Blockchain enhances transparency in charitable organizations — Is it suitable for all?

In 2021, the Australian division of the Red Cross received $90 million to support those affected by the bushfires that impacted various areas of New South Wales and Victoria.

Nevertheless, the organization faced criticism for its lack of transparency after it disclosed that only about one-third of the allocated funds would be used for immediate aid, with the total distribution potentially taking up to three years.

A resident who lost his home in the fires expressed to local media, “They made numerous promises about what they would do, but I’ve received nothing, and I have no idea where the money is going.”

This instance underscores a prevalent issue within charities: The distribution processes for charitable donations are frequently clouded by bureaucracy and susceptible to mismanagement. In the absence of strong accountability measures, charities risk mishandling or misappropriating funds, and in the worst cases, engaging in outright fraud.

Jack Vinijtrongjit, CEO of AAG — a venture capital firm leading the AAG Charity DAO — informed Cointelegraph, “Statistically, a significant amount of money is wasted in charity. For instance, in some situations, only fifty cents of every dollar reaches its intended destination. Very few organizations can achieve efficiency in the 83% range, like Oxfam.”

Blockchain technology can offer substantial advantages for both donors and charities. It enhances accountability and transparency for contributors, allowing them to track their donations and observe the outcomes of their generosity.

How blockchain can provide transparency

Blockchain technology enables real-time tracking of donations and transactions. This degree of transparency fosters trust and confidence among donors, as they can confirm that their contributions are being utilized for the intended purposes.

Moreover, it allows charities to furnish donors with a detailed account of their contributions, illustrating how each dollar is allocated to different projects or initiatives. Vinijtrongjit stated, “With blockchain, the flow of funds can be easily observed, and if the organization wishes to encourage ongoing donations, they must ensure that as many funds as possible are delivered as intended.”

How blockchain can help provide more transparency. Source: OpenLedger

He noted that this transparency can mitigate fraud and the misuse of funds, as “there can be instances where corrupt local officials might misappropriate the funds.”

Blockchain technology also possesses the crucial characteristic of immutability. A blockchain record or transaction cannot be altered or deleted without the consensus of all nodes within the network. Due to its immutability, the financial records of the charity, donation histories, and other data are protected from modification.

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This feature is particularly significant for nonprofit organizations as it ensures that any donations made to their cause will be permanently recorded and easily audited by external parties.

Smart contracts, which are self-executing agreements with the terms directly encoded, represent another beneficial aspect of blockchain technology for charities. These contracts can automate processes such as fund distribution or verifying the completion of specific tasks.

Smart contracts help guarantee that funds are utilized for their intended purposes, as they only release funds when predetermined conditions are satisfied. This enhances transparency by removing the need for intermediaries and decreasing the risk of fund misuse.

Charities using blockchain technology

A prominent example of a charity employing blockchain technology is the United Nations World Food Programme’s (WFP) Building Blocks project. WFP implemented blockchain to provide food assistance to Syrian refugees in Jordan.

Every transaction, from food purchases to distribution, was logged on a blockchain, enabling refugees to access their entitlements through a biometrically verified account.

The World Food Programme also expanded its use of blockchain to Yemen, where it utilized the technology to deliver food assistance to vulnerable populations amid the ongoing Yemeni civil war. By offering digital vouchers through blockchain, the WFP ensured that aid reached those in need while minimizing the risk of diversion or fraud.

In 2022, Binance initiated the Ukraine Emergency Relief Fund, a cryptocurrency-focused crowdfunding platform that allowed individuals to contribute to emergency relief efforts aimed at supporting refugees and children in need. This initiative also seeks to provide essential logistical support — including food, fuel, and necessary supplies — for refugees on the ground. Additionally, Binance contributed 16,042 BNB (BNB), equivalent to $6 million at that time, to the fund.

Donations can be monitored via the official fundraising page, which displays a list of donors, the amount contributed by each donor, the total amount raised, and allocations. For instance, 2.5 million Binance USD (BUSD) (valued at $2.5 million) was allocated to both UNICEF and Mercy Corps, out of the $11.3 million raised to date.

Allocation records of dispersed funds. Source: Binance Charity

Smaller charities like GiveDirectly have also embraced blockchain technology. GiveDirectly, which recently provided direct cash transfers to earthquake survivors in Morocco and children living in poverty in Flint, Michigan, utilizes blockchain to document and verify every transaction.

Key considerations for charities

For charities aiming to integrate blockchain technology, several best practices should be observed. First, it is crucial to establish clear objectives when incorporating blockchain into charitable operations.

These objectives should be explicitly defined, including improving transparency, streamlining administrative processes, or optimizing aid distribution.

Choosing the most appropriate blockchain platform is of utmost importance. Options like Ethereum or Hyperledger should be selected carefully, taking into account factors such as scalability, security, and the specific needs of the charitable organization.

Marina Zibareva, a spokesperson for Binance Charity — a nonprofit organization that utilizes blockchain technology for crypto donations — informed Cointelegraph, “Charities must adhere to some essential best practices when adopting blockchain technology to enhance transparency in charitable operations. Among these is acquiring a thorough understanding of how blockchain and cryptocurrency function. Gaining this foundational knowledge is a crucial first step in the integration process.”

Understanding how blockchain technology operates is vital for charities since it is not a one-size-fits-all solution. Various implementations and platforms exist, each with distinct features. For example, layer-2 networks like Polygon offer faster speeds and lower transaction costs. To select the most suitable solution, charities must comprehend these differences and how they align with their specific goals and donor preferences.

Jerry Lopez, founder and CEO of Philcoin — a blockchain-based philanthropy platform — informed Cointelegraph:

“It is essential for the organization to conduct an internal assessment to evaluate capabilities and resources. Is the organization prepared for innovation and/or adaptation? Are the primary stakeholders ready for the transition?”

“This may seem like an obvious point, but it’s critical. Charitable organizations can be slower to embrace change. Understanding what is necessary to transition to blockchain solutions will require additional resources and investments to ensure credible, trusted, and effective solutions are implemented,” he stated.

Lopez also emphasized the necessity for the organization to determine if it is “fully committed to completing the transition,” which can require time, research, understanding, and a dedicated team to manage and oversee the development. “Often, organizations will learn through trial and error,” Lopez remarked.

Good security practices and maintaining data accuracy are fundamental principles for establishing and sustaining trust with both donors and beneficiaries. This entails the ongoing maintenance of accurate, up-to-date records on the blockchain. Regular audits and verification of transactions are crucial measures to prevent errors or fraudulent activities.

Zibareva stated, “Charities must prioritize security as they enter the blockchain space. Implementing advanced security measures and technologies is essential to protect the integrity of the system. Prioritizing safety ensures the protection of the organization and its donors from potential fraud and enhances overall trust in the transparency mechanisms in place.”

Compliance with data protection regulations and safeguarding the privacy of sensitive beneficiary information are non-negotiable components. These data security considerations should be balanced with the need for accessibility for verification purposes.

Planning for scalability is another vital aspect, especially when anticipating an increasing volume of transactions and beneficiaries over time. The long-term sustainability of the blockchain infrastructure should be a primary concern, ensuring that it can adapt to the evolving needs of the charitable organization.

Zibareva added that charities “should assess their technical readiness, considering their ability to manage cryptocurrency wallets and other blockchain-related infrastructures.”

“By aligning their operational needs with blockchain’s capabilities and leveraging expert insights, charitable organizations can determine whether blockchain integration aligns with their transparency objectives.”

It is also necessary for charities to evaluate whether their community (donors, partners, etc.) is prepared to accept the use of blockchain platforms for charitable purposes.

Lopez stated, “Is the community ready to embrace blockchain? How will blockchain solutions affect the supply chain, for instance? Is the community capable of accepting, receiving, or interacting with the new solutions, or will this necessitate additional infrastructure, education, training, and development to ensure the complete charitable cycle is onboarded?”

The implementation of blockchain technology in the charitable sector is a multifaceted process that extends beyond the technology itself. It encompasses organizational readiness, supplier relationships, and the broader community’s capacity to adapt. Transparency in charities is a commendable goal, but it necessitates a comprehensive and well-structured approach to ensure that the full potential of blockchain is realized without excluding any stakeholders.

What else can charities do to increase transparency?

While blockchain technology can indeed assist in tracking the flow of funds, it can be combined with additional organizational processes to guarantee that charitable donations are utilized effectively.

Vinijtrongjit remarked, “I don’t believe blockchain alone can resolve these issues since tracking the use of funds is significantly more complex. For example, local charities at the destination may be compelled to use a vendor that overcharges them as part of a corruption scheme. An independent audit must still be conducted, but at least blockchain can be utilized to ensure the funds reach their destination.”

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Independent audits are another crucial element in ensuring transparency, as they can thoroughly review a charity’s financial records, operations, and compliance with regulations. They provide an objective assessment of the organization’s financial health and adherence to best practices.

Vinijtrongjit also believes that organizations must fully integrate blockchain into all aspects of their operations, as charities that provide comprehensive, accessible, and regular reports detailing their activities and financial information can be advantageous.

This includes data such as fund allocations and the total amount raised, which can be extracted from the blockchain and incorporated into these reports. Vinijtrongjit stated:

“This will offer insights to potential donors, enabling them to decide not only which cause to support but also based on how effectively the organization can fulfill its mission.”