Blockchain presents many opportunities for businesses across all sectors, not just the financial sector and security, but also for not-for-profits, charities, and NGOs.
To find out more about those opportunities for not-for-profits, charities, and NGOs, we talked to the University of South Australia senior lecturer in accounting, Dr Sanjaya Kuruppu.
Kuruppu’s research explores accountability issues, and how to improve organisational governance and sustainability within non-governmental organisations and in large companies.
How can charities and NGOs use blockchain to support their fundraising or mission-based objectives?
There has been much hype about the blockchain in recent years because of the spectacular rise of cryptocurrencies like Bitcoin.
However, blockchain technology (a subset of distributed ledger technology) has multiple applications because it: enables immutable, accurate and encrypted digital records to be created which protects data integrity; enables instant sharing of information; and opens possibilities for continuous auditing of this information.
Bitcoin is a public chain of transactions, but this raises concerns about privacy and confidentiality, particularly in relation to sensitive business transactions.
There is now more momentum in exploring the potential use of ‘permissioned chains’, which restrict the users that have access to various sets of information. These introduce the possibility of triple-entry accounting, a novel development for the accounting profession. Organisations can automatically reconcile standard double-entry accounting entries with other entities, like suppliers or customers with a ‘third ledger’.
This third ledger is a permissioned blockchain which enables transactions to be securely shared with trusted third parties such as auditors and potentially the Australian Taxation Office (ATO). It could transform the way that various organisations can interact with each other and automate transactions.
How does this relate to charities/NGOs and not-for profits in terms of fundraising and achieving mission-based objectives?
Australia’s Department of Foreign Affairs and Trade (DFAT) planned to spend about $4bn this year on international aid, with a significant tranche of that funding channelled through NGOs.
We can potentially imagine a scenario where using a permissioned blockchain enables DFAT to continuously monitor the funding it has disbursed to NGOs and verify where it is being spent immediately.
This is in stark contrast to the present system, which typically relies on a series of impact measurement studies and periodic external audits, which are also quite expensive mechanisms to ensure accountability and governance.
Let’s take a simple example of an international NGO who has received Department of Foreign Affairs (DFAT) funding for conducting a girls’ education project in a Pacific nation. Using a permissioned chain administered by DFAT enables funds to be disbursed to NGOs and other charities more readily.
Triple-entry accounting allows transactions to be recorded on both DFAT and NGO accounting systems which are then automatically reconciled with a secure ‘third ledger’. This removes part of the audit function which would have otherwise taken significant time and incurred great expense to verify each transaction. As a blockchain is used, various rules can be programmed into the way that DFAT disburses funds to an NGO.
For instance, ‘smart-contracts’ can be used to ensure that funding given to a particular NGO for the girls’ education project is only spent on approved items for that initiative, and are not accidentally (or intentionally) misspent on other aid projects that NGOs may be running.
Ultimately, the efficiencies created in managing funding flows and accountability and reporting requirements reduce costs and result in better monitoring of how NGOs (and other charities/not-for-profits) are staying on track towards their missions.
However, this potential system is currently theoretical without empirical evidence to identify issues and ensure feasible implementation. This is part of the research that I am trying to do.
What kinds of laws and regulations need to be put into place to ensure that blockchain becomes correctly integrated into compliance and taxation?
This is a good question and probably one that a colleague from law would be better placed to detail.
Using permissioned blockchains potentially enables these governance conditions like the Australian Charities And Not For Profits Commission (ACNC) requirements to be more readily monitored by regulating bodies like the ACNC, especially for larger charities which have a greater volume of transactions and stricter accountability requirements.
Large charities are considered those with a turnover of $1m and above per year and are required to file annual reports to the ACNC and undergo an external audit. Permissioned chains also enable authorised departments like the ATO to also check records, and smart contracts can automate tax payments (or refunds) for transactions which can also reduce the tax filing burden on charities.
One of the main issues I have when considering charities is the fact that I don’t have any view of where my money would be going.
You raise a very important point, and you are not alone. While nearly 80% of Australians donate financially to charities each year, they are demanding greater transparency and accountability from charities. According to the 2018 Australian Community Trends Report, 75% of donors want transparent reporting of administration costs; 73% want charity administration costs kept below 20%; 72% want to know where their donations are allocated to; and 69% want additional specific reporting on the impacts and costs of charities.
Charities contribute approximately $130bn directly and indirectly to the Australian economy (Deloitte Access Economics, 2017). There are more than 57,000 registered charities in Australia (ACNC) which employ approximately 1.26 million staff (Australian Charities Report, 2017). So at the very least, already, your money is contributing to employment in the 2nd biggest sector by employment in Australia (Australian Community Trends Report, 2018).
That said, transparency and accountability can be an issue. This has no better example than in the debacle surrounding Celeste Barber’s Facebook fundraising campaign which raised $51m for the New South Wales Rural Fire Service. Suggestions to divvy up the vast sum to other states and to target families affected by the bushfire, or those who had lost loved ones can not be accommodated because of the way the fundraising was set up.
As an aside, some of these fundraising platforms, although not all, charge administration fees for handling donations that can be 2% or up to 12%. As you mentioned, this takes money away from those who can directly benefit.
Blockchain technology offers the possibility of making where your donations ultimately go more transparent, as long as the rules with which to distribute those funds are clear. For instance,
Celeste Barber’s campaign could have had contingencies planned early on, where above a certain threshold (say $100,000) funds would then be allocated to other charities such as the Australian Red Cross etc. based on smart-contracts.
These contingencies could be programmed into a blockchain donation platform ahead of time, so funds were automatically distributed to beneficiaries when rules were met.
What could blockchain offer donors in terms of transparency and visibility into where donations are going?
This level of ‘autonomous’ decision making can be enabled through ‘smart contracts’ – a unique feature of blockchain technology allowing rules to be programmed into transactions so that aid funds are disbursed only when specific parameters/targets are met.
As in the DFAT example earlier, this ensures transparency of where Australian taxpayer dollars are spent in overseas countries. As transactions are immediately reconciled and immutably recorded, the chances of fraud or misappropriation at a later date are also significantly reduced.
It is also conceivable that smartphone apps can be set up which connect everyday donors to charities via the blockchain. These apps can allow donors to track and trace where their donations are being spent and how.
Conceptually, if a donor provides $20 for purchasing an ‘education pack’ for a girl to go to school overseas, they would receive a notification via their blockchain donation app when a specific girl receives the package, perhaps with a thank you note from the recipient.
This allows a degree of connectedness between donor and beneficiary that is presently impractical through existing donor management systems. Not only does this increase transparency, but it can also improve trust with the NGO/charity sector and attract more donors to give as a result.