Thursday, November 20, 2014

Aid: Crypto-currencies and the aid industry

Photo: Zach Copley/Flickr. Bitcoins- not quite food on the table

First published 13 November 2014 (IRIN) - Meet Bitcoin: An encrypted digital currency the value of which has fluctuated sharply in recent years. It does not exist physically, there is no authority that oversees it, and you need Internet access to manage it. This might not sound like a formula for humanitarian success. However, experts say, Bitcoin offers important lessons for aid delivery in situations with weak (or destroyed) institutions.

For example, Bitcoin has been used in a small way to raise money for the Ebola response in Sierra Leone: Funds donated digitally were exchanged in the US and wired to NGOs on the ground.

“Bitcoin as a currency certainly offers potential for the aid industry as a collection site. But as far as distribution of funds [is concerned], it won’t work,” Ignacio Mas, a senior research fellow at Oxford’s Said Business School, told IRIN. “People want a currency they can use. In developing countries, that means local currency. If there is no local Bitcoin ecosystem in places we are trying to send aid, then what would Bitcoin aid distribution do except to replicate the Western Union problem it is trying to solve?”

However, Mas insisted, Bitcoin is not just a type of money, but a system of how money gets shared: “It’s a currency, which is complicated and volatile and probably not going to work out in the long run. But it’s also a protocol, a way in which we exchange money peer-to-peer.” In a paper entitled "Why you should care about Bitcoin - even if you don’t believe in it", Mas argued that the five-year-old virtual currency’s “key engineering elements offer us the possibility of imagining a radically different approach for architecting electronic payment systems”.

For aid distribution, such “radical” ideas could influence the way money is transferred to (and between) people in need. Electronic cash transfers - often by SMS - have become an increasingly popular aid tool in recent years.

A 2014 World Bank and Gates Foundation report argued that the “rapid development and extension of digital platforms and digital payments can provide the speed, security, transparency and cost efficiency needed to increase financial inclusion.” One third of all World Food Programme (WFP) food assistance is now given in the form of cash or vouchers. The Cash Learning Partnership’s (CaLP) “Cash Atlas” lists 592 projects with more than 23 million beneficiaries around the world. 

But cash transfers - from agencies to people, governments to people, or people to people - are rife with rip-offs and complications. In short, they depend on institutions that do not necessarily work in their favour. For example, in some parts of Africa where cash transfer infrastructure is dominated by one or two companies, up to 12 percent of the money is lost to transfer fees. And cash transfers via SMS have been accused of cutting costs for aid agencies, but shifting risks onto vulnerable recipients. 

This is where Bitcoin (or other crypto-currencies) - which have only negligible associated costs and require no institutions - could spark change. “Bitcoin will have a huge impact on the world - on how money moves around,” said Mas.

According to Andrej Verity, an information management officer with the UN Office for the Coordination of Humanitarian Affairs (OCHA), “Things will begin to change when power [electricity] becomes more predictable in emergencies, and technology, like smart phones, become part of the standard aid package. Concerns change, however, when the transaction is virtual. When in 2012 WFP launched a partnership with MasterCard, the agency emphasized that the company’s “payment and technology expertise will help WFP to refine and improve its systems that deliver food vouchers via mobile phones or banking cards to people without regular access to banks or financial services.”

This kind of expertise is necessary to provide security to financial exchanges. Explained Mas: “What a bank or transfer service company has to offer is the guarantee that the transfer is real and not duplicated digitally.”

However, he added: “The problem with these big institutions is that they have no interest in helping the poor. The Bitcoin protocol [method by which currency is exchanged], by ensuring these exchanges cannot be duplicated, gives peer-to-peer financial transactions that same kind of security.”

Why use digital currency instead of hard currency?

Kenya’s mobile phone-based monetary system M-Pesa has made in-country transfers much easier and cheaper. But regulatory systems that mandate that all international transfers be made through conventional banks limit such applicability internationally.

Bitcoin is not affiliated with any government, but its legality remains varied around the world, and governments have reacted with everything from all out bans to cautious permissions. For example, in March 2014, Mexico’s central bank banned the domestic use of digital currencies; that same month the government of the Philippines, one of the world’s most disaster-prone countries, issued a warning that Bitcoin was both unregulated (making investments impossible to insure against fraud or bankruptcy) and highly volatile, but stopped short of attempting to regulate it. A new Bitcoin Wallet app was launched in October designed to target the Philippines’ huge remittances market.

However, such assessments tend to focus on the currency of digital crypto-currencies, not the protocol. Or, as Bloomberg analysts put it: “the value of bitcoins is in their usefulness as the basis of a new kind of payment system.”

OCHA’s Verity argues that digital currencies “can facilitate [online] payments at lower costs and with greater security and privacy than existing electronic payment methods.” He also pointed to technical benefits specific to the aid industry when conducting cash transfers - including “the ability to trace exactly where the currency is spent.”

CaLP, a consortium steered by Oxfam, the British Red Cross, Save the Children, the Norwegian Refugee Council and Action Against Hunger (ACF), argues: “The use of ‘new technology’ is increasingly seen as a critical factor to enable cash transfer programming at scale and to implement cash transfer programmes in remote and insecure areas… [and] instrumental to improve monitoring and evaluation systems, early warning and preparedness initiatives and assessment data collection, amongst others.”

At a 2013 briefing hosted by the World Bank and the Global forum on Law, Justice, and Development, David Mills, an economist, cautioned that Bitcoin may be more prone to use in illegal transactions, vulnerable to theft (akin to carrying a large amount of cash on one’s person), and also to cyber-attacks. Emory Krober, deputy director for strategic policy in the Office of Terrorist Financing and Financial Crimes at the US Department of the Treasury, countered: “Virtual currencies are not necessarily riskier than any other electronic payment system.” What to spend it on?

Despite the promises of security, transparency, and rapidity in distribution during a humanitarian crisis, Bitcoin-style digital currency use would be limited to marketplaces that accept the currency (online merchants, for example) or the sufficient construction of currency exchange points that can turn it into useable cash.

Crucially, Mas warned: “Converting Bitcoin into usable services requires the creation of a whole range of complementary capabilities.”

But, he emphasized, the aid industry focus should be on how to use the protocol, not the currency. He explained: “If we had a situation where Bitcoins were issued with US dollar values, for example, but with a similar peer-to-peer sharing protocol, eliminating the central bureaucratic hurdles of traditional banking, that could be quite powerful.”

Meanwhile, Verity is confident that, “by the time the humanitarian community is ready for a digital currency, companies like these [that provide crypto-currency related services] will have mature solutions and many of the crypto-currency challenges will be addressed.” When such services are in place, we may be ripe for a crypto-currency dedicated to humanitarian aid.”

For humanitarians, digital currencies such as Bitcoin raise questions of effectiveness, efficiency, accountability, and sustainability. But the jury is still out on Bitcoin’s benefits. IRIN looks at the issues.

What is Bitcoin?

The US Department of the Treasury calls Bitcoin a “decentralized virtual currency”. The label highlights its key aspects: it is a currency with value, and it exists completely and solely online. Or, as a US public radio podcast, Planet Money, explained, “Everybody who uses Bitcoin has a digital wallet. And when you buy something you send your coins to someone else’s wallet, [for example, an online merchant or another person].” Each coin is encrypted and unique, meaning exchanges cannot be duplicated.

Dozens of other electronic money transfer programmes exist. However, Bitcoin is unique in some important ways. Mas explained: “Bitcoin is different from all other electronic money transfer systems because it allows secure peer-to-peer exchanges.”

Said Mas: “Think about it in terms of a traditional cash exchange: if I have a debt to settle with you for US$10, I can give you a bill for $10 and the debt is settled. The [government] embeds technology in that physical cash which makes it such that it cannot be copied - and we trust that, so the exchange is valid between us.”