It is unfortunately easy to understand why trust in nonprofits in particular is on the decline. There have been several high-profile scandals in the nonprofit sector that still come to mind, from the Red Cross’ hurricane relief efforts in Haiti to Komen’s executive pay structure. Recent news about Oxfam’s efforts in Haiti won’t help matters. Governance and leadership issues that failed to prioritize transparency and accountability are common themes in nonprofit scandals. And although great work continues to flourish across many organizations, the nonprofit community as a whole struggles to effectively and efficiently demonstrate their impact to their donors and the general public.
Donors—both individuals and institutions like foundations—are increasingly calling for greater accountability and are exploring both existing and new methods to improve transparency. In addition, both nonprofits and the donors who support them care about doing the most good. Nonprofits are constantly looking for the best ways to deliver services and meet constituent needs; they can then convey to donors how well their funds are being spent to meet social challenges, thereby helping to increase trust. Nonprofits would be well served by getting ahead of the curve and exploring how blockchain can, and likely will, be used in the near future to improve accountability, decrease corruption, and facilitate efficiencies in mission pursuits.
Beyond bitcoins: blockchain
While increasing numbers of nonprofits are accepting cryptocurrency donations, and one organization has made several large bitcoin donations, the technology that supports the cryptocurrency markets—blockchain—holds greater potential for the nonprofit community.
Applications for nonprofits using blockchain technology—either public blockchains like the Bitcoin and Ethereum blockchains, or private permissioned blockchains like Hyperledger and others—are still very new. But projects already underway provide good insights into what’s possible with the technology, and the types of benefits—and some challenges—nonprofits are likely to see in the relatively near future. The exact timeline for mainstreaming distributed ledger technology is anyone’s guess, and it feels like everyone is guessing these days. But what we know is there are already a number of blockchain-based pilot projects worth following that could have an impact on the nonprofit community.
Transactions and increased accountability
Donors are exploring blockchain-backed donation platforms. Whether the donations are in a cryptocurrency or fiat, these platforms leverage blockchain’s inherent transparency to create trust and improve accountability through reporting. Using smart contracts, these platforms can tie funding to reported outcomes. Once a milestone has been achieved by a donation recipient, it can be reported and written onto the blockchain. A smart contract then automatically releases the next tranche of funding.
This degree of transparency is not without challenges: How do nonprofits manage with a new type of restriction potentially placed on funding? How do donors ensure milestones have been met as reported? What will it mean for donors to have that degree of insight into nonprofits’ operations? While these and other questions remain, these types of platforms and tools are coming, and nonprofits would be well served to plan for them.
Leveraging blockchain technology to facilitate reporting provides many benefits to non-profit organizations and to the communities or causes those funds are intended to support. Blockchain-based solutions would reduce administrative work, increase efficiencies, eliminate double-spending, and contribute to a robust and strategic approach to real-time analytics that could be compared year after year.
Why blockchain and not the cloud or a networked database? For starters, security: a distributed ledger is virtually impossible to hack. Data is easily encrypted and secure since the ledger needs to be the same across thousands of computers. Just imagine, no accounting discrepancies across databases or reports. The process is completely auditable and transparent for those with the access keys to the data.
This type of system could increase the flow of philanthropic capital to emerging organizations by increasing trust and transparency. Foundations are traditionally risk averse, and this type of platform can help de-risk philanthropic investments so that donors can confidently invest in organizations and projects they might otherwise be averse to supporting.
Mission-related tools and solutions
Nonprofits have an opportunity to think strategically about whether and what types of blockchain solutions would help their missions and operations (and help rebuild trust in the sector) by leveraging the inherent benefits of the technology: increased trust, greater transparency, and high levels of data security.
For example, if a nonprofit is engaged in the distribution of funds, emergency supplies, or the administration of logistics (such as the case of the Red Cross in Haiti) utilizing a blockchain-based system could provide real-time proof of a mission-driven operation. Relief supplies, medicines, temporary housing could be logged and monitored through a blockchain-based supply chain. Responders on the ground and managing from afar would better know where to send relief and assess how to apply available resources. Incidents of waste, fraud, and abuse could become obsolete with a secure system to trace these supplies and funds.
Data can be stored and shared across multiple organizations serving the same constituents in a private permissioned blockchain (which would restrict access to a limited number of approved stakeholders) to help coordinate efforts in the provision of care and to help identify needs that are not adequately met.
The potential to use blockchain to advance sustainability and human rights efforts are well underway. Several conservation groups are already exploring how blockchain can be used to trace the provenance of goods from fish to diamonds to help ensure that goods are brought to market legally and from reputable providers. Other conservation groups are pursuing blockchain solutions to help them track diminishing natural resources. Savvy consumers are beginning to rely on blockchain-based solutions to track whether goods or services are associated with good labor rights practices.
The initiatives currently being tested are nascent; there is much still to learn about how these tools will succeed in supporting the missions of the organizations developing or co-developing them, but the potential is exciting.
Transparency builds trust
Blockchain is a powerful and still emerging technology. It is best applied in situations where transparency can help improve trust, and where transparency can be beneficial, as is currently the case in the nonprofit sector. Organizations that are strategic in their pursuits of blockchain solutions can potentially improve trust by demonstrating transparency and accountability, whether in their uses of donated funds or in the services they’re providing to their constituents.
As with any technology, the success of specific uses will depend on how well the tool meets a specific need, and how it is implemented (for example, with sufficient buy-in from key parties). With that in mind, the possibilities are significant for blockchain to help underpin key systems and solutions that help boost trust in specific organizations and restore trust in the sector, thereby increasing the flow of philanthropic capital and ultimately increasing impact.