A popular (and troll-fueled) trope in Bitcoin Twitter culture is to respond to any stated challenge with, “Bitcoin fixes this!.”
- The years-long Ebola outbreak in the DRC? Bitcoin apparently can fix it.
- Hurricane Dorian devastated the Bahamas? Bitcoin could have fixed that.
- Creating a brand new cryptocurrency and app for incentivizing school attendance (an actual idea non-satirically pitched at the 2017 World Bank Youth Summit)? Bitcoin could fix that too.
On October 9, UNICEF announced the creation of the first-ever development Cryptocurrency Fund to receive, hold, and disburse donations for open source technology using cryptocurrencies. Powered by the Ethereum Foundation, a non-profit promoting the alternative cryptocurrency of Ethereum, this Fund is intended to explore the viability of cryptocurrencies as a form of digital finance. UNICEF will initially use the Ethereum blockchain to make grants to three organizations, two of which do impact investing and create community tokens.
The assumption that cryptocurrencies will be the new “magic bullet” is misplaced and fundamentally flawed. UNICEF’s announcement serves as a topical opportunity to evaluate cryptocurrency solutions to development challenges in general against the Principles for Digital Development, and to make the argument that cryptocurrencies are not yet a mature or appropriate technology for the development sector, and may never be.
Cryptocurrency and Distributed Ledger Technology (DLT) is a broad and diverse topic, so the primary focus of this blog post will be on Bitcoin, the oldest, most robust and secure of the many cryptocurrencies available. Any drawbacks to Bitcoin will surely be even more applicable to less-mature cryptocurrencies, making UNICEF’s choice of Ethereum additionally baffling, even if the general premise was sound. So let’s apply some of the Digital Principles now and dissect why this Cryptocurrency Fund may be an ill-advised investment.
Full disclosure: I am familiar with owning a cryptocurrency mining rig and holding Bitcoin as a store of value (as part of a diversified investment portfolio, not as a currency).
Blockchain Violates Design with the User
Blockchain solutions have a well-documented history of violating “Design with the User.” In a study commissioned by the Humanitarian Policy Group (https://www.odi.org/sites/odi.org.uk/files/resource-documents/12605.pdf), the authors state:
“On the project level, motivations for adopting DLT varied, but were shaped more by programmatic and organisational considerations than technical specificities or end-user needs.”
While technology and markets in the Global North have matured enough for individuals to dabble in cryptocurrencies, this is certainly not the case for most markets in the Global South. There is a high cost to implementing, tracking, and staying up-to-date on crypto chains, which people who do not invest time in cryptocurrencies might not know (see also “Design for Scale”).
More than just the hardware and software, there is a time cost in educating users to understand how DLTs work, how they can decipher a chain and transaction history, and how they can turn cryptocurrencies into real money. While the digital literacy of both development practitioners and end users has improved significantly over the last few years, DLT is still not well understood by either.
Additionally, conducting financial transactions using cryptocurrencies alienates local technology talent because start-ups in the developing world are less likely to have a way — or have little financial incentive — to accept grants in the form of cryptocurrencies.
Ethereum Doesn’t Understand the Existing Ecosystem
Converting crypto to hard currency is difficult, and may be impossible in some resource-constrained environments. Cryptocurrencies can also harm local markets because they allow for bypassing trading in local currencies and take money out of the local economy — essentially harming the communities we are trying to help.
As an individual in the United States, long-term capital gains taxes are applied to any cryptocurrency held longer than one year, meaning you will take a significant financial hit for converting your digital money back to hard currency.
This doesn’t apply to donations made to 501c3’s, but serves as an example of the current state of regulations on cryptocurrencies. But it took the U.S. years to figure out how to create these regulations — most countries where we work do not have such regulations in place, making it harder and more uncertain for companies and individuals to conduct such transactions.
Additionally, it’s unlikely that an Ethereum grant would be used as anything other than a store of value, converted back into hard currency when spent further down the value chain. In fact, cryptocurrencies are currently a very cumbersome method for making grant payments or providing stipends to end users (see also “Build for Sustainability”).
Bitcoin Does Not Design for Scale
As a grant-making mechanism, both grant-maker and grant recipients are compelled to run a “full node” to ensure security: the entire blockchain (record of all historical transactions, upon which each new transaction is cryptographically dependent) must be downloaded and verified.
Bitcoin’s blockchain is 195Gb in 2018 (Ethereum’s is 181Gb), and continues to grow. This is an outrageously high bandwidth requirement on even a broadband connection, to say nothing of lower-connectivity environments. It also takes days of fully-dedicated computing power on a commodity laptop to verify either of these chains.
This storage and computing cost is the minimal ticket price to enter the market, and must be paid for each new grant-maker or grantee, and is an increasing cost as the blockchains grow. In addition to this initial cost, Bitcoin software additionally needs roughly 200GB of upload per month.
\Blockchain transactions are also slow. Layer-2 solutions (higher-level protocols existing outside of the main blockchain) to solve this problem, such as Lightning, require a more insecure, immature, and complicated peer-to-peer network where micro-transactions remain off the main ledger for days or longer (and are therefore not strongly verified).
Again, it’s worth noting that Bitcoin is the most mature cryptocurrency. Ethereum’s layer 2 solutions are even less robust.
Bitcoin Isn’t Building for Sustainability
How do you write a grant proposal or a project budget using cryptocurrency? The conversion rate is volatile and changes wildly week-to-week.
- On March 31, a single Bitcoin was worth $4,000.
- On June 10, Bitcoin was at approximately $8,000 per coin
- By July 8, it had jumped to almost $12,500 per coin
- By October 11 it was back to about $8,500 per coin.
How can an organization plan their spending around crypto payments if they do not know what their value will be a month out? Ethereum suffers from even lower valuation and higher volatility (1 ETH = $192 at time of writing, versus $8,303 for BTC). While this may all change in the future, a cryptocurrency fund is certainly not sustainable at this time.
Theory of Change Isn’t Data Driven
One of the most important components of being data driven is the creation of a Theory of Change (TOC). TOCs define the long-term vision for a technology’s use and map out how a team intends to meet that goal through planned activities and intended outcomes and impacts based on the effects of those activities as well as assumptions contributing to the expected change.
It is critically important when a new technology — such as cryptocurrency — is being implemented because the new technology is unproven and untested. UNICEF has not shared their TOC for a Cryptocurrency Fund publicly; there is no information on why they decided to start distributing cryptocurrency grants, what they hope to achieve, and what change they expect to occur as a result, beyond the little information shared in the press release.
UNICEF Is Not Being Collaborative
UNICEF also appears to have been non-collaborative and entirely unilateral in this decision making. There is no online documentation of any workshops, public commentary, or co-design taking place prior to this announcement. And because of this, there is no (and has not been a) way for the digital development community to provide feedback or give input into the process.
No Appropriate Use of Open Source Technology
While Ethereum, Bitcoin, and many others are indeed open source, they are sprawling and complex in nature (213 repositories for the Ethereum protocol and tools!). They are also immature and therefore prone to exploits which in the case of cryptocurrency software can lead to loss of funds. As is true with all of the Principles, appropriate use of open source technology is an important aspect of technological decision-making.
A Failure in Addressing Privacy and Security
The primary draws of DLT are its immutability and its anonymity. While DLT has the potential to empower individuals against oppressive governments, improve adherence to official record keeping, and protect human rights in a business supply chain, it does not lend itself to organizational use for finances.
When an individual (or in this case, an organization) holds cryptocurrencies, their money is kept in a digital wallet which has a public and private key. The public key can be given out to a second party for transactional purposes, the same as your bank account and routing number can be. But the private key is kept secret for personal access and most importantly to be used for cashing out crypto.
If an organization accepts grants in the form of cryptocurrencies, that private wallet key is less secure because multiple people will need access to it: a CFO, accountant, budget manager, etc. That opens up major risk to the security of the funds, which is the very foundation of cryptocurrencies.
A private key cannot just be changed like a password if one of those individuals with access leaves the organization; funds would theoretically have to be transferred to a new wallet each time a key-holder left. Alternatively, if all copies of the private key were lost, the funds cannot be recovered.
An even bigger liability for an organization is the potential for their wallet to be hacked (both an insider and outsider threat). Though cryptocurrencies are regulated for tax purposes, they are not insured or backed by the U.S. government (or any other government).
In the event a wallet is hacked and the crypto is moved to another party’s wallet, that transaction would be near impossible to trace (especially given that many crypto practitioners utilize multiple-hop micro transactions, known as “washing,” to further increase their anonymity). Those funds cannot be replaced and there is no recourse available to an organization to rectify it.
Is Ethereum Reality or Blockchain Hype Cycle?
UNICEF Innovation has a mixed history, frequently investing in appropriate technologies but also taking some missteps towards hype cycle technologies. Cryptocurrencies, and the blockchain data structures underpinning them, continue to largely be a solution looking for a problem.
This is one of the crucial reasons the Digital Principles (which UNICEF was instrumental in helping create) were devised: they offer a rubric to help determine when a technology is mature enough to be applicable to the challenging sectors of development and humanitarian aid. And cryptocurrencies just aren’t — at least, not yet.
Great piece. Made me wonder on a tangent though… Should we be making exceptions to guidance like the Principles when we are experimenting with new ideas… Is there a case – for example – that if we always design with the user, we can never do truly novel innovative things…
I don’t believe ANY of this UNICEF crypto meets this criteria by the way – not remotely innovative and far too big to be called an experiment….
Just wondering more broadly 🙂
I don’t think we should be making exceptions to the Digital Principles, regardless of solution maturity. Every project design effort should work through the Principles (and their conflicts) as part of the idea-to-deployment process. Not all Principles will be followed at all times, but there should always be a concerted effort to achieve them all without slippery exceptions that have a tendency to gown in size and permanence as projects proceed.
Nadia, you couldn’t have put it any better even if you tried. I am agnostic about the hype around blockchain. The harsh reality is most blockchain projects are BINO (blockchain in name only), The several Innovation conferences I attend make me fall off my chair with laughter. You find a company pitching blockchain with ridiculous claims such as their blockchain solution is faster and cheaper than say mobile money payments. Blockchain has several use cases, reducing costs is not one of them.
Nice summary. It will be interesting to see how ‘stable coins’ overcome volatility and acceptance network issues. Similarly, while I agree alt currencies can de-value fiat currency. There’s also the other perspective where people / companies are being forced to lose all their savings. E.g. Venezuela now legally mandates companies holding foreign currency to do so for a max of 10 days in an aim to protect a currency which in no way is a stable or fair store of value. As such, I think there’s an arguable right to have choise – or at least an alternative. To big to fair is never a good position to be in.
It’s good you reference Venezeula, if you read the article again, you will note the author mentioned ‘bitcoin will fix that’, the Venezeula use of bitcoins is a good example of a bad example. Bitcoin or cyrptocurrencies can’t fix a countries woes. Actually what the people in Venezeula are doing is akin to digging your own grave as they are further devaluing their own currency. Currency woes can’t be fixed by coins. The value of your currency is determined by only 2 things, imports and exports, when your have less exports and you still import, it’s a game of math. This is a common misconception around the use of cyrpto currencies. Volatility is not determined by some genius, simply forces of demand and supply, high school economics 101
Agreed on imports / exports being critical to the value of money. But so is macroeconomic mismanagement and corruption.
However, if you were in Venezuela, would you want to go down with a sinking ship and watch your saving vamosh?
Can’t see FIDC kicking in anytime soon.
sinking ship analogy has cracked my ribs, I need to visit a doc
I’m hyper-critical yet ultimately intrigued and have a bit of an optimism and hope towards cryptocurrencies and specifically Bitcoin.
I have a few thoughts I’d like to share (humbly, even if it may not come off that way, that certainly is my intention!).
I’d be interested in why you think end users will need to be “implementing, tracking, and staying up-to-date” on blockchains, particularly Bitcoin since that’s the primary focus of the article.
Apps are becoming more intuitive (still a ways to go, true) but I’d say most of my non-technical friends that have experimented with Bitcoin didn’t have to have some long learning experience to understand the technology behind what they’re using, just like when they swipe their credit card they’re unaware of how that actually works.
“As an individual in the United States, long-term capital gains taxes are applied to any cryptocurrency held longer than one year, meaning you will take a significant financial hit for converting your digital money back to hard currency.” This is misleading, I think. If you’re using it as money, the capital gains tax gets applied to PROFITS, so there is no “significant financial hit” unless you were using it only as an investment, which then the same investment rules will apply.
“As a grant-making mechanism, both grant-maker and grant recipients are compelled to run a “full node” to ensure security: the entire blockchain (record of all historical transactions, upon which each new transaction is cryptographically dependent) must be downloaded and verified.”
I am on the side of seeing _very_ little reason why any grant recipient will need to run a full node. SPV/Light clients are perfectly acceptable for most people.
“No Appropriate Use of Open Source Technology” So… the Digital Principles advocate for using closed source technology until it’s old? I think this is a stretch to say it’s violating the Digital Principles in this way.
“If an organization accepts grants in the form of cryptocurrencies, that private wallet key is less secure because multiple people will need access to it: a CFO, accountant, budget manager, etc. That opens up major risk to the security of the funds, which is the very foundation of cryptocurrencies.”
There are plenty of reasonable solutions around this. If there is a large sum of money that an organization is holding, using multisigs, etc make sense and is common practice.
I do think bitcoin specifically is not “searching for a problem”. The problem is unstoppable, borderless money (or store of value). The time frame relative to the financial crash and when Bitcoin was developed isn’t an accident or a coincidence. There are pros and cons to that, but that is the aim that it was designed for. There are some nuggets here that I think are good. It is still early with the technology and things are still maturing, but the progress has been solid.
As for things related to Ethereum, I do have excitement but also _many_ concerns. I do think there are a whole SLEW of things that need to be criticized… I’m just not sure this is the angle I’d go at, personally.
Beyond all of this, there is just a slew of really confusing flipping back and forth of Bitcoin criticisms and then _other_ blockchain criticisms when convenient.
“Blockchain transactions are slow.” Not really true. Speed is relative Some argue Bitcoin transactions are slow and that all depends on what you’re comparing it to. A Visa card transaction? Sure, it’s slower. An international SWIFT transaction? Wires? It’s much faster and convenient. No one (or at least should be no one), not even the _developers_ of Lightning, would want you to move tons of money over to the Lightning network. It’s in beta. Literally early users of Lightning adopted #Reckless as a mantra, knowing they’re taking on risk. Ethereum does provide a middle ground re: speed.
The Bitcoin codebase itself is more mature, and the link off to a funds vulnerability to suggest it is insecure is actually that of #Reckless Lightning.
(“If an organization accepts grants in the form of cryptocurrencies, that private wallet key is less secure because multiple people will need access to it: )
The private key has no role here, it’s the public key, which in itself is not an issue.
Right. The point Nadia is making (I think… feel free to elaborate OP) is if an organization is having a wallet with many people in the org sharing the same private key.
Gotcha, so in that case it comes down to internal systems, unless the donor is also controlling this (i.e. how to manage and spend your coins).
I was actually unaware some grants are disbursed in cyrpto, I know Non profits can collect donations in cypto, and transferring this money to cash is no problem, unless am missing something here.
Over on Twitter, Michael Klein asked, “As it’s simply donations… isn’t this a case of not looking a gift horse in the mouth?”
I happen to think that we should not have separate rules or exceptions for donations (and donors). The Principles should apply to all things and all actions, as best as we can follow them and their contradictions.
I’m not sure our current banking and financial systems also fall within the Principles either. 😉
I don’t think this Ethereum coin donation will lead to a flood of cryptocurrency donations for UNICEF or anyone else. We have a clear example that Bitcoin will not fund your next ICT4D project. Though this post shows that adding “blockchain” to your organizational messaging can certainly generate hype, which again proves my hype cycle post.