China’s e-commerce giant Alibaba made a big splash into the issue of financial transparency in July when it announced plans to use blockchain technology to track donations that are made to charities and other aid organizations using the company’s online payment platform.
Blockchain — the technology that underpins popular virtual currencies such as bitcoin — has become increasingly associated with transparency and accountability because of its tamper-proof system of record keeping that can be used to publicly track financial flows and other transactions.
Proponents of the technology contend that blockchain systems can be used to monitor government aid, track assets or enforce contracts and can promote the type of open governance and transparency that is needed in developing countries. And indeed, Alibaba’s adoption of blockchain is specifically geared toward promoting greater accountability in Chinese philanthropy, which in recent years has been hit by several scandals involving inappropriate spending. Could a vote of confidence by an industry titan such as Alibaba be just what is needed to mainstream blockchain for development?
There is still a lot of convincing to do within the development community. Civil society groups who focus squarely on promoting financial transparency are still hesitant to embrace blockchain and its upside for development. Questions linger over whether blockchain is the most efficient tool to boost public transparency and if the technology does enough to identify the individuals behind suspicious financial payments.
Publish What You Fund, a global advocacy campaign for aid transparency, declined to comment for this story, but in declining suggested that the potential benefits of blockchain for its interests are still not clear.
Global Witness, a civil society campaign for transparency and anti-corruption, also deferred commentary, stating that blockchain is not on its radar.
A common view among civil society is that while blockchain is widely discussed in technical circles it has not fully broken through into everyday development thinking.
The idea that civil society is taking a wait-and-see approach toward a technology as complex and novel as blockchain does not come as a shock. Even seasoned financial experts concede that blockchain is complicated, not intuitive and unfamiliar to many.
But beyond its complexity and newness, development experts also question the applicability of blockchain to address the transparency issues that the industry faces.
Blockchain’s security feature
Arguably the strongest appeal of blockchain is its security feature.
At its core, blockchain works on what is called a distributed ledger. Rather than one central hub — such as a bank — that processes transactions, a distributed ledger is shared among a community of users. All transactions are recorded on one giant virtual log that is made publicly known to all network participants.
Entries such as transactions or payments are cryptographically chained together in the network. Each entry is coded to reflect all of the previous transactions that cumulatively led up to it.
“The nature of blockchain is that everyone who participates in the system collectively agrees that a particular chain is the most accurate,” said John Yi of Coinbase, a popular “wallet” for bitcoin users.
The collective agreement feature is what makes blockchain supposedly tamper-proof. Unlike a database where a central server can be hacked, there’s no central point of failure in a blockchain, Yi explained. The network of users is the central server. “There is distributed consensus of what the correct ledger is. Unless you get majority consensus, there’s no way to create an incorrect entry,” he said.
In practice, a blockchain that tracks entries such as government aid spending will make known to all network participants where the money is going.
However, that degree of specificity might be misdirected.
“The problem that we have in development is not that we don’t trust the recording of the transactions, which is what blockchain will solve,” said Owen Barder, a senior fellow with the Center for Global Development. “The problem is that [some governments] aren’t recording those transactions in the first place.”
Another potential shortcoming is the multiple levels of spending that need to be verified. A blockchain network within government can verify that public funds reach contractors and nongovernmental organizations. “But once the money reaches the NGO, you still need to know how it’s being used,” Barder said.
And while blockchain is a system designed to promote transparent financial flows, it does not fully address the question of who is behind those transactions. The issue of beneficial ownership — the individual owners of financial accounts — surfaced earlier this year with the so-called Panama Papers scandal. One of the many revelations that the scandal brought to light was the difficulty in identifying specific individuals behind financial transactions.
Outside of tracking aid funding, blockchain has other practical applications that can impact development.
“[It can be used] anywhere you need to record an asset in an immutable way that is looked at by regulators,” said Scott Manuel, vice president of product management for applied innovation at Thomson Reuters.
Land titling and registry is cited as a common example. Governments in developing countries are increasingly shifting to electronic registries to digitally archive land titles. Migrating those to a blockchain system on a distributed ledger could potentially eliminate competing claims over land.
By extension, licenses and concessions for natural resource projects can be allocated in ways that minimize disputes with local communities if an immutable ledger tracked land titles, said David Mihalyi of the Natural Resource Governance Institute. “Currently, the systems are not in place to make sure they don’t happen,” he said.
But leapfrogging to a technology as raw and untested as blockchain still appears to be a ways off.
“We’re not becoming aware of any strong interests [in blockchain] in the developing country contexts where we operate,” said Mihalyi. “The institutional challenges for governments are a result of low capacity and scarce information. It’s not obvious that they can grapple with problems of clean licenses and contracts with their current systems, let alone adopt something completely new.”
Other big businesses share Alibaba’s bullish sentiment over blockchain, but unlike the e-commerce giant, are not yet ready to commit to commercial investments. Citigroup and JPMorgan Chase & Co. are experimenting with blockchain’s potential for so-called smart contracts — those that get executed when the blockchain system verifies certain conditions such as proof of ownership or the market price of an asset.
Thomson Reuters, meanwhile, is looking to apply blockchain to the land registry systems that it delivers to governments, but still thinks the technology is three to five years away. A systemic question to address, according to Manuel, is not whether blockchain and distributed ledgers could be applied to the issue of land tenure — and development more broadly — but whether they should be.
Manuel cautions against a “hammer and nail” mentality as industry becomes enamored with blockchain technology — the idea that one approach is generalized as a solution for all problems.
“We have to be thoughtful about it. What are the right uses for blockchain? Why do we need to leverage this technology? What are the benefits to it before we go ripping out the current payment and transaction infrastructure?” he said.
Those sentiments will likely also underpin the development community’s continued wait-and-see approach toward blockchain.
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