AidCoin: a revolution in humanitarian financing
The World Humanitarian Summit has opened up a space for debate in the humanitarian sector. Questions about how humanitarian action is financed — where the money comes from, the channels through which it goes, and the way in which it is finally disbursed — have been the focus of much research and discussion, including by High Level Panels contributing to the WHS. We now have a much clearer picture of humanitarian financing, including the problems that it faces.1
A revolution is happening around the humanitarian sector, and our existing financing system is not fit for purpose. Many of the large number of recommendations about how to fix this system have been very good, but all have sought to tweak the existing system rather than accept that system is fundamentally flawed. This short paper outlines a speculative model through which new financial technology (fintech) might make possible a complete revision of humanitarian financing.
Why is this important?
Financing is a critical issue because to a large extent it determines incentives within the sector; and misaligned incentives are the primary reason why accountability in the sector remains a problem. It is important to note that this is a systemic and not an individual problem; many aid workers are committed to accountability, but operate in a system that works against this commitment. Accountability therefore is not merely a question of providing staff with more training and better resources to introduce accountability into their programmatic work — although obviously this will help, and should be encouraged.
While humanitarian organisations struggle to become more accountable to those they claim to serve, their actual obligations — financial and political — are to their donors, who tend to be institutional donors, rich publics, and (increasingly) private philanthropists. Needless to say, none of these three categories can claim to speak for disaster-affected communities.
The problem of accountability is deeply connected to another large problem: transparency. Attempts to track aid finance (such as OCHA’s Financial Tracking System, or FTS) have been frustrated by the complicated nature of aid flows, and the unwillingness of key players — particularly at the top end of the chain — to work towards increased transparency, mainly for political reasons. This has come at the same time as growing calls for increased transparency in a hyper-mediated world — which itself is one of the reasons why the WHS was convened, to address the systemic problems that are increasingly visible to both affected communities and giving publics.
In addition there are second-order questions of effectiveness — whether these funds produce the intended results — and efficiency — whether those results are achieved with a minimum of waste. It is impossible to adequately measure these two variables partly because of the first-order problems within the financing chain. Without being able to track funds from point to end point, it is very difficult to judge whether they have been effective or efficient, whether internally (according to the terms of contract between the donor and implementing agency) or externally (according to the understanding between the implementing agency and the affected community).
At the “bottom” end of the chain of humanitarian finance, cash distributions have become recognised as a legitimate form of relief assistance.2 This has opened up space for humanitarian actors to develop tools to assess local markets as a critical part of humanitarian needs assessment and programme development. Remittances have also now been recognised as a critical aid flow — primarily in terms of development, but also during times of crisis. In many of the countries in which we work, the financial sector is relatively under-developed; people rely on alternative channels such as hawala and innovative solutions such as mobile banking.
A SPECULATIVE MODEL: AIDCOIN
The humanitarian community (primarily the large institutional donors and large international organisations) establish a dedicated cryptocurrency, referred to for convenience here as AidCoin. All major funding is converted from its original currency into AidCoin at a pre-agreed rate of exchange and placed in escrow pooled funds: crisis-specific funds, regional response funds, and one global response fund. These pooled funds can be used to safely store funding and smooth out the response, thus enabling the system to respond more easily to “forgotten emergencies” — indeed it would be possible to earmark some funds for exactly that.
AidCoin ensures that every single unit of funding can be tracked from the point that it enters any given pooled fund, to the point at which it leaves. This can initially be as simple as funding going from e.g. DFID to Save the Children UK, and can leave the fund after SCUK transfers it to their country office. At this point the primary advantage is ease of disbursement: DFID places their money in the fund under a smart contract that enables them to release it immediately and with zero transaction costs when certain conditions are met regarding the situation on the ground and the capability of the agency.
DFID and SCUK agree with their major suppliers and logistics partners to use AidCoin for all transactions. These external actors accept AidCoin with the security that it is backed by actual money that can be seen within the fund, and can be redeemed in a currency of their choice. These contractual agreements are also supported by smart contracts that enable immediate release of funds when pre-agreed conditions are met. Once major private sector actors accept AidCoin under these conditions, smaller actors are also more likely to accept them — both horizontally (at the international and regional level) and vertically (in disaster-affected countries).
Implementing agencies are then be free to use AidCoin down the complete length of their logistics chain, to point of purchase, including national offices and partners. This cuts down transaction costs and removes exchange rate of losses while maintaining transparency, since (like Bitcoin) every AidCoin can be tracked in detail by everybody within the network while (unlike Bitcoin) everybody within the network is equally visible and the precise trail of funding is clear. The disadvantage at this stage is that it is hard to see how agencies can justify their complete set of overhead costs.
The final step extends AidCoin to disaster-affected communities. These communities benefit from the advantages of cash (flexibility and anonymity) with none of the disadvantages (insecurity associated with handling cash, protection from price volatility and exchange rate fluctuations). Recipient security could be ensured by using the same blockchain technology to generate unique IDs supported by biometric verification; this could be done without compromising recipient privacy.3 The danger of AidCoin versus hard currency is that AidCoin may limit the options for affected communities: for example it can not be easily transported across borders to a new country in which AidCoin has not yet been established.
While it may seem unlikely that these communities will adopt such a technology, it should be borne in mind that mobile banking is usually conducted without cash exchange, that voucher systems have been successfully implemented as part of wider cash programming, and ATMs have been successfully incorporated into relief distributions. All of these approachess can be incorporated into the AidCoin system without changing the processes behind them or the experience of the users. Once AidCoin is in use at community level, it enables a wide range of economic activities that might not be possible in a barter or cash economy. Entire economies — particularly within relatively bounded environments such as refugee camps — could be built on AidCoin.
It is possible to track AidCoins from the donor purse to the beneficiary purse, thus creating complete transparency without requiring any additional reporting. This transparency cuts both ways: donors are able to see exactly how their money was being used, but recipients are also able to see exactly where their products and services came from. It will also support coordination, since duplication will become much easier to identify’ and there will be an incentive for donors and agencies to fill gaps since this will also be much more visible.
AidCoins can be used by affected communities or individuals to purchase services and products from aid agencies, thus changing the incentive pattern and contributing to accountability. Since AidCoins are interchangeable between organisations, it is possible for affected communities to “vote with their wallets” in terms of who they purchase services from, thus encouraging improved service and competition within the aid effort. It is also possible to establish smart contracts between aid agencies and affected communities, so that agencies only receive funding if the community feels it has been well-served.
AidCoin also makes it easier for national partners or authorities to inherit these services as part of agency exit strategies. It is also possible to allocate AidCoins for specific activities — such as capacity building — that enable such strategies without fear that these funds would be misused. Legacy AidCoin could be integrated into national-level finance systems through standardised agreement between e.g. the UN and Ministry of Finance, although this will become complicated depending on local regulatory frameworks.
AidCoin could also be used to make earmarking funds far more effective, whether for geographic or thematic focus. Donors or agencies that want to promote e.g. gender-based violence as a critical issue could earmark their AidCoins, and subsequently see very clearly whether they were spent on relevant activities, and consequently how cost-effective those activities were. This would also identify areas which are currently not being paid enough attention, allowing donors and agencies to make more informed decisions about where to direct their funding in order to have most impact. Donor coordination would become much easier as a result.
AidCoin changes incentives around many aspects of the aid industry — for example, once the costs associated with e.g. a London headquarters become clear, it makes much more sense to locate more capacity in cheaper locations closer to disaster areas, thus contributing to decentralisation and capacity-building within the sector, which can be supported by decentralised decision-making processes made possible by blockchain technology.
What are the major challenges?
1. The entire humanitarian system cannot move to AidCoin in one go: the solution is to extend AidCoin in stages across the full extent of humanitarian action — wherever financing is required — until it spans the entire system.
2. None of this will be possible unless AidCoin has real-world value. While it stays within the humanitarian financing chain, there are no problems: as soon as any actor wishes to exchange it for other kinds of value outside the chain — products, services or other currencies — the humanitarian community needs to work out how to address the following scenarios:
- If an aid agency pays its staff, both international and national, in AidCoin, how do those staff redeem that currency for real-world expenditure?
- If a logistics company receives AidCoin upon delivery of e.g. tarpaulins, how do they use those AidCoins to pay the initial manufacturer of those tarpaulins?
- How does a merchant in e.g. Myanmar redeem the AidCoin she receives from a refugee to purchase a jerry-can?
These are not insurmountable problems. Most monetary transactions — especially at scale — are run as virtual through the international banking system. The first two problems could be addressed through co-operation with that system, either to provide points of interface for AidCoin users, or to establish a parallel system that moves money in and out of AidCoin. The third problem is more difficult: on the ground, many people operate in a cash or barter economy; however it has already been pointed out that non-cash economies have already been created in e.g. Kenya (for example, paying in mobile telephone credit), and AidCoin might be no different.
3. Interoperability with other parts of the international system — particularly development and peacekeeping budgets — will be problematic, particularly for those who believe that humanitarian relief needs to be programmed in coordination with those other resources. In one way AidCoin would make it much clearer what is being spent on relief vs development — in terms of being able to disaggregate overall funding — and thus how to use the two funding streams in a complementary way. However unless AidCoin (or a similar approach) was also adopted in these other sectors, there would need to be the same sort of interface as discussed in point 2 above.
4. AidCoin does not address the challenges facing core humanitarian principles such as neutrality and impartiality. At present, the massive technical problem of humanitarian financing is a distraction from the massive political problem of humanitarian financing. As a technical solution with political implications, implementation of AidCoin will enable the humanitarian community to stop worrying about the technical questions and focus on those principles more tightly.
5. The disincentives for this system are huge. They remove many of the opportunities for agencies to recover operating costs — a legitimate concern — as well eliminating less legitimate concerns such as corruption within the supply chain. Both of these can be flipped, however: less operating costs through project budgets would force donors to accept core costs as legitimate expenses that have been covered up for political reasons; and agencies would no longer need to turn a blind eye to corruption, since the opportunities for fraud would be greatly decreased. The political costs to this system would be high at every level: it would force many of the systemic problems fully into the light. At the moment they are half-concealed, however, which is the worst of both worlds.
AidCoin is not the answer for every problem faced by the humanitarian community — for example it does not address the ongoing global shortfall in humanitarian funding — but it does address many of the significant issues. It requires more research and development, but more importantly it requires pilot testing to begin as soon as possible in order to start learning. The technology that makes this type of approach possible will develop quickly and may move in unexpected directions: the only way to take advantage of it is to start moving quickly and keep momentum. The humanitarian community has historically not been good at adopting new technologies: and unlike previous technologies, this one represents a major shift in the system.
This note is intended as a basis for discussion about the potential role of new fintech in the humanitarian sector. It does not provide a comprehensive analysis of financial flows in the sector, or a rigorous model for the application of fintech in disaster settings. Accordingly constructive comments are welcome to critique and improve both the analysis and the model — bearing in mind that papers in the humanitarian sector are usually far too long-winded!
1See, inter alia: Making financing work for crisis-affected people, Charlotte Latimer, July 2015; Looking Beyond the Crisis, Future Humanitarian Financing; Financing in Crisis?, Rachel Scott, June 2015.
2See the website of the Cash Learning Partnership for more resources; the ODI HPN paper “Cash transfer programming in emergencies” gives a good overview, although it is now 4 years old; DFID has convened a High Level Panel on Humanitarian Cash Transfers to contribute to the WHS.
3See specific proposal in “Distributed crypto identity as a mechanism for legal empowerment of the poor and stimulating local economic development”, Gavin Chait, 18 January 2015; and wider discussion in “Cheap ID”, Vinay Gupta, 2006