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Blockchain For Social Impact? Be Careful What You Wish For

Blockchain technology’s potential for social good has become a hot topic for many philanthropists, social entrepreneurs and related non-profits. The Blockchain for Social Impact Coalition (BSIC) with over 50 member organizations, held a conference in June, and Ethereal

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will be sponsoring another major conference in New York in May 2019. The participants share a view that blockchain is inherently democratic because of the absence of centralized control, and with its time stamps, verification systems, audit trail and protections against tampering, blockchain seems a perfect fit for an arena that prides itself on transparency and trust.

For those organizations involved in doing good in developing countries the applications of blockchain seem especially enticing. Smart contracts to execute poverty alleviation projects between heretofore “untrusted” parties like NGOs and local governments, or between NGOs and aid agencies can be transacted faster, at lower cost and eliminate mutual suspicions. Corruption, a major obstacles to development in many Third World countries, would be reduced through “consensus governance.” In the humanitarian aid field blockchain technology would be useful in cash-based aid to refugees and would eliminate the rip-offs that often plague the materials supply chain. The clearinghouse and settlement functions of blockchain technology could be applied to remittance transfers, now in the hundreds of billions of dollars annually, thus eliminating the middlemen, reducing costs and increasing transaction speed.

But in some cases, particularly transactions between and among the growing number of non-profits, aid contractors, VC firms, and others who present themselves as working for social and environmental impacts in the Third World, it might be worth asking the counter-intuitive question: is full transparency what they really want? Is it desirable to have a system that can generate a chain of custody for each item in the supply chain, where each moment in a contractual relationship is visible? There are sometimes good reasons to keep some of the details involved in complex programs hidden, from standard aid delivery to the fostering of local social impact businesses. Unalloyed transparency can also pose risks to an organization’s reputation.

Let’s be honest, the world of social good is highly competitive. The hundreds of NGOs and firms that work in international development for example compete with each other for public recognition, quality personnel and most important, for public monies (government contracts or grants) and private venture capital as well as donations from individuals, religious institutions, corporations or foundations. The people in those organizations want to be seen and known, their CEOs want to speak at forums and all want their organizations to be seen as trustworthy. Making and selling widgets is one thing, but saving lives or helping to reduce poverty puts you on a higher moral plane. In the social impact world image is everything and fund-raising (selling that image) is based on it. Blockchain applications could conceivably harm that image.

Imagine an NGO called Let’s Eradicate Poverty Together (LEPT), a $400 million dollar organization with thousands of employees and projects in 48 developing countries. It has won a USAID (United States Agency for International Development) grant to develop and run a project in Malawi that will train and equip unemployed youth to form cooperatives to produce and market dairy products.

One of USAID’s requirements is that the winning firm agrees to participate in blockchain technology. There will be several data streams for reporting, all in a permissioned environment. LEPT’s financial reports, staffing patterns, salaries, budgets etc. will be entered in the various reporting blockchains. Every transaction added to each chain will be time stamped and cryptographically validated, including for example all the steps in the hiring of new staff for the project, as well as expenditures and progress reports along the agreed timeline.

There are a few obvious advantages in a blockchain approach for organization like LEPT. A typical USAID grant or contract has to go through multiple verifications before monies are released. There are Agreement Officer Representatives (called AORs), legal staff and accounting office staff who must check and sign off on the contract or grant agreement. This process often results in delays in implementation and frustrates many contractors and grantees. Since the blockchain creates a “smart contract” in which trust is no longer an issue, there is no need for these multiple verifiers and things can be speeded up.

But the cons seem likely to be more important than the pros here. Take the target population in the LEPT grant, youth, defined as age 16 to 25. In the region of Malawi where the work is to take place unemployed youth periodically move between their villages and the city and some move to the cities permanently. Because they are in a sense moving targets, recruiting youth to the project proves harder than expected, but still each person recruited is entered into a block in the chain with their details and a time stamp. Within the first 3 months, 60% of these youth are no longer involved in the project and this is immediately visible. The on-the-ground staff, in order to meet recruitment targets, have begun taking on a considerable number of people who are well over 30 years old and even a few 40 year olds. Because of blockchain’s transparency it is now clear that 58% of the project participants are not in the agreed upon age range, nor are they “youth” by any stretch of the imagination.

Or consider the budget line item “Capacity building.” In the pre-blockchain past bookkeeping at the ground level would have been somewhat flexibly managed; day to day changes in local circumstances would demand adjustments that could not be anticipated when the project agreement was signed. Now, for example, two locally hired staff suddenly need housing, and three motorbikes that had initially been acquired under the line item “equipment for outreach activity” are beyond repair and there is no money left in that budget. The project has no choice but to provide housing for the two local staff and buy three new motorbikes under the capacity building line item.

Such reality based adjustments used to be informally negotiated and forgotten about, but now with blockchain, they stick out as red flags and USAID officers have no discretion about how to handle them. In the interest of transparency the blockchain has, as intended, created a single unassailable truth, a good thing in theory. But in fact informal and often sensible flexibility has been replaced by unalterable rigidity.

In reality most NGOs and firms working in projects like these (and the scores of them that work with USAID spend between $4 and $5 billion in U.S. government monies annually) have to do a lot of compromising, both practical adjustments like those noted above and some “white-lie” moral compromising as well. For example, the annual report of LEPT used to make it a point of pride that $0.90 cents of every dollar donated goes directly to its projects’ beneficiaries. If LEPT were to create a public blockchain it would be impossible to fudge the fact that this $0.90 cents includes things that are necessary to carry out a project but which do not look that way, such as the housing for expatriate staff, travel to conferences where LEPT staff talk to funders about possible proposals, the costs of hiring consultants to write proposals, the travel costs of LEPT’s CEO to each of its regions two to three times a year to inspire the staff and so on. It is now begins to look like far less than $0.90 gets to the beneficiary community.

Another image enhancement item in LEPT’s pre-blockchain days used to be claim that LEPT’s work in scores of projects around the world impacted millions of poor people. But with blockchain it is now easier to see that LEPT is actually a subcontractor along with anywhere from two to six other firms in those same projects, and these other organizations make the same impact claims, often with the same exact numbers. This fairly common double counting, in some sense an innocent part of impression management, is now fully visible.

Given the general public’s long-standing skepticism about much of foreign aid, some of it based on misunderstandings of its scope and purpose, perhaps there is something constructive to be said for the way things used to be, in effect a kind of selective transparency. Both non-profits and for-profit firms claiming to be in the social impact arena have a stake in their reputation and public image. Blockchain, for all its enticing possibilities, might just pull back the curtain a little further than some organizations want.


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