The Red Cross of Norway, and Denmark, and Kenya are to deploy blockchain-backed “local currencies” in Kenya and Ethiopia to improve the use of distributed aid. Digital Asset Live Editor-in-Chief talked to Nick Williams, Co-founder of Sempo, Adam Bornstein who works with alternative financing at the Danish Red Cross, and Will Ruddick, Founder of Grassroots Economics.
Q1: Every year Red Cross distributes $1B in the form of cash or vouchers to help people living in disaster-prone areas. What do you need blockchain for?
A2: This system provides several advantages over traditional cash and voucher based assistance:
- It’s transparent and efficient; between the donor and the intended recipients traditional voucher based assistance may involve dozens of intermediary organisations such as different regional banks. This complexity makes it hard to see just how well funds are making to people, as well as adding time and overheads. In contrast using a blockchain based asset means we can cut out a lot of these middlemen, making the flow of funds from donor to recipient is massively simplified and far more traceable. As a consequence, in a some of our previous pilots in Vanuatu we’ve between Sempo and Oxfam, reduced aid delivery times where reduced by 90% compared to traditional cash aid. In the context of CICs, we would expect there to be a 100% improvement because users are already enlisted and part of a network; indeed, there is no need to register aid recipients.
- A blockchain based process allows us to do far more complex programs than pure cash or vouchers. The work Grassroot Economics have pioneered in Kenya is a great example of this – were launching a network of community level currencies that have constantly varying exchange rates to each other and with the national currency. Such sophisticated financial process would be impossible with pure cash, or vouchers.
- Blockchain, or more specifically stable-coin cryptocurrencies, allow us to operate in places where traditional financial systems have failed or did not exist in the first place – it provides an asset that people can accept with the assurance that it will still have value in 1 week, 1 month or 1 years time, regardless of the local conditions.
Q2: How exactly will the blockchain based system work in comparison to the present one? Perhaps, you can answer with an example?
When you think about what characteristics that are important for a Community Currency to have, they’re very similar to a traditional currency. It must be hard to forge fake currency. It should be easy for anyone to work out basic things relating to the health of the currency, like how much is being spent each day, or even how much is even in circulation. Lastly, the issuer of the currency should not be able to manipulate currency freely, for example by creating more currency without oversight.
Traditionally community currencies rely on physical paper vouchers which are very similar to bank notes. Unfortunately, these don’t really have any of the characteristics described above; these are expensive to produce and relatively easy to forge, it’s difficult to understand how the currency is being used, and there’s nothing to stop the creator from just printing more. In contrast, our blockchain based system allows us to create a currency that is highly secure – it’s impossible for anyone, including us as the original creator of the currency to forge fake additional currency, and anyone can check the blockchain to see how the currency is performing at any time.
Q3: How will residents register on blockchain? How will they be able to use your credits for barters?
- Registration is much simpler than a regular blockchain wallet – if someone wishes to accept a payment in CICs they can sign up in a couple of minutes using only their phone number. They don’t even need a smart phone, because the wallet uses a technology called USSD to make transactions, which is very similar to sending an SMS and works on very basic phones.
- The entire system is designed to enable people to trade goods and services with each other more effectively in times when they lack access to National Currency.
Q4: How will your credits interact with the local fiat currencies?
- Each Community Currency has a constantly adjusting exchange rate between it, other Community Currency’s and the National fiat currency. This exchange rate remains close to parity but varies slightly based on relative demand. Community members are able to convert their community currency to fiat and vice-versa, but only at a certain rate (i.e up to 15% of total reserve) to prevent people from draining the system.
Q5: You are going to introduce local blockchain based currencies, you call them community inclusion currencies. Do you interact with the authorities of the target countries, who maintain their own national currencies? Do they mind?
CICs are eVouchers, first and foremost. CICs are strictly a social medium of exchange, much like personal commitments underlying barter trades. Underlying the value of CICs are the local goods and services of a community. These CIC eVouchers can only be exchanged within a given community, so for example is a CIC user took an eVoucher from Bangladesh, a community in Mombasa to a vendor in Nairbio, the CIC would be a valuable as Post-it Note.
CICs are softly pegged to the national currency which means that a reserve pool of fiat currency backstops each and every CICs. To help with conversation rates, we utilize bonding curves, which is a mathematical curve that defines a relationship between price and supply. To optimize this relationship, the team works with economists and engineers to develop simulations, for example the teams out of BlockScience and The Commons Stack.
From a regulatory stance, Grassroots Economics Foundation and Sempo have extensive experience working with in this area. Grassroots has been operating and piloting the concept of community currencies in Kenya for over a decade, whereas Sempo has supported some governments, such as the Government of the Republic of Vanuatu, pass new legislature supporting donor backed eVouchers.
It is important to stress that, at the first instance, the team always seeks the advice and guidance from regulators on how ensure CICs fully comply and complement a sovereign nations rule of law. As humanitarians, social entrepreneurs, and private companies, our collective team is very clear in our understanding that we are not only guests in these countries that we operate in, but also must adhere to the seven fundamental principles of the Red Cross and Red Crescent Socieiteis: humanity, impartiality, neutrality, independance, voluntary service, unity, and universality.
Q6: You have also introduced a blockchain based catastrophe bonds. How will it work, and what is the use of blockchain here?
A Cat Bond is a security that is used to transfer risk of financial loss arising from a catastrophic event from the sponsor to investor. The Danish Red Cross is sponsoring the world’s first pure-volcano catastrophe bond. This parametric cat bond is structured such that the principal is paid to the Red Cross if specified trigger conditions are met. The trigger for this cat bond is the occurrence of a volcanic eruption as measured by the column height of the ash plume. To mitigate against concerns that if there is an eruption that doesn’t trigger the bond, we have tiered the triggers across three predetermined ash plume heights. The cat bond notes will be digitised on a private blockchain developed by Solidum Partners, a Zurich based asset manager, which dramatically lowers the costs associated with clearing, custody, and documentation while increasing transparency and governances associated with conflicts of interest between financial intuitions acting as both trustees and transfer agents.
MITIGA Solutions and the Barcelona Supercomputing Centre are developing the long-term probabilistic model to calculate expected financial loss to investors in the event of an eruption, as well as a short-term deterministic impact model churning out post-eruption risk scenarios. The Red Cross uses these real-time scenarios to improve the effectiveness and efficiency of our assistance allocation. To this end, the ten volcanoes we’ve selected for this cat bond must satisfy specific characteristics to ensure maximum humanitarian impact, for example the minimum number inhabitants living within 100km radius of the volcano is 1M, and that the volcanic hazard medium impacting these communities is ash, not lava.
The significance of selecting the height of the ash plume as the cat bond’s parametric trigger has to do with this cat bonds early action, or ex-ante features. When there is a volcanic eruption, an ash plume fills the sky, and depending on wind currents or density of the ash, will dictate where and when the ash settles on the ground. Since the Red Cross cat bond’s parametric trigger is ash plume height, funding is released in advance of major loss resulting from the ash settling on the ground. In other words, money can be channelled to the ground while there is still time to implement preventative measure, relocation livestock, product agriculture, evacuate children, and stand-up shelters. By comparison, a parametric earthquake cat bond is triggered by the risk event, and funding is only released after the damage has been done.
If we consider that at the heart of our cat bond is this multi-peril deterministic risk model, and you combine it with smart contracts and blockchain, moving forward, we see an opportunity, although a challenging one, to sponsor a fully regulated crypto cat bond backstopped with a stable coin to help hedge against foreign exchange risks.
Furthermore, as the CIC platform expands, globally, there becomes a very interesting opportunity, potentially, to develop various social impact and insurance linked securities for regulated investors. Imagine creating suites of crypto enabled mini-cat bonds that help direct targeting funding to mitigate against risks associated with conflict, climate change, and other humanitarian crises without so much as relying on algorithms, bonding curves, datasets, and pre-arranging funding commitments – in the near future, this is how chunks of humanitarian assistance will be allocated.
Q7: How much quicker will aid be distributed with the catastrophe bonds?
Humanitarian assistance can be distributed within hours of the triggering event being verified by the cat bonds calculation agent. As long as there is a bank open, the system can release funding within a matter of hours.
This is significant given recent funding gaps some humanitarian organizations have experienced related to volcano response. In 2018, Mt. Feugo erupted putting at risk about 650,000 children and adolescents living in areas affected by the volcano. Within a handful of days, UNICEF was already faced with a funding gap of nearly US$900k. You can have a look at this link to get a better idea of the risk and funding gaps:
Q8: What other potential use cases of blockchain do you see in humanitarian activities?
At the heart of CICs is the ability to leverage blockchain to complement and enhance cash and vouch assistance; this is truly the tip of the iceberg. CICs represent a platform approach to multiple aspects of humanitarian assistance. It is a network effect whereby multiple, symbiotic local currencies make-up the operating system and the inputs contributing to humanitarian operations are the applications. While use cases are popular terminology in the technology world, when it comes to saving lives, elevating pain and suffering, and caring for displaced people, humanitarian organizations have to implement in practical, scalable terms. In this context, we look at the applications that pull from CICs as critical components to delivering on our mission, which is why the team pulled in world class partners focused on last mile supply chain, ex-ante risk modelling, micro-insurance, technology, social impact investing, and microfinancing.
The featured image Courtesy of Keith Parsons/Oxfam Australia