Where does all the money go? How Blockchain can help the Non-Profit Sector become more transparent.

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Donations are like a black hole. On several occasions, nonprofits have reached out to me for donations without telling me how much of my money goes towards projects they’re “supporting” as opposed to management salary, fundraising and other overhead expenses. Because few non-profits provide this information, choosing worthy causes becomes a challenge. As an example, Kids Wish Network, a charity that grants wishes to children who are battling life-threatening illnesses, raised $18.6M in 2012 and spent only $240K (a little over 1%) granting wishes 1. Kids Wish Network still exists today and is among the 50 worst charities in the U.S. that devote less than 4% of donations to their causes 1. Restoring donor trust and ensuring that donation dollars are being put to their best use, is an important matter. And that’s where blockchain technology comes in. By only processing donations to charities that meet specific criteria and tracking how donations are spent, blockchain can enhance accountability and governance within the philanthropy sector.

Key Industry Highlights:

  • In 2017, $390 billion was donated to >1M nonprofits in the U.S 2.
  • The average program efficiency ratio (% of donations that go directly to the charitable purpose) in 2017 was 87% 3. According to charity watchdogs, such as Wise Giving Alliance, no financially-responsible charity should have a ratio lower than 65% 3.
  • A poll conducted by the Chronicle of Philanthropy in 2015 indicated that 1/3 of Americans believe that charities spend funds irresponsibly. And “35 percent said they had little or no confidence in charities” 4.

A Little Big Idea:

All incoming and outgoing cash flows in nonprofits should be in the form of a traceable, digital currency (i.e. Bitcoin or another cryptocurrency) recorded on the blockchain through a platform that does the following:

  • Provide an audit trail of how donations at both the individual and aggregate level are spent. By having a nonprofit’s donors, recipients, employees and vendors/partners interact on either a public or semi-private blockchain, there will be an immutable record of how donations funnel down to the end recipient. Each time a cryptocurrency donation gets converted into a local currency (i.e. when a nonprofit converts 40% of its Bitcoin donations to USD in order to cover payroll and buy necessary supplies for its projects), that information is recorded by the platform. Subsequently, the nonprofit can also upload receipts and evidence to confirm their spending.
  • Track donations against milestones and provide notifications to donors on progress. (i.e. Kerry’s donation of $10K led to the completion of a new well in Kenya!)
  • Leverage smart contracts that can facilitate goal-based funding. Given an objective function, Kerry can set up donations that satisfy how it is she wants her money to be spent. For instance, she can customize her recurring, yearly donations such that they don’t go through unless the nonprofit maintains a program efficiency ratio of at least 80%. In addition, a subsequent donation will not be made until her previous donation resulted in a known outcome.

BlockChain for Philanthropy

Who does this benefit?

Donors
  • Increased transparency
  • Ability to know how their donations are being used
Non-Profits
  • Increase in donor trust can lead to increased giving
  • Reduce costs; eliminates transfer fees by processing transactions to happen without an intermediary (i.e. bank or central authority)
  • Mitigate financial risks, such as corruption and fraud committed by partners 5. When nonprofits collaborate with other organizations to obtain materials and services that are necessary for the completion of a project, setting up payments that will only be processed once contractual work is finished reduces the possibility of fraud.
  • Enhances coordination between different charities, allowing funds to be transferred automatically once they complete the part of the project they’re responsible for.

Are there similar ideas out there? 

There have been many recent developments that leverage blockchain for philanthropy 6:

Crypto Fundraising –

  • BitHope is a crowdfunding platforms (think Kickstarter) that allows people to make Bitcoin donations to charities of their choice 7.

Crypto Tracking –

  • GiveTrackAlice and AidCoin all offer platforms that can track donations through their life cycles, from donor to donee. However, they’re still in early stages and while GiveTrack was founded by a 501c3 nonprofit called Bitgive, it is unclear how much Alice and AidCoin – which seem to operate on a for-profit model – will charge as commission. Ideally, the platform should be run as a non-profit and only collect a % enough to sustain and improve itself. GiveTrack, currently in beta version, collects donations in the form of Bitcoin and tracks how they’re spent by maintaining a record of transactions in which the Bitcoin either exchanges hands or is converted into local currency 8. Alice and AidCoin are both powered by the Ethereum blockchain 9, but AidCoin uses its own cryptocurrency to track the flow of donations 10,11, which gives rise to exchange risks and uncertainties around its value.

Challenges / Risks:

Realistically, it would take years before all nonprofits – let alone, a single non-profit – has all of their cash flows recorded on the blockchain. For this to happen, there needs to be widespread adoption of blockchain by all counterparties that a nonprofit engages with. Right now, less than 8% of Americans own cryptocurrencies 12 because a) they’re not easy for the average consumer to use (you can’t buy items at the store with Bitcoin yet), b) their value is unpredictable and c) the process of buying cryptocurrencies isn’t very straightforward 13. Nevertheless, people’s mentality towards cryptocurrencies may be different when it’s purchased for philanthropy and for the purpose of introducing traceability and trust (rather than for speculative and investment reasons). Furthermore, any concerns that donors have on how a drop in Bitcoin value has on non-profits’ ability to deliver impact, opens the door for more creative solutions, such as hedge products.

Sources:

1 https://www.cnn.com/2013/06/13/us/worst-charities/index.html

2 https://www.forbes.com/top-charities/#205ffb6276ab

3 https://www.forbes.com/sites/williampbarrett/2017/12/13/analyzing-a-charity-before-giving/

4 https://www.philanthropy.com/article/1-in-3-Americans-Lacks-Faith/233613

5 https://www.forbes.com/sites/forbestechcouncil/2018/04/25/blockchain-is-reestablishing-trust-in-nonprofits/#57f25c577916

6 https://cointelegraph.com/news/how-cryptocurrency-and-blockchain-are-changing-philanthropy-expert-take

7 https://bithope.org/what-is-bithope

8 https://www.givetrack.org/docs/faq/basics

http://donationsapp.alice.si/#/how-it-works/main

10 https://www.aidcoin.co/assets/documents/whitepaper.pdf?v=3.18.4

11 https://medium.com/aidcoin/aidcoin-bringing-blockchain-technology-to-the-charity-sector-e7ce77380d83

12 https://www.cnbc.com/2018/03/16/why-just-8-percent-of-americans-are-invested-in-cryptocurrencies-.html

13 https://www.finder.com/why-people-arent-buying-cryptocurrency

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