Blockchain and Foreign Aid Governance

Wing Lee
Wing Lee
Jul 21, 2018 · 8 min read

This article was written in collaboration with Dr Bernhard Reinsberg from the University of Cambridge — Centre for Business Research.

We recently had the chance to discuss the use of blockchain as a vehicle to foster growth in developing countries with Dr Bernhard Reinsberg based on his recently published working paper Blockchain Technology and the Governance of Foreign Aid (only hard copy available), which focuses on uses of blockchain technology to address collective action problems in the governance of Official Development Assistance. This complements existing blockchain applications that aim at making aid delivery more efficient and resilient against fraud, such as secure delivery of humanitarian aid, digital identity services and proof of provenance.

In light of great interest amongst many blockchain enthusiasts around the use of blockchain for social and economic development — and with the help of Dr Reinsberg — we summarise in this article some of the key insights from the paper as well as our thoughts on the findings.

About: Dr Bernhard Reinsberg

Dr Bernhard Reisberg

Dr Bernhard Reinsberg has been a Research Associate at the Centre for Business Research at the University of Cambridge since 2016. His research is about the complex life of international organizations and their potential contribution to addressing global development problems. More specifically, he analysed the rise of earmarked funding over the past two decades and contributed to a better understanding of underlying donor motivations. In addition, he also assesses the effectiveness of multilateral development programmes in the context of International Monetary Fund policy reform programmes. His work has appeared in leading peer-reviewed journals, including International Organization, American Journal of Sociology, and Review of International Organizations, among others.

You can read his full profile here:

Words from Dr Bernhard Reinsberg on Blockchain Technology and the Governance of Foreign Aid:

“Blockchain technology has been considered a vehicle to foster development in poor countries by promoting applications such as secure delivery of humanitarian aid, digital identity services, and proof of provenance. This paper examines whether (and if so how) blockchain technology — if appropriately designed — can enhance the effectiveness (and efficiency) of foreign aid governance, thereby moving beyond completely anonymous contexts. Foreign aid governance is plagued by lack of credible commitments among states which are further exacerbated by information asymmetries and which often undermine aid effectiveness. In this context, blockchain technology holds two promises. First, through guaranteed enforcement of smart contracts, it can strengthen the credibility of state commitments, for example collective burden-sharing rules among a group of donors or recipient-country compliance with policy conditionality in return for aid. Second, through leveraging prediction markets, blockchain technology can allay information problems related to the verification of real-world events along the entire aid delivery chain. Overall, the paper shows that blockchain technology can be understood as a mechanism with institution-like features, with significant potential to complement real-existing institutions. It also suggests that deploying blockchain technology in semi-trusted environments and at the international level avoids many of its well-known disadvantages.”

Hashreader Summary

Having spoken to a variety of groups working across the blockchain space, it has been clear that people are excited about the potential of the technology to bring many positive impacts to our society.

The key benefits would generally include increases in productivity, reductions in transaction costs and general enhancement of market efficiency. However, it has often been emphasised that blockchain brings the most benefit as an alternative mechanism for parties to reach consensus about economic facts. Hence, blockchain is most impactful where traditional mechanisms fail to efficiently reach consensus.

As Dr Reinsberg points out, one such area is in foreign aid, and his recent working research paper (June 2018) can be broken down in the following sections:

Blockchain and foreign aid

The money we give to help people overseas generally end up being wasted or in the hands of corrupt dictators. This is a common notion of the current state of foreign aid governance. Whether this is the entire truth or a media spin, international development organisations and NGOs has a role to combat these perceptions in order to rebuild trust that is essential to philanthropic contributions. Some people in the sector sees blockchain technology as the answer to re-instil this trust and reignite enthusiasm in donation activities.

Blockchain can provide clarity on who is donating and also how money and supplies flow through organisations that provide aid (such as tracking clothing purchased by an organisation to the location where it was delivered). As such, the technology represents an opportunity to re-design how philanthropy and donors interact.

Implementation is key as there are a number of ways the technology can potentially be used to solve the big challenges in foreign aid governance.

Implementation

Dr Reinsberg outlines several ways blockchain technology can be implemented to solve for the key challenges in foreign aid delivery and governance, which we summarise as follows:

1. A decentralized application (“dApp”) for private charity delivery

This represents permissionless blockchain technology-enabled peer-to-peer donations under incomplete trust. There are several examples of how this can be applied:

The native Augur token, REP, is used for staking when people report the result of an event (say the tree has been planted in a certain area) in the system. If the report outcome is the same as the majority, the individual will win a staking reward (i.e. the donation in this case).

The ‘honest’ reporters receive market trading fee proportionate to their REP token holdings. Outcomes are made harder to manipulate using the consensus-based system and payments are guaranteed by smart contracts.

For further information on Augur, please refer to our cryptocurrency database: https://hashreader.com/coin/REP/

In the long term, a charity dApp may also democratize aid because it eliminates the need for domestic groups to lobby their government to alter aid allocations.

2. Blockchain-based bilateral foreign aid governance

This relates to the replication of existing aid contracts on a permissioned blockchain which allows a private group (states and selected international development organisations) to gain read/write access.

On top of this, blockchain technology allows states and parties involved to make more credible commitment. This can be implemented through codifying aid relationships and transactions as smart contracts to import guaranteed execution when predefined conditions are fulfilled.

3. Others

Permissioned blockchain networks can also be used to help donor governments maintain their commitments when channelling aid multialterally. Furthermore, Dr Reinsberg’s paper explores how blockchain technology can be used by international development organisations to enhance their operations, such as automation of routine activities such as the maintenance of transaction records and digital file archive and the settlement of procurement contracts and conditional cash transfers.

Building Blocks: The World Food Program has taken first steps to harness blockchain technology to enhance their ability to provide efficient and transparent aid. As part of its Building Blocks pilot, the World Food Program is using blockchain technology to make cash transfers more efficient, transparent and secure. As a result, these cash transfers (through vouchers or pre-paid debit cards) allow people to purchase their own food locally and are an effective way to empower them to make their own purchasing decisions to relieve hunger.

A point to note here is the way blockchain is used as a secure trusted way to track ownership of assets and speed up transactions while lowering the chance of fraud or data mismanagement. This is a huge solution as organisations working in international relief can lose up to 3.5% of each aid transaction to various fees and costs. Furthermore, across the industry, an estimated 30% of all development funds do reach their intended recipients because of third-party theft or mismanagement. In this instance, Building Blocks can be used to audit each beneficiary’s spending in near-real time.

Also by paying vendors directly, Building Blocks has reduced money — for example management costs by 98%. For an aid organization spending US$6 billion annually across 80 countries, that adds up to tens of millions of dollars in savings.

Link and data source: https://innovation.wfp.org/project/building-blocks

Note this differs to some of Dr Reinsberg’s proposals in the level at which blockchain is used where the whole governance system is supported by blockchain technology to allow stakeholders to share relevant information and make credible commitments. This essentially forms an ‘institution’ alongside existing organisations (such as the United Nations and other institutions.

Other blockchain-powered foreign aid initiatives

In addition to the illustrative examples Dr Reinsberg’s highlighted, we also took a look at other initiatives being developed in the space (albeit under a variety of structures and forms):

One of the key functions of Disberse is acting as an electronic money provider to guarantee, issue and distribute the funds more transparently and efficiently on the Ethereum blockchain.

Link: http://www.disberse.com/

Image courtesy of United Nations

https://www.ibm.com/blogs/blockchain/2018/05/challenge-accepted-chance-make-world-better-blockchain/

Conclusion

In summary, blockchain application in foreign aid represents an innovative and bold reinvention of how philanthropy and donors interact. There are various ways the technology can be implemented to solve a number of key challenges which is currently faced by foreign aid governance and delivery. While some forward-thinking institutes has taken steps to testing the new technology, we will surely see a lot more widespread application in this space in the near future.

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