How Blockchain will make philanthropic organizations better
Blockchain apps have the potential to revolutionize the relationship between charities, donors, and recipients. Using distributed ledgers to track transactions, and cryptocurrencies to transfer funds directly to recipients and the organizations that are in a position to help them, is going to fundamentally change how we participate in charitable endeavors. By eliminating much of the opportunity for financial leakage and fraud we can better incentivize transparency and encourage more generosity from individuals that are skeptical of how charities currently spend donated funds.
Americans gave over $373 billion dollars to charity in 2015. How much of that ended up helping the people those charities claim to assist? It’s a very difficult question to answer because charity monitoring sites aren’t exactly watchdog groups and they tend to just use the numbers given to them by the charities themselves without asking very many questions. There are some extremely negative examples of charities blatantly using donor money for personal expenses, like the Cancer Fund of America, but even the most principled charities with the leanest, most streamlined organizations still end up with a lot of financial leakage. This list of the top compensation packages for charity executives could make a reasonable person question whether they’re giving money to a charity or a for profit corporation. I’ve painted a grim picture of charities, but I do want to point out that many charities are simply doing the best they can with the current system.
So how can we reduce inefficiency and give people confidence that most of their donation is going to help the cause they’d like to support? Let’s start by listing the challenges facing well-intentioned charities and donors: high overhead, middle-men, lack of accountability for how the money is spent, and administration fees that charities charge when they contract “boots on the ground” aid groups to do the actual charity work. See this NPR article about the Red Cross and their handling of the Haiti disaster for some textbook examples of what we’re talking about.
Overhead
Labor and office space is expensive in the Western nations where most of the audience reading this is based. In many cases over 30% of an organization’s revenue is spent on staff compensation and office space in cities like London, New York, and Paris. For international charities this is particularly troubling, because this money is being spent thousands of miles away from its intended recipients. Micro-managing the distribution of aid in Ghana from New York or Washington D.C. is simply not possible to do efficiently. Not just blockchain, but the internet in general is the solution to this. More and more companies have been able to significantly reduce overhead and eliminate unnecessary staff by creating virtual workspaces. This is not me calling for the unemployment of a lot of Westerners, I’m merely floating the idea that people would be more willing to give to charity if the charity wasn’t in a nicer office than the one they work in, and the employees weren’t being paid more than people working at for profit corporations.
Lack of accountability for how the money is spent
If you dive into the tax returns of some prominent international charities, you’ll see that they’re doing some creative accounting and shifting the salaries of employees in their Manhattan HQ and claiming it’s part of their direct aid expenses to Africa, South America, and Asia. It’s disingenuous on the part of charities to do this, because it would be difficult to locate a donor who would agree that paying staff in Manhattan is in any way direct aid to an earthquake affected village in Nepal.
How will blockchain technology change this? It will allow charities to reduce their administrative staff considerably. Rather than donating to the Red Cross for relief efforts in Nepal, donors could directly donate to organizations on the ground in Nepal using a cryptocurrency like bitcoin or ether, and those organizations can then use the money to order the supplies they need and pay locals to get to work with cleanup and rebuilding efforts. With blockchain ledgers tracking the transactions, and the organizations showing time/date stamped photographic proof of supplies delivered, the donation process will be far more transparent and efficient.
Middle-men
In between the charity and the intended recipient you’ll find a complicated path of bureaucrats, tax collection agencies, customs officials, and corrupt governments who often have a hand in exacerbating the problems that charities and NGOs are trying to solve. While some of these stops along the way are necessary for preventing money laundering, tax evasion, and the funding of terrorist organizations, overall too much is siphoned off. Using a blockchain app like Humaniq, that can put donors directly in connection with the organizations and individuals making a difference on the ground, can bypass several layers of bureaucracy that are value subtractive, rather than value additive. Using the blockchain ledger, as discussed in a preceding section, can provide transparency and reassure the donors that their money is going directly to the people who need it the most.
The other bonus to cutting out middle-men is that many charities lack the expertise to provide effective aid, even if they mean well. This ProPublica article details the egregious example of how the Red Cross collected half a billion dollars in donations for Haiti and achieved staggeringly mediocre results. One of the main reasons for this tragic failure? Lack of local expertise in navigating the bureaucracy to get results, and lack of administrative expertise in disbursing funds to organizations that were achieving results in Haiti.
Administration fees
The Red Cross’s efforts in Haiti serve as a case study in how administration fees can eat into a charity’s funds. As you can see in the graphic from ProPublica, over 40% of the funds used for Haiti were spent on the overhead of the Red Cross, on program management by the Red Cross, and on the overhead of organizations the Red Cross contracted to work on projects in Haiti. That’s $200 million dollars that wasn’t spent directly helping or employing Haitians to help other Haitians. You will also notice that the Red Cross claimed that 91% of donations were used for direct aid, when that was absolutely false. Observing an organizational fail on this large of a scale makes you wonder how prevalent financial leakage is among international charities, and how often they misreport their expenses to make them seem more effective than they actually are.
In many cases the well-marketed charities people donate to don’t actually do much direct aid work. This is contracted out to NGOs and other organizations with local expertise who can accomplish goals in a target country. With each organization you add to the process, a percentage, usually between 7–9%, is taken by the participating contractor to cover overhead. With blockchain technology we can change this dynamic by connecting donors directly to the organizations and contractors that will be doing the actual work. In the case of Haiti, $155 million more could have been spent helping Haitians, rather than seeing it evaporate in the hands of a completely inept Red Cross effort.
People want to help other people. Although there are certainly plenty of examples of humanity being inhumane, the reality is that people are hardwired to help others who need it. With blockchain technology we’re going to be able to provide aid far more efficiently than we ever could in the past, through the reduction or elimination of wasteful practices that currently diminish the positive impact that many charitable organizations want to make. I don’t think I’m being overly idealistic in believing that people will be even more generous with their donations when they can see that their money is directly benefiting the cause they want to support.
