How might we reduce the proportion of international aid money currently lost to corruption or inefficient intermediaries? A recent technological innovation, the blockchain, could offer a solution to this challenge. By design, the blockchain supports transparent and auditable transactions, and provides a way to automate the execution of agreements based on mutual satisfaction. With willingness to embrace this technology, the blockchain could therefore radically transform funding models for international organizations – and herald a new paradigm for global resource transfer.
The cost of funding the United Nations is an ongoing source of debate among the populations of member countries. To make things worse, not all of these funds are deployed for their intended purpose: it has been estimated that up to thirty percent of development aid from UN funds may be currently lost to corruption or inefficient intermediaries. However, a recent technological innovation, the blockchain, could radically transform this situation.
The blockchain technology has recently emerged as a disruptive element. The technology is able to automate the processes of data verification, access and exchange through algorithmic protocols, with reduced reliance on trusted authorities. Blockchain technology was developed in 2008 as the underlying technology of Bitcoin, the first peer-to-peer network for decentralized and cashless payments. Since then, it has proven its worth as a stand-alone computing and organizational paradigm, with numerous and significant benefits for many different sectors – such as public administration, finance and banking, industry, healthcare, and insurance. These benefits generally include: improved data security and integrity; better effectiveness of data management and workflows through automation and disintermediation; reduced need for infrastructures, with substantial savings in time and administrative costs; and new opportunities for sharing data and exchanging value between unknown or untrusted participants.
Importantly, the blockchain enables a new ecology of data governance, which is based on neutrality, tamper-resistance and transparency. This can hardly be overstated. Indeed, thanks to the algorithmic protocols of the blockchain, digital transactions can be automatically executed on a large scale with reduced or no human intervention. Records of such transactions are permanently auditable and resistant to possible accidental errors, corruption or fraud by privileged insiders or third parties.
The blockchain may thereby have a number of particularly interesting applications for international organizations. Any financial services – from the management of UN funds to microfinance projects – could be directly provided to the parties involved through peer-to-peer transactions, or managed in a more transparent and effective fashion, with reduced bureaucratic red tape and counterparty risk.
“The blockchain could be successfully integrated to the policy of the United Nations, NGOs and other global organizations, who have long called for a reliable financial and administrative structure through which to promote specific objectives and monitor their real progress at local level.”
The blockchain opens a possibility for self-enforcing agreements (or smart contracts), digital escrows, which prevent the release of a payment until all of the terms of an agreement are met, and multi-signatures wallets, which require the consent of multiple parties for the execution of a payment or the transfer of digitalized assets. These could be successfully deployed to overcome difficulties related to the low recovery rate of micro-credit, or to avoid problems typically associated with corruption, fraud, lack of transparency or moral hazard from participants in the process of international fund transfer – such as local intermediaries whose actions cannot be monitored through the use of traditional financial instruments.
Moral hazard and adverse selection – asymmetrical access to information that benefits one of the parties in a transaction – are common occurrence among institutions and credit groups, especially in developing countries, largely due to the lack of advanced regulation. They represent key reasons why so many development projects have failed in many parts of the world in the last decades, and they must be prevented with great care, particularly when donors with sizable funds are involved.
The blockchain may ensure the effectiveness of projects aimed at the redistribution of wealth and sustainable development, since it provides for the transparency and auditability of transactions by-design – namely throughout the engineering process of digital platforms, with a proactive and preventative approach – rather than by-policy, i.e. through anti-corruption measures and subsequent verifications of financial operations by the competent authorities, which may turn out to be ineffective. Sheltered from possible opportunistic behaviors, dishonesty or general sluggishness on the part of traditional financial actors and local operators, agreements between parties could be protected and automatically executed through the blockchain, in respect of the original goals and obligations of the subjects involved. International funds could thus be used with less friction and in a more effective way, leapfrogging long value chains and intermediaries, and substantially increasing the creation of social and economic value at local level, for the benefit of the final users. At the same time, the complete traceability and transparency of transactions enabled by the blockchain would also prevent any illicit action or misuse of financial resources. The blockchain could hence be successfully integrated to the policy of the United Nations, NGOs and other global organizations, who have long called for a reliable financial and administrative structure through which to promote specific objectives and monitor their real progress at local level.
It is important to recall, however, that many issues still need to be addressed in the construction of a reliable blockchain-based governance model at the global level. This endeavour requires high levels of coordination and security, and involves great complexity.
From a technical standpoint, the first problem is to establish well-defined quality standards in the industry. Blockchain networks may present a number of crucial weaknesses, so it is fundamental for global organizations to rely on trustworthy and secure digital backbones that are able to guarantee high performance, legal compliance, and privacy. The underlying systems must also ensure continuity of service and long term preservation of data, from which depend the future execution of smart contracts and the persistence of digitalized assets over time. In this regard, the blockchain networks of Trust Service Providers have recently emerged as infrastructures with the most reliable certified standards at the international level, both in terms of technical and management issues.
Further problems relating to the last section of the value chain must also be addressed before introducing blockchain-based solutions in the management of international funds. The digitization of services generally needs minimal infrastructure – such as stable and high speed connectivity and a sufficient user base – as well as computer literacy, and a sufficient degree of regulation expertise. In many areas of the world where populations are still struggling with subsistence farming, famine and illiteracy, this is still only a long-term prospect.
Since every country or region has its own specific conditions, it is important to assess the potential effectiveness of new technologies case by case, taking into account all the relevant factors at the social and anthropological levels. However, through adequate local innovation policies, together with incubators and small pilot projects run on secure and reliable platforms, the blockchain could be deployed to radically transform the funding models for international organizations– and herald a new paradigm for global resource transfer.