January 10, 2020
Table of contents
Head of Blockchain Competency Center
The humanities and tech don’t always go well together, but in recent years nonprofits have started looking toward the innovations such as blockchain to support their work.
Providing potentially a wealth of versatile solutions to an equally big number of unique problems, blockchain implementation is definitely not a one-size-fits-all resolution. While blockchain has its limitations, if implemented right, it's an innovation that can change the way both commercial businesses and nonprofits operate.
It can be hard to fathom how a technology that’s most often associated with cryptocurrencies connects with nonprofit. But why not? Blockchain-based solutions have been implemented in many sectors—from art authentication to smart business contracts to digital voting to business process management.
Essentially, the only way a nonprofit differs from a commercial company is that its primary objective is not to make money. Still, nonprofits have business needs to be addressed—project management, analytics, accounting, etc. There is no doubt that nonprofits can also leverage the expertise of blockchain consultants to help them solve their organizational issues.
Unlike commercial businesses, nonprofits as actors for good additionally experience problems around trust, accountability, and transparency that can prove detrimental to achieving their missions. The 2019 Give.org Donor Trust Report shows that only 19% of respondents highly trust charities.
Let’s take a look at the top nonprofit issues and their blockchain-based solutions.
A hot topic right now, one of the key issues facing nonprofits is accountability. Especially considering how recent scandals—from unethical spending to mission drift— have rocked their once-spotless image, more and more people are recognizing that those working for nonprofits are not always as clean as they make themselves out to be.
Corruption can be particularly prevalent in less economically developed countries where many nonprofits work. This happens in various forms such as misplaced aid, bribes, and favors for aid and is especially damaging to an organization’s image. ACFE reports that nonprofit organizations suffer the median loss of $75,000 due to occupational fraud, including corruption.
But does that mean people shouldn’t donate? Absolutely not. There are those genuinely in need, and we shouldn’t turn our backs on them because of the poor decisions of the few. The fact is humans are, by nature, flawed. And while we would like to believe the best in people, sometimes they need a little help to stay honest, and this is where accountability comes in.
So, what makes people accountable in their roles? Reporting, transparency, and general openness in what they do. Blockchain can provide nonprofit organizations with the opportunity to account for their activities, track the passage of funds from the donor to the beneficiary, and show that the latter’s employees are fulfilling their actual obligations.
When funds just seem to ‘disappear’ or cash solutions are proving tricky, employing blockchain for nonprofits can help to hold these organizations accountable for how exactly funds are being used. As every transaction is intricately recorded, any misuse of funds becomes apparent.
According to the study Determinants and Consequences of Nonprofit Transparency published by the Journal of Accounting, Audit and Finance in 2018, nonprofits that are more transparent receive 53% more in contributions compared to less transparent ones. Nonprofits should take it into the account that donors are doing their research before contributing. Besides a nonprofit’s mission and goals, the availability of financial reporting may be the key factor influencing the donor’s decision.
In some cases, nonprofits can be hesitant to share their financial reports publicly due to high overhead costs. However, these expenses are justifiable, as donors will have confidence that their money makes an impact.
Insight on how donations are used provides for a level of transparency that can’t be achieved otherwise. And in case with nonprofits, the level of transparency directly corresponds to the volume of donations.
Donors can now be reassured that their funds have reached desired destinations. Rather than publishing exhaustive reports that are often hard to validate, nonprofits can simply make their wallet addresses public. The ability to track funds in real time will expose squandering and finally reestablish donors’ trust.
For example, Alice.si assures donors that their money is really making an impact by storing all donations in smart contracts on the Ethereum blockchain. The platform automatically releases donations to charities only when they achieve their announced specific goals. This allows for an unparalleled level of transparency and accountability.
Blockchain implies that once the transaction is made, it’s permanently encrypted in the network and there is an extremely low probability that this information can be changed. This can also be useful when a donor needs to show a proof of donation, as the transaction ID will be enough to prove it.
Blockchain presents itself as an almost infallible platform for tracking funds, services, and actions made by a nonprofit. It can help regulate and control cash flows, helping organizations show their funds truly go to those in need.
From do-good philanthropists to those who may be persecuted for investing in certain nonprofits, anonymous donors come with a range of reasons why they wish to remain unknown. Traditional funding methods make it difficult to maintain this anonymity as there’s always a financial trail somewhere, whereas blockchain presents the ultimate solution for confidentiality.
Although every transaction on a blockchain network can be tracked, digital wallets can successfully mask owners’ identities. Transactions can be made using smart contracts, which automatically trigger a predefined action once certain conditions are fulfilled.
Like any other type of business, nonprofits are dependent on intermediaries to market their philanthropic intents and maintain their business operations. This includes banking and exchange fees for international payments, marketing expenses, and human resources.
Due to the architecture of the blockchain technology, most intermediaries like banks and payment services are taken out of the equation. This helps nonprofits to reduce administrative costs and transfer funds directly to those in need faster.
Adoption of blockchain-based solutions also attracts a new donor target market with strong incentives to donate in crypto. Some nonprofits might be discouraged by the idea of accepting crypto due to its volatility. However, services like The Giving Block make handling digital currencies risk-free by instantly converting them to cash upon receipt.
When it comes to catastrophic events, time becomes priceless. Effective disaster relief requires comprehensive coordination between multiple parties and timely allocation of resources. Unfortunately, current emergency response methods lack the required level of efficiency.
It can be a challenge to get funds needed on location in enough time to prevent further damage. As blockchain is decentralized, funds can travel from one part of the world to another in seconds and with much lower fees.
Additionally, blockchain also serves as a reliable system to do so in case of a bank or national currency collapse as it retains a certain level of its value (usually in comparison to the US dollar). One such example occurred in Syria, when the United Nations Food Programme provided aid to refugees through the Ethereum blockchain.
Currently, emergency funds distributed to marginalized communities by nonprofit organizations are often misused or spent too quickly to provide a lasting impact. Moreover, some economies simply lack the cash to provide. However, blockchain-based funding has huge potential for nonprofits in this regard.
For example, Red Cross has unveiled a two-year project to help vulnerable communities by deploying blockchain-based local currencies and thus stimulating economic activity. Instead of donating fiat money or providing in-kind aid, they help community members become self-sufficient by earning blockchain-based currencies for their social services and managing them with mobile wallets.
Less prominent but still significant, these solutions can address other current problems faced by nonprofits.
During war and displacement, establishing who is who can be impossible once the dust settles. But even without conflict, one in four children under age five do not officially exist, according to UNICEF. By implementing cost-effective blockchain solutions for birth registration, it becomes possible to give a legal identity to a person who may otherwise stay without one. This can act as a form of ID and help ensure no one falls between the cracks when it comes to accessing services, upholding their rights, or engaging in education.
Real estate industry suffers from inefficient protection of owners’ rights and lack of transparency. Blockchain solutions can help track the history of a property and detect discrepancies such as illegal land acquisition.
For example, American startup Ubiquity has partnered with Brazil’s Real Estate Registry Office to improve its real estate ownership recording process. Brazil has always suffered from high rates of fraud and corruption in the real estate sector. Owners now leverage the immutability of a blockchain-based data recording system that ensures their property rights and greatly reduces fraud potential.
As much as we’d like to believe it, speech is almost never free. Some countries choose to censor media outlets to skew public opinion and hide events that might interest nonprofit organizations. Blockchain-based social platforms may protect the rights of free speech without being at risk of repercussions.
The importance of big data and its business impacts should never be underestimated. In part because of its value, it continues to attract cybercriminals.
Stealing donors’ financial information, data tampering, and identity theft are all real examples of cyberthreats for nonprofit organizations. While many organizational leaders are aware of these, the 2018 State of Nonprofit Cybersecurity report by NTEN shows that more than half of nonprofits (68.2%) don’t have documented policies and procedures in case of a cyberattack.
In order to ensure the highest level of security possible, nonprofits can use private blockchains for storing data. The use of end-to-end encryption can provide nonprofits with a much higher level of data security and confidentiality, which will also make anonymous donors more willing to donate to such organizations.
In December 2018, UNICEF announced its intention to invest up to $100,000 USD in blockchain startups through its innovation fund. Among chosen innovators were Atix Labs, OS City, Prescrypto, StaTwig, and W3 Engineers.
Let’s take a closer look at these initiatives.
An Argentinian blockchain platform developer, Atix Labs focuses on the democratization and traceability of funds and addresses issues of transparency and accountability. The company ensures that funds raised through crowdfunding platforms get to where they’re supposed to, using smart contracts.
Based in Mexico, OS City seeks to address issues of corruption, transparency, and accountability with a platform that tracks the implementation of state-delivered social services and reports on how the resources are allocated.
Another Mexican startup Prescrypto provides a blockchain-based platform that helps patients anonymously send medical information to pharmacies and doctors. This solution effectively protects sensitive patients’ data and leverages blockchain interoperability to connect healthcare professionals. The technology can become revolutionary as the lack of communication among pharmacies, physicians, and doctors often leads to poor medical outcomes.
This Indian startup uses blockchain to increase transparency for logistics providers and their clients. Their aim is to help prevent corruption and ensure appropriate distribution through their blockchain-based platform that tracks food and vaccine deliveries.
Headquartered in Bangladesh, W3 is developing an open-source blockchain-based messaging service to provide access to digital communication to remote areas. The company’s solution helps connect refugees, aid workers, and NGOs for the purposes of communication and emergency broadcasting.
The idea of using blockchain for nonprofits hasn’t been fully adopted yet, but it presents a great potential to solve the critical issues related to trust, accountability, and corruption and rebuild the faith of people investing in doing good.
However, blockchain technology is not a cure-all solution that can be applied in any situation. To provide real value, organizations need to thoroughly evaluate their challenges and ask important questions like: “Is blockchain the only feasible solution in our case?”
At the same time, nonprofits don’t usually have enough proficiency with emerging technologies to make informed decisions about their adoption, which is understandable as their goals fall into a different category. In such cases, organizations should leverage partnerships with experts on the matter to squeeze the most value out of the blockchain technology.
Early solutions can prove expensive and confusing, but nonprofits don’t have to do it on their own. This nascent field has seen many productive partnerships, and reliable providers can expand the possibilities of nonprofit organizations in achieving their key objectives and truly making the world a better place.
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