Bitcoin could change the game for foreign aid

4 minute read

If you find WORDS helpful, Bitcoin donations are unnecessary but appreciated. Our goal is to spread and preserve Bitcoin writings for future generations. Read more. Make a Donation

Bitcoin could change the game for foreign aid

By Alex Gladstein

Posted May 23, 2019

Today’s humanitarian aid model is fundamentally broken. Whether you’re a foundation making a donation to a nonprofit abroad, a government distributing aid to another government, or an individual sending emergency funds to family members across borders, your money only gets to where it needs to go after passing through intermediaries. Even in the simplest payment scenario, there’s your bank; a coordination network; and the aid recipient’s bank. But often, there are even more middlemen, with money moving along complex chains of third parties.

Such a system has obvious flaws. One is that each intermediary between you and the person or organization you are trying to help can delay, surveil, censor or steal your funds. In 2012, the UN’s then-secretary general Ban Ki-moon said that “corruption prevented 30% of all development assistance from reaching its final destination.”

Corruption aside, aid is at risk of getting eaten up along the way by overhead and administrative costs. In a research study done by Oxfam, only 7% of $28 million in US aid meant for Ghana provably made it into that country between 2013 and 2015 due to a lack of available data. Even if all goes well, it can take several days, weeks or even months for the recipient to finally receive the aid. And in a world where 1.7 billion people don’t have a bank account, many can’t even ultimately claim your donation.

The way aid moves today is corruptible, inefficient and slow. Research from organizations like the World Bank and the charity organization GiveDirectly suggests that distributing aid via direct cash transfers can be extremely effective. But how can we truly innovate in this area if there are so many intermediaries, even for small payments? Here’s where Bitcoin changes the equation.

With Bitcoin, you can send money directly to anyone in the world in a matter of minutes. As your funds move to the recipient, it’s not possible for third parties to censor or steal, as payment processing is done through a global competition, not by a centralized institution. To receive Bitcoin, you just need a smartphone with Bitcoin wallet software. According to the latest Pew data, 45% of citizens in emerging economies already own a smartphone today. While that means a large number of people in the world’s poorest countries don’t have the internet in their pocket yet, the fact that nearly half do is significant and this number will only continue to rise in the coming years. To receive Bitcoin, they don’t need a passport or an ID or a bank account, and they don’t have to ask permission from a government or a company to accept the funds. It is a true peer-to-peer transaction, done over a global, neutral payment rail. Of course, what isn’t guaranteed is that the recipient can turn Bitcoin into local currency so they can buy the food, medicine or help that they need. That’s a major challenge, but it’s changing in a big way.

According to a global analysis of Bitcoin exchange data, individuals in West Africa, Latin America and East Asia are seeing a significant increase in their ability to sell Bitcoin for local currency. In an interview with researchers at the Open Money Initiative, I learned that the “liquidity time” of Bitcoin in Venezuela today is 15 minutes. Meaning, if you’re in Caracas, I can send you Bitcoin from Miami and you can be holding bolivares in your hand within 15 minutes of my Bitcoin arriving on your phone. To give you an idea of the scale of Bitcoin activity in Venezuela today, consider that on April 26, 639 million bolivares were traded on the Caracas Stock Exchange. During that same week, the average daily volume of Bitcoin traded on one online platform alone — LocalBitcoins — was 5.2 billion bolivares.

LocalBitcoins is one of several online marketplaces — like Paxful, Hodl Hodl and Bisq — that work a bit like eBay. For example, if you’re in New York and I’m in Lagos and you send me 1 bitcoin (roughly $7,800 at today’s price), I’d create an account on the LocalBitcoins website and make a post, saying I’m selling 1 bitcoin for the going rate of around 2.8 million Nigerian naira. When I get a good offer, I click accept. I send my Bitcoin to LocalBitcoins, you send your naira to me, and my Bitcoin is only released to you when I confirm that I’ve received your naira. Or, we can choose to meet and make the trade in person, where you give me cash and I send you Bitcoin, smartphone-to-smartphone. And — voila — I just received Bitcoin from across the world and turned it into local, spendable currency.

When the highway blockade occurred on the Colombian border, preventing much-needed aid from getting into Venezuela, millions of dollars of Bitcoin were freely moving in and out. A big perk of using Bitcoin is that even when brick-and-mortar banks close, the Bitcoin network never shuts down. As global Bitcoin infrastructure improves and local exchange becomes more widely available, its value proposition for humanitarian aid — especially in disaster zones and tough political climates — will only increase. If you are one of the billions of people stuck in a country restricted by capital controls, suffering from hyperinflation, trapped behind sanctions or simply lacking identification or a bank account, donors can now use Bitcoin to reach you directly.

If you are a gift-giving foundation, foreign ministry or development advisor, could sending your aid via Bitcoin be a better way? Bitcoin’s peer-to-peer digital payments network could be the future of humanitarian aid.