In 2021, the Australian branch of the Red Cross received $90 million to assist victims of the bushfires plaguing multiple regions in New South Wales and Victoria.
However, the organization was quickly criticized for its lack of transparency as it revealed that it would only allocate about a third of its scheduled funds for immediate aid and that it could take up to three years to distribute the full amount.
One resident lost his home in fire Tell “They made a lot of promises, saying they would do this and that, but I didn’t receive anything and I don’t know where the money went,” local media said.
This example highlights a common problem for charities: the process for distributing charitable donations is often buried in bureaucracy and prone to mismanagement. Without robust accountability mechanisms, charities risk mismanagement or misuse of funds, and in the worst cases, outright fraud can occur.
Jack Vinijtrongjit, CEO of AAG, the venture capital firm responsible for the AAG Charity DAO, told Cointelegraph, “Statistically, when it comes to philanthropy, a lot of money is wasted. For example, in some cases, a dollar Only fifty cents of it ever reaches its destination. Few achieve 83% efficiency like Oxfam.”
Blockchain technology can bring real benefits to donors and charities. It provides donors with greater accountability and transparency, allowing them to track their donations and see the results of their generosity.
How blockchain provides transparency
Blockchain technology provides instant tracking of donations and transactions. This level of transparency helps build trust and confidence among donors, as they can verify that their funds are used for the intended purpose.
Additionally, it allows charities to provide donors with a detailed breakdown of their donations, showing how each dollar is allocated to different projects or initiatives. Vinijtrongjit said, “With blockchain, the flow of funds can be easily seen, and if organizations want people to continue donating, they need to ensure that as much of the funds as possible are delivered as expected.”
He said such transparency could reduce fraud and misuse of funds because “in some cases, corrupt local officials may take the funds and misuse them.”
Blockchain technology also has the important property that it cannot be tampered with. Blockchain records or transactions cannot be changed or deleted without the consent of all nodes in the network. Because of its immutability, the charity’s financial records, donation history, and other data will not be altered.
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This feature is especially important for nonprofits, as it guarantees that any donations made to their cause will be permanently recorded and easily audited by third parties.
Smart contracts, which are self-executing contracts where the terms of the agreement are written directly into the program code, are another valuable aspect of blockchain technology for charities. These contracts can be used to automate processes, such as allocating funds or validating the completion of specific tasks.
Smart contracts help ensure that funds are used for specified purposes, as they only release funds when predefined conditions are met. This increases transparency by eliminating the need for intermediaries and reducing the risk of misuse of funds.
Charities using blockchain technology
A well-known example of a charity using blockchain technology is the United Nations World Food Program (WFP)’s Building Blocks initiative. WFP deployed blockchain while delivering food aid to Syrian refugees in Jordan.
Every transaction from food purchase to distribution is recorded on the blockchain, allowing refugees to access their rights through biometrically verified accounts.
The World Food Program has also expanded its use of blockchain to Yemen, using the technology to provide food aid to vulnerable groups in the country’s civil war. By providing digital credentials through blockchain, WFP can ensure aid reaches those in need while minimizing the risk of diversion or fraud.
In 2022, Binance launched the Ukraine Emergency Relief Fund, a cryptocurrency-focused crowdfunding platform that allows people to contribute to emergency relief efforts aimed at helping refugees and children in need. The initiative also aims to provide vital logistical support to local refugees, including food, fuel and necessities.In addition, Binance Donated 16,042 BNB (BNB), equivalent to $6 million at the time, was deposited into the fund.
Donations can be tracked through the official fundraising page, which displays a list of donors, the amount each donor donated, the total amount raised and distribution. For example, 2.5 million Binance USD (BUSD) (worth $2.5 million) Assigned Of the $11.3 million raised so far, each has been donated to UNICEF and Mercy Corps.
Smaller charities such as GiveDirectly have also adopted blockchain technology. GiveDirectly, which recently provided direct cash transfers to earthquake survivors in Morocco and impoverished children in Flint, Michigan, uses blockchain to record and verify each transaction.
Key considerations for charities
For charities looking to adopt blockchain technology, there are some best practices to follow. First of all, the goals must be clear when blockchain is integrated into charity business.
These goals should be clearly defined, including increasing transparency, streamlining administrative processes, or optimizing aid distribution.
Choosing the most suitable blockchain platform is crucial. Choices like Ethereum or Hyperledger should be made wisely, taking into account factors such as scalability, security, and the unique requirements of charitable organizations.
Marina Zibareva, spokesperson for Binance Charity, a non-profit organization that uses blockchain technology for crypto donations, told Cointelegraph, “Charities need to adhere to some key best practices when adopting blockchain technology to increase transparency in charity operations. Among them This includes a thorough understanding of how blockchain and cryptocurrencies work. Obtaining these fundamentals 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 implementations and platforms, each with unique capabilities. For example, layer 2 networks like Polygon have faster speeds and lower transaction costs. In order to choose the most appropriate solution, charities must understand these differences and how they align with their specific goals and donor preferences.
Jerry Lopez, founder and CEO of blockchain-based charity platform Philcoin, told Cointelegraph:
“It is important for organizations to conduct internal analysis to assess capabilities and resources. Is the organization ready to innovate and/or adapt? Are key stakeholders ready for the transformation?”
“This may sound like an obvious point, but it is a crucial one. Charitable organizations can be slow to embrace change. Understanding what is required to make the leap to blockchain solutions will require additional resources and investment to Ensuring the implementation of solutions that are reliable, trustworthy and effective.”
Lopez also stressed the importance of organizations understanding whether they are “fully committed to completing the transition,” which may require time, research, understanding and a dedicated team to help manage and oversee development. “A lot of times, organizations learn through trial and error,” Lopez said.
Good security practices and maintaining data accuracy are fundamental principles for building and maintaining trust with donors and beneficiaries. This involves continuously maintaining accurate, up-to-date records on the blockchain. Regular audits and transaction verification are important measures to prevent errors or fraudulent activity.
Zibareva said: “Charities must prioritize security when venturing into the blockchain space. Employing cutting-edge security measures and technology is critical to protecting the integrity of the system. Prioritizing security ensures the protection of the organization and its donors protection from potential fraud and enhance overall trust in existing transparency mechanisms.”
Complying with data protection regulations and protecting the privacy of sensitive beneficiary information are non-negotiable elements. These data security considerations should be balanced against the need to allow access for authentication purposes.
Planning for scalability is another key aspect, especially as transaction volumes and beneficiaries are expected to grow over time. The long-term sustainability of blockchain infrastructure should be a core issue, ensuring it can adapt to the changing needs of charities.
Zibareva added that charities “should assess their technological readiness, considering their ability to manage cryptocurrency wallets and other blockchain-related infrastructure.”
“By comparing their operational needs to blockchain’s capabilities and leveraging expert insights, charities can decide whether blockchain integration meets their transparency goals.”
Charities must also assess whether their community (donors, partners, etc.) is ready to accept the use of blockchain platforms for charitable purposes.
Lopez said: “Is the community ready to embrace blockchain? For example, how will blockchain solutions impact supply chains? Will the community be able to accept, embrace or interact with new solutions, or will this require additional the infrastructure, education, training and development to ensure the entire philanthropic cycle is launched?”
Adopting blockchain technology in the charity sector is a complex process, not just the technology itself. It involves organizational readiness, supplier relationships and the resilience of the broader community. Transparency for charities is a noble goal, but it requires a comprehensive and well-planned approach to ensure that the full potential of blockchain is realized without leaving any stakeholders behind.
What else can charities do to improve transparency?
While blockchain technology can indeed help track the flow of funds, it can be combined with other organizational processes to ensure that charitable donations are spent effectively.
Vinijtrongjit said: “I don’t think blockchain by itself can help solve these problems, because tracking the use of funds is much more complicated. For example, as part of a corruption scheme, local charities in the destination may be forced to use funds charged to them. High-fee vendors. Independent audits will still have to happen, but at least blockchain can be used to ensure funds get to their destination.”
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Independent audits are another important aspect of ensuring transparency, as they provide a thorough examination of a charity’s financial records, operations and regulatory compliance. They provide an objective assessment of an organization’s financial health and compliance with best practices.
Vinijtrongjit also believes that organizations must fully adopt blockchain in every part of their operations, as it may be beneficial for charities to provide comprehensive, easily accessible and regular reports detailing their activities and financial information.
This includes information such as funding allocations and amounts raised, which can be gathered from the blockchain and added to these reports. Vinit Longit said:
“It’s like providing insights to potential donors so they can decide not only what cause to contribute to, but also based on the organization’s ability to deliver on its mission.”
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