Kirsty Weakley attempts to decrypt blockchain. What is it? How can it help charities?
Everyone suddenly seems to be talking about blockchain, cryptocurrency, and mining. Claims range from it being the solution to the problems the charity sector didn’t know it had, an existential threat to charities’ very existence, or a flash in the pan that is not worth worrying about.
None of these are quite right. Blockchain technology is not about to solve any problems (real or imagined) the sector has with public trust and charities are not about to haemorrhage supporters, beneficiaries and staff to new entities. But most importantly it is a ‘thing’, which sector leaders need to start thinking about before they find themselves becoming irrelevant.
To illustrate the point let’s look at an example in the music industry. Last week it was announced that 2017 had seen the biggest rise in music consumption since 1998, with the value of music sales increasing by 10 per cent to £1.2bn.
More and more people are paying for the privilege of listening to their favourite bands and artists where and how they want. This is a far cry from doom and gloom of a few years ago when the advent of illegal streaming services like Napster with fuelled fears that people would stop paying for music and the industry would collapse.
Today legal streaming services like Spotify or Apple Music, which charge users or sell space to advertisers, dominate the space. But there has been a well-documented resurgence in vinyl, people still buy CDs and some people even buy cassettes.
It turns out that people didn’t want to stop supporting acts they enjoy and respect, but when there was an option to consume music differently many did so. And now what has emerged is a richer, more diverse sector, where people have the choice to buy and hear a wider variety music in a way that works for them.
So the message here for charities is that people don’t want to stop supporting causes they care about, but the way they support them might be about to change. Blockchain is just one emerging technology with the potential to change how we all interact and do business. Ignoring it is not an option.
So on to blockchain…
Is it the same as Bitcoin?
No. Bitcoin is the first, and probably best known, cryptocurrency - a medium of exchange which is underpinned by blockchain technology. More on cryptocurrencies in a bit.
Blockchain was developed to make Bitcoin work, but the technology has applications beyond supporting cryptocurrencies.
What makes it different?
A blockchain is essentially a database that can record all sorts of information such as financial transactions, legal agreements, medical records and more, along with a timestamp.
It is often described as a “distributed ledger system”. Each new 'block' of information is linked to the others using complex computer algorithms, and then stored across a peer-to-peer network, instead of being stored centrally and managed by a single third party.
This makes the network harder to hack than a centralised system, where records are controlled by an intermediary or third party. Records cannot be easily changed after they have been created, without the consent of everyone involved in the blockchain.
The absence of a centralised third party managing the contract, such as a bank, government or regulator, is an obvious distinguishing feature.
Another key feature of “smart contracts” stored in this way is that they are difficult to break. In theory this means that any agreement made entirely on a blockchain must be honoured.
Advocates of blockchain often talk about it being transparent. This is because many, though not all ledgers are public, meaning they can be viewed by anyone who knows how to access them.
How could charities use it?
Let’s start by saying that some charities are already using blockchain technology.
There are three main areas where it could be useful, but there may be more that I’ve not come across.
- Faster, easier and cheaper money transfers
- Funding agreements
- Governance and regulation
One of the initial applications to reduce the foreign exchange fees transferring money across borders, particularly for getting funds to people who need it in countries with little infrastructure or hostile governments.
Disberse is one platform trying to make this work. It has already piloted the platform with a small charity and has partnered with Start Network, a coalition of 42 aid organisations around the world including War Child, Christian Aid, Muslim Aid, Oxfam and Tearfund, to explore ways platform to distribute aid on larger scale. The preliminary work has been supported by a grant from the Estonian government.
They say that up to 10 per cent of aid can be lost because of banking fees, poor exchange rates and currency fluctuations which are circumvented by using the Disberse platform.
Funding agreements, either between individuals or institutions, made using blockchain technology as a 'smart contract' could mean that payments could be automated once certain conditions are met. Funders can also in theory identify exactly where their money has gone.
But a more radical use of blockchain could alter how charities are structured, governed and regulated. This area is still very theoretical, but because blockchain technology can be used for any sort of contractual arrangement, such as governing documents.
Hypothetically this could make it incredibly difficult for charities to break the rules while they are using blockchain, and ultimately vastly alter the role of regulators like the Charity Commission.
What is a cryptocurrency? Will it revolutionise giving?
Whenever there are new technologies the first thoughts are often about how it could be leveraged for fundraising, which has led to a lot of speculation about how Bitcoin or other cryptocurrencies could benefit charities.
Cryptocurrencies, such as bitcoin, are digital currencies that exist without the support of a central bank backed by a government.
For this reason they have a reputation for being popular with drug dealers and tax avoiders.
But there are also a number of initiatives underway to either use existing crytpocurrencies, such as Bitcoin, or create new channels for giving.
For example, GiftCoin announced its intention to develop and launch a new platform and cryptocurrency later this year. To do so it needs to raise between $3m and $10m to build the system.
Elsewhere the homelessness charity St Mungo’s has been using the blockchain giving platform, Alice.si, to raise money for a specific project supporting 15 people and keep donors informed about the progress.
Is anyone actually taking this stuff seriously?
Yes. Most of the banking and financial services sector. While they might have been the first industry which was first threatened by the emergence of blockchain, they are now leading the way in incorporating it into the services they offer.
Estonia’s government is leading the way. As I noted above it has provided financial backing to Disberse but it has also a wider ambition to become a “blockchain nation” and is looking at how to launch its own cryptocurrency.
The UK government also thinks this is a big deal. Last year the Government Office for Science produced a report, Distributed ledger technology: beyond blockchain, which made a series of recommendations about how the government could use and support the area.
Are there scams?
Yes. And charities could become involved.
Last year we reported that the Charity Commission is investigating a complaint about As-Sabur Global over a connection to OneCoin, a cryptocurrency that is under a police investigation. The Financial Conduct Authority issued a warning urging customers to be "wary of dealing with OneCoin".
So what don’t charities need to know?
I bet you don’t know exactly how a car engine works, but you still drive (or get driven). And how often do you stop to worry about what’s going on inside a smartphone? You need to understand the basic principles and trust in the manufacturer that it is safe and secure.
The same holds true for blockchain. The temptation with any new technology is to get bogged down in trying to understand the finer detail and end up missing the big picture.
In summary, charities should understand that blockchain technology offers a new way of making and storing agreements and transactions without a third party. This has implications for the third parties that charities use, and for the sector's role as an intermediary between donors and beneficiaries.
Charities need to be considering how they might be able to influence those developing the systems to harness it for social good, and to make sure that beneficiaries are protected from harm.
Subscribers to Fundraising magazine can read an article by Richard Strachan, managing director at digital agency 3sidedcube, about how Blockchain might impact the sector.
Rhodri Davies, head of policy at the Charities Aid Foundation, has written extensively on the subject. Find CAF’s reports and video explainers here.
Raphael Mazet, chief executive of Alice.si, wrote an article explaining why he developed a the platform, for Huffpost.