How Blockchain Would Improve Governance of Charities

By Elliot Maras for CryptocoinsNews

Given the important role that charities and not-for-profit organizations play in society, the benefits of blockchain technology have just as much relevance to this sector of the economy as any other.

The Charities Aid Foundation (CAF), a U.K.-based organization, has taken a pioneering role in exploring how blockchain technology can improve the governance of charities and not-for-profit organizations.

The fact that a U.K. organization would take a leadership role in this area is not surprising, given the fact that the U.K. is one of the few countries to have dedicated governance of this important sector.

Paper Explores Three Key Areas

CAF’s most recent paper, “Block & Tackle,” examines how blockchain technology can improve three key aspects of charity governance: registration, reporting and enforcement.

Blockchain technology has a role in all three areas, the paper noted. The blockchain ledger provides transparency, reduces transaction costs, improves trust since there is no third party, and integrates the digital with the physical.

While CAF has done extensive research on applying blockchain technology to CSOs, actual deployments have been rare.

Rhodri Davies, head of CAF’s “Giving Thought” think tank, told CCN:

The barriers to entry for this technology are fairly high, and (with apologies to a few honorable exceptions), CSOs (civil society organizations) are not generally renowned for their tech savvy.

Blockchain Use A Years Away

“I have spoken at various events and in meetings with CSOs about the potential for using blockchain technology, and this has met with a reasonable amount of enthusiasm, but the registration of the first entirely blockchain-based CSO is still a few years off I would think,” Davies said. “I raised the issues in the paper primarily to spark some debate, and to make those in the CSO world aware that this technology is growing rapidly, and potentially has significant consequences in terms of creating new, decentralized models of governance.”

Registration is the process that confirms an organization meets the requirements for being considered a charity or not-for-profit. This helps the organization raise funds, bid for contracts and access gift aid.

The blockchain provides a more effective way to enable online identity to be managed and shared. The blockchain could even allow charities to register themselves, the paper noted.

Multiple smart contracts can be bound together to create decentralized organizations that conform to a certain set of procedures, resulting in a new company. One example of such an organization is the Decentralized Autonomous Organization (DAO) investment fund that was constructed from smart contracts on the Ethereum blockchain. All DAO decisions are based on consensus among members.

The same principle can apply to charities.

What About The DAO Hack?

Asked what could be done to prevent hacks in light of the recent DAO hack, Davies said human error and poor coding played a part in that unfortunate event, but these are areas that can improve in future iterations.

“I don’t think it demonstrated that there was anything fundamentally wrong with the idea of a DAO in general, though,” Davies said. “Hopefully the next iteration (once the dust settles) will be more robust.”

“Also, a charitable DAO might stand a better chance because participants are not being asked to make decisions in their own self-interest (e.g., investment decisions) but rather with a view to the collective good,” he said.

Key Benefits To Charities

Registering a CSOs on a blockchain will reduce management costs enormously by eliminating the need for third parties to maintain dedicated registers for organizations. Administrative costs would also be reduced. In addition, governance can be achieved by recording transactions directly to a blockchain.

With the right algorithms deployed on the blockchain, the registration process could be automated to the point where applications could be accepted or rejected on the basis of available information. The small number of uncertain cases could be automatically referred for adjudication. Such a system could operate based on consensus; CSOs would own their own information register.

As for the reporting function, blockchain technology would bring a major transformation as information will be available in real time. Information would post to the blockchain automatically if the organization used digital currency or digital tokens.

Stakeholders would be better able to trust the integrity of the organization’s data. Costly audits would not be necessary.

Smart Contracts Make A Difference

Total transparency and real time updating would also help regulators. Because CSOs would be governed by smart contracts, functions could be built into the contracts to ensure an organization was referred to a regulator if certain events occurred.

Smart contracts could also prevent organizations from breaking rules in the first place. A smart contract governing a CSO’s existence on a blockchain could prevent the organization from spending funds improperly, as spending would be governed by the smart contract.

‘Governance By Algorithm’?

“Governance by algorithm” places a big responsibility on ensuring the smart contracts do not prevent legitimate activities from taking place. Consideration must be given to what authority will determine contract design.

The regulatory sector, however, has not demonstrated as much interest as the not-for-profit sector in the U.K. when it comes to using blockchain technology in regulating charities.

“Most of the interest in regulation in this area so far that I can see is fairly narrowly focused on cryptocurrency,” Davies said. “CSO regulators certainly haven’t started thinking about the impact that wider blockchain tech will have on their operations or the nature of regulation, and one of the points of my paper was to try and kick start some of that thinking.”

Also read: How the block chain will revolutionize charitable giving

Which Blockchain Will Be First?

As for which blockchains show the most promise, Davies was non-commital.

“It may be an open blockchain that we haven’t even heard of yet, or it may be a permissioned blockchain of some kind (or at least one with different levels of authority),” he said. “The latter is quite likely, given that in many countries there is some sort of legal status that comes with being an official CSO, so if CSO registration shifts to the blockchain, there will need to be accreditation of some kind.”

“But it may also be the case that some people decide to forego the traditional CSO structures and set up charitable organizations as DAOs (or whatever) on open blockchains based on consensus, which could potentially create a two-tier CSO environment (split between ‘traditional’ organizations that get their status from official approval, and ‘new’ organizations which get it from consensus among users).”

First appeared at CryptocoinsNews