Blockchain backing transparency?

Since 2008, the EU has provided more than €1.2 billion in developmental and financial aid to Somalia. Yet, to this day it is estimated that 6.2 million people, more than half the country’s population, are in need of urgent food assistance. Why has European aid not significantly improved Somalia?

As well as the country’s acute vulnerability to famine and humanitarian disasters, as it is highly exposed to floods and drought, the country has been driven apart by war and clan conflicts. However, the real hindrance to European developmental goals in Somalia is seemingly petty corruption. 

In 2009, the head of The United Nations Children’s Fund (UNICEF)’s program in Somalia explained that whenever UNICEF wanted to bring a food aid truck to the many starving children in the country, they would have to pay each time the truck met one of the many roadblocks set up by the Somali militia. Typically, this would cost them more than €3,300 each time.

Corruption represents a major obstacle in reaching the Sustainable Development Goals. The activity hampers economic growth and increases poverty, depriving the most marginalised groups of equitable access to vital services such as healthcare, education and water and sanitation. Development practitioners should now start to modernise their approach to preventing petty corruption from hindering their agendas and look towards new technologies.

For most people, if asked about blockchain technologies, what would probably come to mind first would be dark web cryptocurrencies, such as bitcoin. This image of a pseudo-secretive, online black-market network, which aims to bypass centralised forms of financial regulation is perhaps not what most people would associate with transparency. However, researchers and practitioners have begun to question whether technologies such as these can help curb and eradicate the dangerous precedent of corruption in developing countries such as Somalia.

Corruption compromising aid 

International development projects have often suffered setbacks and dilemmas, when it comes to fighting corruption. Manoeuvring strategies through the complex local social and political systems, so that humanitarian and development aid reach its desired target, can often be highly problematic. Foreign aid, especially in Africa, often lands in the wrong pockets. Consequently, this lends weight to the argument that African states receive too much in European aid. How to minimise corruption while still being able to respond to the humanitarian imperative, i.e. the obligation of the international community to provide humanitarian assistance wherever it is needed, has long been a fundamental dilemma facing humanitarian aid practitioners. This is increasingly relevant to Danish development ambitions, especially since the government has launched a new aid program in Uganda costing nearly 1 billion DKK.

With corruption being an inherently difficult phenomenon to measure, anecdotal and survey evidence is heavily used when discussing it. As an example of such evidence, Transparency International estimates that nearly 75 million people in Sub-Saharan Africa paid a bribe in 2015 – some to escape punishment by police or courts, but many forced to pay to get access to the basic services that they desperately need. Evidence such as this, however, suggests that corruption is rampant in the developing world, and far more prevalent in developing countries than in rich ones.

As scholars such as Morten Broberg have argued, it would be frequently impossible to provide humanitarian aid without accepting a certain level of corruption. Nonetheless, the legal framework from the European Union applies a zero-tolerance principle towards corruption. The consequence is that the NGOs and other humanitarian organisations working in the field to help those in need may find themselves trapped. On the one hand it may only prove to be possible to get the humanitarian aid to those in need through the use of bribes. On the other hand, the humanitarian organisations may face sanctions by the EU if they decide to use bribery. Today the solution is to find loopholes whereby it is possible to get the humanitarian aid to those in need without reporting everything to the EU. Consequently, statistics about corruption are hard to verify and open to considerable dispute. Officials often have no clear idea of how much of donated aid funds are stolen or ‘lost’.

Evidently, technologies that could improve upon transparency and reporting of corruption, are imperative. Blockchain has the potential to reveal to multilateral agencies the full extent of ‘lost funds’. It would, however, require organisations such as the EU to come to terms with the very real prospect that manoeuvring through the complex aid network in developing countries will lead to funds being lost to petty corruption.

The Blockchain technology 

Originally devised for digital currencies such as Bitcoin, the tech community is now finding other potential uses for blockchain technology. By allowing digital information to be distributed but not copied, the technology has created the backbone of a new type of internet, and potentially a new form of anti-corruption strategies.

In 2017 alone, the value of cryptocurrencies increased more than 2,700%. With the markets already displaying overwhelming exponential growth, there is no doubt that virtual currencies are destined to become mainstream.

In recent years cryptocurrencies and the blockchain technology underlying cryptocurrencies have sought a foothold in financial services, attracting attention from private investors. Now, interest in using the technology in the public sector is growing. Blockchain experts and proponents have argued that governments will soon drive its adoption. This is perhaps an ironic twist for something that began as a libertarian system of protection against centralised authority.

One of the proposed purposes for blockchain, driven by states and international organisations, is preventing fraud and corruption. Information held on a blockchain exists as a shared, and continually reconciled, database. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.

Technological advances have made it possible to dramatically increase the accountability and transparency of public finances to reduce corruption. Adopting a cryptocurrency and using blockchain technology would drastically improve the speed and the cost of corruption investigations. Investigations that now take on average 15 months, could be performed at the touch of a button and at a fraction of the cost. More importantly, this type of financial tracking would be a deterrent for bribes in the public sector, which amount to between $1.5 trillion and $2 trillion annually, or roughly 2% of global GDP.

The adoption of cryptocurrency as a mode of payment for a project allows the identification of each user of the money, unlike with traditional modes of payment like notes and coins. Though most popular cryptocurrencies, like bitcoin, are anonymous and only use a key to identify a user, it is possible to include personal information, like the ID number, and make the cryptocurrency non-anonymous.

Challenge: Weak institutions 

The expectations and hype around the potential for blockchain technologies is high. However, it is important that governments and proponents of the technology understand its requirements and limitations and are mindful about what problems they must address.

It is expected that the type of blockchain used by governments and multilateral institutions to fight corruption would be ‘permissioned’, which means that there would remain a central entity acting as a gatekeeper to certify that the information uploaded onto a blockchain is accurate. This will mean that the blockchain platforms will be private and overseen by a set of trusted validators and distributed in a controlled fashion, where a single government or institutional agency controls the master ledger and data entry. The governing system of any blockchain in the public sector will require rules, regulations and oversight.

Essentially this means that governments deploying blockchain to protect public data and registrars should first address the weaknesses of underlying institutions and agencies. If the central gatekeeping entity, entrusted with certifying and validating data and entry is corrupt and dishonest, then the entire process is undermined.

Challenge: Digitalizing public records

Additionally, with regards to developing nations and recipients of aid and development funding, there is the challenge of the costs and scalability of blockchain. Many countries, such as Somalia, and other countries in Africa that suffer from ripe corruption, have not yet digitalised many of their public records. Thus, the amount of energy and resources that would need to be committed to digitalise and modernise these records to be ready to use blockchain would be enormous. The question then becomes whether the potential benefits outweigh the costs.

Blockchain is not the panacea to the issue of corruption. However, with the technology making rapid improvements on its efficiency and usability, it can make a critical contribution in strengthening public integrity and restoring trust in government and the international aid spectrum. Potentially, the technology could add a layer of security to records and transactions that are particularly exposed to corruption. However, donors and recipient governments must begin to work towards modernising records in recipient countries, as well as improving the trust in existing central agencies and authorities, in order to make blockchain feasible and worthwhile. Multilateral agencies, such as the European Union must also take steps to acknowledge the existence of corruption within their own aid spectrum, in order to address problems in tracking funds and resources.