Case 67: Blockchain Can Strengthen International Aid Systems

Overview
DLT could enable the government to better control the distribution of foreign aid, and to ensure that the funds reach the intended recipients. This will also help ministers help improve transparency and encourage effective financial management. The use of DLT could therefore help in honouring the UK’s international commitments to achieve the Global Goals.

Background
In order to meet global obligations, countries must support Global Goal action plans that incorporate transparency, accountability and integrity measures. International aid donors place significant emphasis on helping to develop more transparent and robust aid systems. Activities preventing fraud, theft and misappropriation of funds can be expensive. Technological advancements that could help strengthen prevention efforts would be beneficial for the wider aid system Fraud and corruption reduces opportunities for poverty alleviation, reduces inward investment, and is strongly linked to lower educational achievement. There is, therefore, a great opportunity to apply DLT in international aid in order to provide transparency and traceability of funds. Proving that money is being well spent could encourage nations to give more, and also all funders to target key outcomes more effectively.

DLT proposition
The key aspect of this proposition would be to use three main aspects of DLT. Firstly, it would allow international donors to issue coins that have a sterling value, without encountering many of the bureaucratic hurdles of traditional banking. Distributed ledgers achieve this through their lack of geographic boundaries — they operate in the same way in any jurisdiction in the world. There is an opportunity, therefore, to reduce the foreign exchange fees for international aid significantly below standard transaction costs. Moreover, it is possible to create smart contracts that can be used “to create self-enforcing contracts between strangers, offering citizens a framework for transactions independent of the domestic judicial and executive branch”.

Secondly, international donors could take advantage of DLT’s ability to reduce the fungibility of cash, offering the possibility of reliable and irreversible transfers of digital goods — in this case aid funding. In addition, digital ledgers solve the double-spending problem: where digital currencies may allow end-users to spend the same unit of currency twice, digital ledgers prevent this because each ‘coin’ is unique. This makes payment without intermediation possible. In cases where aid is meant to directly support end-users, it is possible to bypass the limitations and restrictions placed on currencies and banking services in some countries through peer-to-peer transfer of funds.

Thirdly, the use of unique sterling-linked coins could prevent them from being spent on items not deemed appropriate within the international aid context. For example, money sent to build infrastructure intended to reduce poverty could not be appropriated for other purposes. This stems from DLT’s ability to trace exactly where the currency has been spent and by whom.

Outcomes
• Increased transparency of international aid spending targeted specifically at the Global Goals to reduce corruption to better achieve desired development objectives.

Maturity level
• Unpredictability of donor demands may create bigger problems than fraud and corruption, and would therefore need to be carefully aligned to project outcomes to ensure effectiveness.
• In every case of international aid, international donors needs to maintain a relationship with the host government. Where issues of corruption are linked to individuals within specific ministries or embedded within the systems of host governments, it is crucial to get buy-in from the recipient nations for this type of system.
• Converting distributed ledgers into usable services of this nature requires the creation of a whole range of complementary capabilities