Rhodri Davies, Programme Leader, Giving Thought

Rhodri Davies

Head of Policy

Charities Aid Foundation

The role of giving

Could the blockchain transform the way we create and regulate civil society organisations?

21 October 2014

Today we launched the latest in our series of Giving Thought discussion papers exploring the potential implications of cryptocurrency and blockchain technology for civil society organisations (CSOs): Block and Tackle: using blockchain technology to create and regulate civil society organisations.

The previous papers in this series have looked at how cryptocurrency (eg Bitcoin) and blockchain technology could be used to transform philanthropy and charitable giving. Our new paper builds on that work by considering the impact that blockchain technology could have on the way in which CSOs are created and regulated.

Impact on charities

Take charities registered in the UK as an example: these are legal entities that meet the requirements of charity law and regulation and are registered with the appropriate regulator (ie The Charity Commission in England and Wales, OSCR in Scotland and Charity Commission for Northern Ireland in Northern Ireland).

What this actually boils down to is that they are collections of individuals (the trustees) combined with a document outlining how the legal entity will operate and what rules it will be bound by (the governing document).

impact on companies

This is much like the situation for registered companies, which are essentially just collection of individuals (minimally a Director and a Company Secretary) and some governing documents (the memorandum and articles of association). And as some people have started to point out, it is possible to record both the individuals and the relevant documentation using the blockchain and bind them together using smart contracts in order to create a company on the blockchain itself. The same basic idea applies to charities.

Benefits for charity

What would be the benefits of registering charities in this way? Well, for one thing it could reduce costs as the process of registration could be largely updated, and it would be easier to make amendments in the future without having to contact the regulator and request that they update the organisations governing documents etc. It could also have a positive impact on level of trust, as it would be far easier to vet potential trustees more effectively by cross-checking their ID on the blockchain against other information sources in order to identify potential conflicts of interest or risks.

If charities were registered as blockchain entities, then an additional benefit is that you would no longer need to maintain a separate register of organisations. The blockchain itself is a secure public ledger, so would fulfil this function automatically. If you take things one step further and assume that financial transactions are conducted on the blockchain (either in cryptocurrency or using a tokenisation process where fiat currencies are represented in some way), then you also get the possibility of real-time financial information.

Not only would this make it unnecessary for organisations to submit audited annual reports, but it would also make their operations radically more transparent (for more on the potential challenges this poses see my previous report Giving Unchained).

Impact on regulation

The final, intriguing, way in which creating charities as entities on the blockchain could have an impact on regulation is when it comes to ensuring compliance with the rules. Currently, the way law and regulation works is that an official body sets out the rules; then monitors whether organisations are complying with them and takes appropriate measures to censure them if not. However, using blockchain technology it could be possible to embed the rules in the very smart contracts which govern the system, so that it is literally not possible to break the rules in the first place.

This would represent a fundamental shift from governance-by-enforcement to governance-by-algorithm, which raises many challenging questions such as: who decides on the appropriate smart contracts to govern the system (ie does a single party have that responsibility, or is it done by majority consensus?), and what mechanisms, if any, are there to challenge these smart contracts if an organisation feels that they unjustly prevent legitimate activity.

Do check out the paper if you are interested in these ideas and want to find out more, but here is a quick top-line summary of the key ideas explored:

  • Verifying trustees: The blockchain could enable a new model of highly secure, user-controlled online ID, which would make it possible to automate all the relevant background checks needed to confirm an individual is a suitable trustee.
  • Charities as blockchain entities: Charities could be registered on the blockchain using smart contracts which link all the relevant documents with the IDs of trustees.
  • No separate register of charities: If charities are registered on the blockchain, there would immediately be a secure, continually updated public ledger recording all of their information. Hence a separate, dedicated register would be redundant.
  • Real-time reporting: Annual reporting would no longer be necessary if transactions were conducted or recorded on the blockchain, as accurate, real-time information on spending would be available to everyone.
  • Proactive enforcement: Smart contracts could be used to provide an early-warning system for breaches, allowing problems to be dealt with before they escalate.
  • Governance-by-algorithm: laws and regulations could be embedded in the very smart contracts governing how charities operate, so that it would not be possible to break them and hence enforcement would become unnecessary
  • Consensus-based regulation: the smart contracts in the system of governance-by algorithm could be agreed by consensus among the users of the system, with representatives of the judicial system retaining an appropriate arbitration role as expert “oracles”.

Obviously this is fairly forward-looking stuff, and it is well-known that futurology is a mug’s game, but even if the technological developments I have posited do not come to pass in the exact form I am suggesting, I do think that the general trends toward decentralisation and greater transparency will happen come what may. If CSOs want to be equipped for this new environment, they need to think through the issues now so that they have a chance to shape developments and are in a position to take advantage of any opportunities which may arise.