According to the web portal Philanthropy, almost 35% of Americans distrust charitable foundations. It comes at a price: over 52% of the US NPOs suffer underfunding. A similar situation is observed all over the world, which makes sense – controversies around charitable activity are globe‐spanning.
For instance, in 2011 the internationally reputed charity organization Oxfam spent considerable funds on a party with sporting girls of minor age.
In 2015 the case with a Russian fund was hotly debated in Russia – the fund raised a hefty sum for medical treatment of a ten‐year‐old child that ended up in the pockets of the founders.
There are plenty of similar scandals resulting in cutoff of donations and their inefficiency and, consequently, an increased number of people who were left without help.
Unwilling to work with phony NPOs, those people who have sizable capitals establish their own funds subsidized by their private money. Typically, American businessmen and famous people are active in this area.
For example, the Microsoft founder and Windows OS creator Bill Gates gives tremendous funds to charity – over his life he has donated over USD 36 billion. His nonprofit organization’s name is Bill and Melinda Gates Foundation.
Joan Rowling, the famous author of Harry Potter, has established Lumos Foundation, donating vast amounts, which resulted in her being out from the list of dollar billionaires.
These people have to establish their own NPOs because they cannot just give money to charity as it is not safe and their funds can be stolen. However, even such foundations are not immune to manipulations by their staff members who can conceal their fraud by means of cash flows.
Thus, the major problem of the world charitable activity is the non‐transparency of charity funds flow. The issue is not just in insufficient transparency of the foundations’ operations but also in the lack of transparency of the fund recipients’ activity. For instance, a foundation allocated funds to a certain charitable organization and reported on the transaction – but how exactly did that organization dispose the received funds? It is the lack of transparency that holds off many potential contributors. The lack of transparency is the core problem of charitable activity.
Nevertheless, not many want to deal with the problem. A vast number of various organizations uses NPOs for personal profit, money‐laundering and improving their own reputation. They are not interested in technologies that can help the charitable activity – genuine philanthropy is not their purpose.
For example, in 2016 the US Department of Justice suspected the Leonardo DiCaprio Foundation of theft of USD 3 billion. And in 2014 the Russian billionaire Vladimir Evtushenkov was accused of a similar crime. Both of them were acquitted, but it did not make these foundations’ activity more transparent.
Opaque Goals
Many charitable organizations, including the large and well known, operate on the common pool principle where funds from different sponsors are accumulated and later at the discretion of the foundation management allocated to various purposes established by their Charter.
It means most NPOs’ websites have only a section for donations with no option for selecting a certain field, individual or country as the recipient of the funds. In fact, sponsors cannot channel their funds.
This is the way in which such charitable foundations as Product Red, seeking to help eliminate HIV and supporting patients with HIV/AIDS, and World Wildlife Fund, working in the field of wilderness preservation, research and restoration operate. Web visitors have access to the forms where they can select a sum but nothing else – therefore it is unclear which specific patients or most endangered species the funds will be allocated to.
However, there are projects that support personalized donations. They are not numerous, but in some countries such as Russia and Ukraine those projects are in the majority. It is related to the fact that contributors from ex‐USSR countries traditionally distrust foundations where management makes decisions on funds allocation. Contributors want to select to whom their donations will go.
Such NPOs’ websites have options enabling the selection of specific individuals by reading their problems and transferring money to them directly. Such options are available with Predanie and Rusfond charitable foundations. These websites provide information about each person in need of help.
In this case it is clear who will be the funds recipient, however another issue is still unsolved: how exactly the recipient manages the funds.
Non‐Transparent Spending
Though it is possible to trace donations to specific individuals, it is still unclear what the charitable funds are spent for. Often large NPOs describe funds consumption purposes; however it is impossible to find out about everything for a fact.
For example, the website of Kids In Need Foundation has a section with stories telling how the Foundation helped to a particular child. However, no proof of the help is provided.
Of course, it is not always the case – management of most large NPOs provides all the necessary receipts when goods were purchased or surgery was paid with charitable contributions.
Specifically, the Russian charitable foundation Predanie website says that RUB 500,000 was raised for the medical treatment of Kirill Udenko, a patient with lymphoma. All contributors received the invoice and payment order as a proof of funds spent for a good thing. But how can it be proved that the confirmation documents are trustworthy?
Efforts to improve the situation
Therefore, the major problem with charitable foundations and projects is the problem of trust. Without trust, contributors are not ready to provide funds, and without funds it is impossible to help those in need of help. Today they are trying several solutions to the problem.
Advertisement is the primary one. Many NPOs are often discusses on the radio, TV and Internet: to raise money and earn trust. The foundations’ representatives have to spend the lion’s share of their funds telling their own stories. But commercials tell people that the foundation has existed for a certain period rather than the fact that all its expenses are transparent. Also, many contributors are unhappy that their money is used for advertising instead of charity.
And without advertisement most NPOs will run short of funds – people will simply refuse to give their hard‐earned money to an unknown organization. It can be easily understood.
In addition, foundations have the opportunity to promote themselves and raise funds using special platforms, such as FirstGiving. In that case no large‐scale advertising campaign is needed – big‐name crowd‐funding projects meet the eye on their own, but it does not resolve the problem of trust. On such websites impostors are in spades.
However, today with modern technology evolving, a new way to solve the main problem has emerged – the blockchain.
Blockchain Rescue Rangers
We need to get to the heart of this technology in order to understand how the blockchain can improve charity organizations’ transparency and earn trust back.
Blockchain is like a book, copies of which are in the possession of many people. Due to this an individual cannot alter its content – nobody will trust them, as the substitution is easy to identify by opening their own copy and reading an authentic fragment.
The system works in a similar way – if one of its participants decides, let’s say, to twist payment information, it will become known immediately. No excuses and lies will help – they will simply not make sense.
That is why blockchain is the real way to solve the main charity problem; it will enable each transaction to be traced. But perspectives it suggests for charity do not end here.
The blockchain has another important feature – smart‐contracts. These are common software applications enabling the specification of algorithms for any potential scenario. They ensure fulfillment of all contractual conditions without any middlemen, even if the parties do not want to follow the agreement. Smart‐contracts are written within the blockchain making it impossible to replace one smart‐contract with another unnoticed.
If you give money to an alcohol addict for their treatment for alcohol abuse, it is highly probable that they will spend it on drink. Smart‐contracts ensure that the money will be spent directly on the treatment for alcohol abuse. If you define in the smart‐contract that available funds can be transferred only to rehabilitation facilities, the funds recipient will be unable to spend it for other purposes even if they want – the smart‐contract will simply reject their order to transfer the money to other accounts.
By means of smart‐contracts charity contributors will be able to independently select projects and purposes on which they want to spend their money and forget about fraud – the smart‐contract will automatically allocate funds to the selected projects, while the charity management will not be able by any means to intervene. Additionally, contributors can vote for automatic refund of all unused funds if they agree that the nonprofit organization performs poorly.
That way smart‐contracts also enable the reduction of the charitable foundation management cost. If projects are selected directly by the contributors and after the vote funds will be allocated automatically, the staff can be reduced to the extent of the employees who currently perform these operations.
As soon as the benefits of the blockchain became obvious, blockchain‐based charity projects started to appear in the Internet. People who developed the projects have set themselves a clear task: to introduce a truly useful and affordable service that can be trusted entirely.
Currently there are a few of them, but they do exist.
The project developed in the US quite recently and already is preparing for its first ICO – AidChain operates and helps people all over the world. Today anyone can contribute one of the popular crypto‐currencies to a charitable foundation and clearly trace this currency.
For example, during July 2018, AidChain managed to raise about USD 104,983 to help Hiroshima, Ehime and other West Japan area residents who suffered natural disasters.
This British portal is also based on the blockchain technology and is designed to help everyone in need. Those who developed Alice.si are committed to the same principles as the AidChain creators. The key currency is Ethereum.
Currently Alice.si has only one project: helping the homeless. In fact, by using smart‐contracts the portal freezes funds until particular actions are taken by any given charitable organization; otherwise the funds will be returned to their contributor.
The Canadian blockchain portal, like the two mentioned above, is helping people in need. Its work is focused on supporting refugees, poor people and those who have been affected by natural disasters. The key currency is bitcoin.
Youth is a disadvantage which passes with time
It would seem that, if the blockchain solves the most acute problem in the area of charity, then all charity organisations would be racing to adopt this technology in their processes. Unfortunately, not all is so rosy.
The blockchain technology is indeed an excellent solution for all decent nonprofit organisations, however it has one major disadvantage: its low acceptance rate. Too few people know about the advantages of this technology and even fewer people adopt it.
The reason for this is its young age: the blockchain technology has been developed quite recently – about 10 years ago – and has only started gaining popularity. In order for people to trust it and become familiar with it, some time has to pass. At the moment, mainly young people pay attention to it.
This problem is easy to spot. Just look at the transactions sections of the blockchain funds’ web sites. It is quite sad: the number of donations does not exceed 30, while the largest amounts have been donated by the organisers themselves, e.g. in case of AidChain. Most projects have not been funded at all.
In addition, the need for placement of advertisement remains an open issue. Indeed, now the funds’ representatives no longer need to prove their trustworthiness. However, they still need to deliver information about their organisation, even if at a minimum level.
For the time being, blockchain does not yet address the problem of non‐transparency of expenses on the part of the charity recipients. This is due to the fact that in order to trace how the funds donated for a child’s surgery have been used, it is necessary for the clinics to accept payments in cryptocurrency. So far, this is not happening and hence tracing the cash flows via blockchain is only possible until the stage when the cryptocurrency is converted into fiat currency needed to pay for medical services (or to misuse the funds received).
Also blockchain is no panacea for all types of fraud. While it does protect against falsification of information on transactions, it doesn’t work if the recipient of aid doesn’t actually need it but instead is colluding with the administrator. However, even the solution of the problems the technology does solve is already a great step forward for the charity industry.
For the time being, we have to wait for blockchain to gain popularity and attract the attention of not only the young people but older people as well, and for all nonprofit organisations to adopt this technology in their work.
This may take a considerable amount of time; however the first steps on the path to truly high quality and transparent charitable funds have already been taken.
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