.
On October 9, UNICEF announced the creation of the first-ever development Cryptocurrency Fund to receive, hold, and disburse donations for open source technology using cryptocurrencies. Powered by the Ethereum Foundation, a non-profit promoting the alternative cryptocurrency of Ethereum (ETH), this Fund is intended to explore the viability of cryptocurrencies as a form of digital finance. UNICEF will initially use the Ethereum blockchain to make grants to three organizations, two of which do impact investing and create community tokens.
The assumption that cryptocurrencies will be the new “magic bullet” is misplaced and fundamentally flawed. UNICEF’s announcement serves as a topical opportunity to evaluate cryptocurrency solutions to development challenges in general against the Principles for Digital Development, and to make the argument that cryptocurrencies are not yet a mature or appropriate technology for the development sector, and may never be. Cryptocurrency and Distributed Ledger Technology (DLT) is a broad and diverse topic, so the primary focus of this blog post will be on Bitcoin, the oldest, most robust and secure of the many cryptocurrencies available. Any drawbacks to Bitcoin will surely be even more applicable to less-mature cryptocurrencies, making UNICEF’s choice of Ethereum additionally baffling, even if the general premise was sound. So let’s apply some of the Digital Principles now and dissect why this Cryptocurrency Fund may be an ill-advised investment.
Full disclosure: One of the authors owns a cryptocurrency mining rig and holds Bitcoin as a store of value (as part of a diversified investment portfolio, not as a currency).
Design with the User and Understand the Existing Ecosystem
Blockchain solutions have a well-documented history of violating “Design with the User.” In a study commissioned by the Humanitarian Policy Group (https://www.odi.org/sites/odi.org.uk/files/resource-documents/12605.pdf), the authors state:
“On the project level, motivations for adopting DLT varied, but were shaped more by programmatic and organisational considerations than technical specificities or end-user needs.”
While technology and markets in the Global North have matured enough for individuals to dabble in cryptocurrencies, this is certainly not the case for most markets in the Global South. There is a high cost to implementing, tracking, and staying up-to-date on crypto chains, which people who do not invest time in cryptocurrencies might not know (see also “Design for Scale”).
More than just the hardware and software, there is a time cost in educating users to understand how DLTs work, how they can decipher a chain and transaction history, and how they can turn cryptocurrencies into real money. While the digital literacy of both development practitioners and end users has improved significantly over the last few years, DLT is still not well understood by either.
Additionally, conducting financial transactions using cryptocurrencies alienates local technology talent because start-ups in the developing world are less likely to have a way — or have little financial incentive — to accept grants in the form of cryptocurrencies. Converting crypto to hard currency is difficult, and may be impossible in some resource-constrained environments. Cryptocurrencies can also harm local markets because they allow for bypassing trading in local currencies and take money out of the local economy — essentially harming the communities we are trying to help.
As an individual in the United States, long-term capital gains taxes are applied to any cryptocurrency held longer than one year, meaning you will take a significant financial hit for converting your digital money back to hard currency. This doesn’t apply to donations made to 501c3’s, but serves as an example of the current state of regulations on cryptocurrencies. But it took the U.S. years to figure out how to create these regulations — most countries where we work do not have such regulations in place, making it harder and more uncertain for companies and individuals to conduct such transactions. Additionally, it’s unlikely that an Ethereum grant would be used as anything other than a store of value, converted back into hard currency when spent further down the value chain. In fact, cryptocurrencies are currently a very cumbersome method for making grant payments or providing stipends to end users (see also “Build for Sustainability”).
Design for Scale
As a grant-making mechanism, both grant-maker and grant recipients are compelled to run a “full node” to ensure security: the entire blockchain (record of all historical transactions, upon which each new transaction is cryptographically dependent) must be downloaded and verified. Bitcoin’s blockchain is 195Gb in 2019 (Ethereum’s is 181Gb), and continues to grow. This is an outrageously high bandwidth requirement on even a broadband connection, to say nothing of lower-connectivity environments. It also takes days of fully-dedicated computing power on a commodity laptop to verify either of these chains. This storage and computing cost is the minimal ticket price to enter the market, and must be paid for each new grant-maker or grantee, and is an increasing cost as the blockchains grow. In addition to this initial cost, Bitcoin software additionally needs roughly 200GB of upload per month. Blockchain transactions are also slow. Layer-2 solutions (higher-level protocols existing outside of the main blockchain) to solve this problem, such as Lightning, require a more insecure, immature, and complicated peer-to-peer network where micro-transactions remain off the main ledger for days or longer (and are therefore not strongly verified). Again, it’s worth noting that Bitcoin is the most mature cryptocurrency. Ethereum’s layer 2 solutions are even less robust.
Build for Sustainability
How do you write a grant proposal or a project budget using cryptocurrency? The conversion rate is volatile and changes wildly week-to-week. On June 10, Bitcoin (the most mature and stable cryptocurrency available) was valued at approximately $8,000 per coin; by July 8, it had jumped to almost $12,500 per coin; by October 11 it was back to about $8,500 per coin. All of this is up from March 31, when a single Bitcoin was worth $4,000. How can an organization plan their spending around crypto payments if they do not know what their value will be a month out? Ethereum suffers from even lower valuation and higher volatility (1 ETH = $192 at time of writing, versus $8,303 for BTC). While this may all change in the future, a cryptocurrency fund is certainly not sustainable at this time.
Be Data Driven and Be Collaborative
One of the most important components of being data driven is the creation of a Theory of Change (TOC). TOCs define the long-term vision for a technology’s use and map out how a team intends to meet that goal through planned activities and intended outcomes and impacts based on the effects of those activities as well as assumptions contributing to the expected change. It is critically important when a new technology — such as cryptocurrency — is being implemented because the new technology is unproven and untested. UNICEF has not shared their TOC for a Cryptocurrency Fund publicly; there is no information on why they decided to start distributing cryptocurrency grants, what they hope to achieve, and what change they expect to occur as a result, beyond the little information shared in the press release.
UNICEF also appears to have been non-collaborative and entirely unilateral in this decision making. There is no online documentation of any workshops, public commentary, or co-design taking place prior to this announcement. And because of this, there is no (and has not been a) way for the digital development community to provide feedback or give input into the process.
Use Open Standards, Open Data, Open Source, & Open Innovation
While Ethereum, Bitcoin, and many others are indeed open source, they are sprawling and complex in nature (213 repositories for the Ethereum protocol and tools!). They are also immature and therefore prone to exploits which in the case of cryptocurrency software can lead to loss of funds. As is true with all of the Principles, appropriate use of open source technology is an important aspect of technological decision-making.
Address Privacy & Security
The primary draws of DLT are its immutability and its anonymity. While DLT has the potential to empower individuals against oppressive governments, improve adherence to official record keeping, and protect human rights in a business supply chain, it does not lend itself to organizational use for finances. When an individual (or in this case, an organization) holds cryptocurrencies, their money is kept in a digital wallet which has a public and private key. The public key can be given out to a second party for transactional purposes, the same as your bank account and routing number can be. But the private key is kept secret for personal access and most importantly to be used for cashing out crypto.
If an organization accepts grants in the form of cryptocurrencies, that private wallet key is less secure because multiple people will need access to it: a CFO, accountant, budget manager, etc. That opens up major risk to the security of the funds, which is the very foundation of cryptocurrencies. A private key cannot just be changed like a password if one of those individuals with access leaves the organization; funds would theoretically have to be transferred to a new wallet each time a key-holder left. Alternatively, if all copies of the private key were lost, the funds cannot be recovered.
An even bigger liability for an organization is the potential for their wallet to be hacked (both an insider and outsider threat). Though cryptocurrencies are regulated for tax purposes, they are not insured or backed by the U.S. government (or any other government). In the event a wallet is hacked and the crypto is moved to another party’s wallet, that transaction would be near impossible to trace (especially given that many crypto practitioners utilize multiple-hop micro transactions, known as “washing,” to further increase their anonymity). Those funds cannot be replaced and there is no recourse available to an organization to rectify it.
Conclusion
UNICEF Innovation has a mixed history, frequently investing in appropriate technologies but also taking some missteps towards hype cycle technologies. Cryptocurrencies, and the blockchain data structures underpinning them, continue to largely be a solution looking for a problem. This is one of the crucial reasons the Digital Principles (which UNICEF was instrumental in helping create) were devised: they offer a rubric to help determine when a technology is mature enough to be applicable to the challenging sectors of development and humanitarian aid. And cryptocurrencies just aren’t — at least, not yet.
