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Blockchain for cost and risk reduction after disasters

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05th-Jan-2019       
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John Schellhase :
Among the many disruptions created by blockchain technology, the most profound may come in the way aid is delivered to people whose lives are upended by wars, famines, and natural disasters. The influx of aid following a disaster shows the power of human generosity. Sadly, corrupt officials and middlemen often see it as an opportunity to enrich themselves at the expense of the displaced. The Center for Global Development estimated last year that about 5 percent of global aid, or $8 billion, is lost to theft and corruption each year. Measured against disaster victims' relatively modest needs, it is a staggering sum.
Blockchain-based distribution systems won't eliminate corruption, but their ability to confirm identity and execute secure digital transactions can ensure that a larger proportion of aid will reach its intended recipients. Blockchain technology promises to change the way we store information, confirm transactions, exchange money, and protect our identities. The transparency and security of blockchain, or distributed ledger technology, can increase trust and lower costs for a variety of programs and projects. This is particularly true in countries with a weak or underdeveloped legacy of telecommunications and financial infrastructure.
I saw firsthand how this idealistic promise could become reality in July, when I visited World Vision International's Nepal Innovation Lab in Kathmandu. World Vision created the lab after the 2015 7.8-magnitude earthquake that killed nearly 9,000 people in Nepal, injured more than 22,000, and destroyed hundreds of thousands of homes.
In the aftermath, the lab explored the use of blockchain to distribute money to those in need when roads become impassable and banking systems go offline. The result is Sikka, a system that distributes digital credits to beneficiaries through an Ethereum-based blockchain. The credits can be exchanged for cash or goods at participating merchants, financial cooperatives, or relief centers. Sikka's digital credits are distributed through SMS text messages managed on a restricted blockchain. Aid recipients text credits to merchants to make purchases. Because blockchain transactions are transparent, aid agencies can see when credits are spent and arrange payments for participating merchants.
Aid agencies and NGOs are testing blockchain technology as cash transfers become a mainstay of global philanthropy and development. Blockchain systems eliminate the need to take cash into volatile areas and they reduce losses caused by card theft. And by eliminating intermediaries, blockchain systems substantially reduce administrative costs.
To test their idea, Sikka's creators used the Ethereum platform - a public blockchain network for programmers - to pay 73 workers hired to repair an earthquake-damaged irrigation canal. Digital credits redeemable for cash without charge at a local financial cooperative were sent to their phones by text. And project managers tracked distribution in real time via the blockchain.
Sikka credits aren't a cryptocurrency. Once the cooperative verified the amount to be redeemed through the blockchain, the credits ceased to exist. That way, the number of credits outstanding always matched the amount of money left in the aid agency's account. Sikka's creators estimate that the system lowered the cost of administering payments by 78 percent by reducing staff time, transportation costs, and fees normally charged by intermediaries such as banks. Moreover, the blockchain virtually eliminated the risk of losses to corruption.
There are other pilots that validate blockchain's value. Building Blocks, for example, is a system operated by the United Nations' World Food Programme that distributes credits to refugees living in a camp near Jordan's border with Syria. Instead of mobile phones, shoppers transfer their digital credits via an iris scan.
This is one of two basic lessons to take from the Sikka experience in Nepal: We are past the proof-of-concept phase. Blockchain can be successfully deployed to reduce overhead costs and risks associated with cash transfer programs, particularly in countries with poor physical and financial infrastructure. Aid organizations and local governments should work to tailor blockchain systems to meet their specific needs and then deploy them on a larger scale.
The second lesson is this: Aid agencies and NGOs should empower local young people with relevant expertise to develop technology-driven solutions to the problems facing their countries. Their ingenuity - and their deep-rooted concern to improve their own societies - can lead to better ways of doing good.
(John Schellhase is an associate director at the Milken Institute Center for Financial Markets. His work focuses on strengthening financial markets in developing countries).

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