Blockchain improves charity transparency – but is it right for everyone?

In the year In 2021, the Australian branch of the Red Cross received $90 million to help victims of bushfires in New South Wales and Victoria.

However, the lack of transparency was soon criticized when the organization announced that it would only distribute 1/3 of the intended amount of immediate aid and that it could take up to three years to distribute the entire amount.

A resident of the city who lost his house in the fire told the local media, “They promised a lot to do this, that and others (but) I got nothing, I don't know where the money is going.” He said.

This one example highlights a common problem among charities: the processes for distributing charitable donations are often mired in bureaucracy and prone to mismanagement. Without strong accountability mechanisms, charities are at risk of misuse or abuse of funds and, at worst, outright fraud.

Jack Vinijtrongjit, CEO of AAG – the venture capital firm that runs AAG Charity DAO – told Cointelegraph, “Statistically, a lot of money is wasted in charity. For example, in some cases, only fifty cents of a dollar ends up at the destination. Very Few can achieve efficiency in the 83% range like Oxfam.

Blockchain technology offers tangible benefits to donors and charities. It provides greater accountability and transparency, allowing contributors to track their donations and see the results of their generosity.

How blockchain provides transparency

Blockchain technology offers real-time tracking of donations and transactions. This level of transparency helps build trust and confidence among donors as they ensure that their funds are being used for the intended purpose.

It also allows charities to provide donors with a breakdown of their contributions, showing how each dollar is allocated to different projects or initiatives. “With blockchain, the flow of funds can be easily tracked, and if the organization expects people to continue donating, they need to ensure that as many funds as possible arrive as intended,” Vinijtrongjit said.

This transparency can reduce fraud and misuse of funds because “corrupt local officials can take the money and misuse it.”

Blockchain technology has the important characteristic of being immutable. A blockchain record or transaction cannot be changed or removed without the agreement of all nodes in the network. Because it is immutable, the charity's financial records, donation history and other information are protected from alteration.

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This function is especially important for non-profit organizations because it guarantees that contributions to their cause are permanently recorded by third parties and easily auditable.

Smart contracts, self-executing contracts written directly into code with the terms of the agreement, are another important benefit of blockchain technology. These contracts can be used to automate processes such as disbursing funds or ensuring the completion of certain tasks.

Smart contracts help ensure that funds are used for their designated purpose, as they release funds only when pre-defined conditions are met. This will increase transparency by removing the need for middlemen and reducing the risk of misuse of funds.

Charitable organizations using blockchain technology

One prominent example of a charity using blockchain technology is the United Nations World Food Program's (WFP) Building Blocks project. WFP deploys blockchain while providing food aid to Syrian refugees in Jordan.

Every transaction, from food purchase to distribution, is recorded on the blockchain, allowing migrants to access their rights with a biometrically verified account.

The World Food Program has extended its use of blockchain to Yemen, employing the technology to provide food aid to vulnerable citizens in Yemen's civil war. By providing digital vouchers on the blockchain, WFP can reduce the risk of diversion or fraud and ensure that aid reaches those in need.

In the year In 2022, Binance launched the Ukraine Emergency Relief Fund. This initiative aims to provide critical logistical support – food, fuel and essential supplies – to refugees on the ground. In addition, Binance donated 16,042 BNB (BNB), equivalent to $6 million at the time, to the fund.

Donations can be tracked on the official fundraising page, which shows a list of donors, the amount donated by each donor, the total amount raised and allocation. For example, of the $11.3 million raised so far, 2.5 million Binance USD (BUSD) ($2.5 million) has been allocated to UNICEF and Mercy Corp.

Small charities like GiveDirectly have also embraced blockchain technology. GiveDirectly, which provides direct cash transfers to survivors of the recent earthquake in Morocco and children living in poverty in Flint, Michigan, uses blockchain to record and verify every transaction.

Key issues of charities

For charities looking to incorporate blockchain technology, there are several best practices to follow. First, it is important to set clear objectives when integrating blockchain into charity work.

These objectives should be well defined, including increasing transparency, streamlining administrative processes or facilitating the distribution of aid.

It is very important to choose the most suitable blockchain platform. Choices like Ethereum or Hyperledger should be approached fairly, taking into account specific requirements such as scalability, security, and charity.

Marina Zybareva, a spokeswoman for Binance Charity – a non-profit organization that uses blockchain technology for crypto donations – told Cointelegraph that charities should adhere to some critical best practices when using blockchain technology to improve transparency in charitable activities. Among these is gaining a general understanding of how blockchain and cryptocurrency work. Acquiring this basic knowledge is a critical first step in the integration process.

Understanding how blockchain technology works is important for charities because blockchain technology is not a one-size-fits-all solution. There are different applications and platforms, each with unique features. For example, Layer-2 networks like Polygon have faster speeds and lower transaction costs. In order to choose the most appropriate solution, charities need to understand these differences and how they fit with their specific goals and donor preferences.

Jerry Lopez, founder and CEO of Philicoin – a blockchain-based philanthropy platform – told Cointelegraph:

“It is important to conduct an internal analysis to assess the organization's capabilities and resources. Is the organization ready for innovation and/or adaptation? Are key stakeholders ready for the change?”

“This seems like an obvious point, but it's an important one. Charities can be slow to embrace change. Understanding what it takes to make the leap to blockchain requires additional resources and investments to ensure that reliable, trustworthy and practical solutions are implemented.

Lopez emphasized the importance of knowing that the organization is “fully committed to going through the transition,” which can take time, research, understanding and a team to help manage and manage its growth. “Usually, organizations learn through trial and error,” Lopez said.

Good security practices and maintaining data integrity are fundamental principles for building and maintaining trust with donors and beneficiaries. This includes the continuous maintenance of accurate and up-to-date records on the blockchain. Regular auditing and verification of transactions are important steps to prevent errors or fraud.

“Charities must prioritize security when entering the blockchain realm,” Zybareva said. Adopting robust security measures and technologies is essential to maintain the integrity of the system. Placing security at the forefront ensures that the organization and its donors are protected against fraud and strengthens overall trust in the transparency mechanisms in place.

Compliance with data protection regulations and maintaining the privacy of sensitive user data are non-negotiable elements. These data security issues must be balanced with the need to allow access for authentication purposes.

Planning for scalability is another critical aspect, especially when anticipating ever-increasing volumes of transactions and users. Ensuring that the long-term sustainability of the blockchain infrastructure can adapt to the needs of the charity should be a central focus.

Zybareva added that charities should “assess their technical readiness, taking into account their ability to manage cryptocurrency wallets and other blockchain-related infrastructure.”

“By comparing their operational needs with blockchain's capabilities and using expert insights, charities can determine whether blockchain integration is compatible with their transparency goals.”

It is important for charities to assess whether their community (donors, partners, etc.) is ready to use blockchain platforms for charitable purposes.

Lopez, “Is society ready to embrace blockchain? For example, how will blockchain solutions impact the supply chain? Can the community adopt, adopt or interact with the new solutions, or will it require additional infrastructure, education, training and development to ensure the full welfare cycle is on board?

Adopting blockchain technology in the philanthropic sector is a complex process that goes beyond just the technology itself. It includes organizational readiness, supplier relationships and the ability to adapt to the wider community. Transparency in charities is a noble goal, but realizing the full potential of blockchain without leaving any stakeholder behind requires a comprehensive and well-planned approach.

What else can charities do to increase transparency?

While blockchain technology can help track the flow of money, it can be integrated with additional organizational processes to effectively utilize charitable donations.

Vinijtrongjit said, “I don't believe that blockchain alone can help fix these issues as tracking the use of funds is very complicated. For example, local charities at the destination may be forced to use a supplier who overcharges them as part of the corruption scheme. An independent audit still needs to be done, but at least blockchain can be used to ensure that the funds reach their destination.

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Another important aspect of ensuring transparency is that an independent audit can thoroughly examine a charity's financial records, procedures and compliance with regulations. They provide an objective assessment of an organization's financial health and adherence to best practices.

Vinijtrongjit also believes that charities should fully embrace blockchain in all aspects of their operations, as charities can provide comprehensive, accessible and regular reports on their activities and financial information.

This includes information such as the allocation of funds and the amount of funds collected, which can be collected from the blockchain and added to these reports. Vinijtrongjit said:

This is like giving donors insight so that they can make decisions based not only on what they should contribute, but also on how well the organization can fulfill its mission.