Can Blockchain Help Bypass the Problem of Corruption in Development Aid?

Corruption undermines the effectiveness of foreign aid. While precise numbers are hard to come by, numerous press reports suggest that mass “leakages” (a euphemism for probable theft) are all too common. UN Secretary General Ban Ki Moon has reportedly asserted that approximately 30% of foreign aid is lost to corruption, though controversy over the magnitude and impact of the problem remains (see, for example, here, here, and here). The perception of a severe problem has naturally led to searches for innovative solutions, including technological solutions. One possibility that has been garnering some recent attention is blockchain technology. In fact, a few months ago, the Ministry of Foreign Affairs of Denmark, the think tank Sustainia, and the blockchain currency platform Coinify jointly published a report delineating how blockchain technology can be used to “hack the future of development aid.”

Blockchain systems make use of a shared digital “ledger,” in which each transaction contains the history of all previous transactions; because the ledger is transparent and distributed across many computers, rather than stored in a centralized database, it is (allegedly) not susceptible to manipulation or hacking, and ensures the transparency of all transactions (though not necessarily the real-world identities of those engaged in those transactions). Blockchain is probably best known as the technology that makes possible Bitcoin and other so-called cryptocurrencies. But blockchain technology and its applications are rapidly evolving, and many have already begun to see how this technology can be used as a tool to combat corruption, for example by increasing transparency in land records and by using blockchain systems to support anti-money laundering efforts. Now, companies such as Disberse, AID: Tech, and Donorcoin are developing blockchain-based fund management systems that, their proponents contend, can help reduce corruption in development aid. Blockchain technology would allow donors to transfer money to end users directly (and instantaneously), bypassing the formal financial institutions and corrupt bureaucracies that have often been the source of financial leakage, and preserving a transparent record of all transactions. This would help ensure that aid money goes to where it is intended to go.

To understand how and why blockchain technologies could help fight corruption in development aid, it is first necessary to realize that in the current system, money does not go directly from donors to the intended recipients. Rather, aid money typically passes through several complex layers of so-called “aid-chains.” As David Sogge argues, most of these chains “have at least four segments beyond the funding authority: typically first an aid agency or bank, second an operator in the public or private sectors, third a national or local authority, and fourth local collaborating bodies in the public or private sectors.” With so many segments in the “aid chain,” there are copious opportunities for aid money to be stolen, often by national or local authorities (i.e. politicians in the recipient country) or local collaborating bodies (i.e. development project implementing partners and businesses).

Blockchain helps to address this problem because assets stored in a blockchain system are unique and nonfungible, so they can be traced all the way through a system. In other words, the flow of funds is trackable through the entire chain of transactions from the donor to the ultimate intended recipient. Digital, physical, and even intangible assets can all be recorded on blockchain, and with blockchain’s digital ledger, we can know how much went to whom, making it much harder to divert assets. Blockchain technology also eliminates the need for third party intermediaries such as banks and government agencies. To illustrate, Niall Dennehy, Co-Founder and COO, AidTech explained that if an individual or organization wanted to make a donation of a certain good to another individual, the donor could do so directly by using AidTech’s technology. Subsequently, the aid recipients can scan the item they would like to “purchase,” and at the point of “sale” of the “donated” item, the technology will release stored information about the recipient’s identity and what goods that recipient is entitled to; after the transaction is complete, a permanent record of the transaction, accessible to everyone, is stored on the system. This provides a complete and permanent audit trail and enables donors to avoid working with corrupt government agencies in the intended recipients’ countries.

Last but not least, so-called “smart contracts”—self-executing computer protocols stored on the blockchain that perform set actions when defined conditions met—can also ensure that aid money goes to the project that the donor intended, under the right conditions. For instance, smart contracts could be written up in such a way that a salary “token” cannot be used for miscellaneous repairs in a road construction, making embezzlement of funds more difficult and costly. In large investment projects, one can improve efficiency and mitigate the risk of corruption by programming funds to be spent on pre-defined inputs. As Coinify’s chief executive Mark Højgaard contended, “You will be able to pay with your cryptos directly into a solar panel situated in, for example, an African village and then you would not donate money but electricity.” Similarly, with the Donorcoin system, no real money is sent until the job is done; instead, a token is sent, preventing real money leakages.

While Donorcoin is still at its inception stage, Disberse and AidTech have already won many accolades for their work in transparent aid delivery. In fact, AidTech successfully issued digital identities to Syrian refugees at a refugee camp and used their technology to allow the refugees to “purchase” goods and products provided by the United Nation’s World Food Programme at a supermarket without real money. It is hard to estimate the money saved from preventing leakages due to corruption, but Disberse claims that it enabled the donor to save 2.5% on their transfer fees in a program that distributed UK funds to a girls’ education project in Swaziland.

Of course, while blockchain technology holds much potential for curbing corruption in aid, there are still significant hurdles to overcome, including both technological challenges and political pushback. Nevertheless, technological change is already underway, with many international organizations and countries already seeking ways to incorporate blockchain technology in their development aid practices. (Denmark, for example, is considering being the first donor country to transfer aid by using cryptocurrency.) With such changes occurring rapidly, aid agencies and their private sector partners should continue to explore ways that blockchain technology may help in the fight against corruption in development aid.

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