UNDP Alternative Financing Lab applies blockchain to create new mechanisms

(Photo courtesy of Kaplan collection agency)

Ten months ago, we had an innovation team advancing a range of financial mechanisms: blockchain-based cash transfers and projects to reduce the impact of accumulated bonds, to predict financial disasters and peer-to-peer lending for SMEs - what the Overseas Development Institute (ODI) called a "new era of options" for development finance.

We are determined to address this, with a $2.5 billion financing gap in the current SDG agenda (even as ODA-Official Development Assistance to developing countries continues to increase). We are raising funds from more sources than just the priority lists of development organizations and governments. The European alternative finance market grew by 144% in 2015, the global turning point impact investment market is expected to grow by more than $3 trillion in the next few years, and crowdfunding investments reached $37 billion in 2015 (for comparison, this is one-third of the total ODA funding of $131 billion in 2015).

The above situation has led to the birth of an alternative finance laboratory, which we have inadvertently started to operate in Istanbul. What kind of tools do our customers need to tap into new sources of funds? Can this tool be run experimentally under the current laws of most countries (blockchain for remittance purposes)? Many mechanisms are precautionary in nature and require expected liabilities to be accounted for in costs (based on the social financial cost of youth unemployment). What form of "logic framework" is suitable for such projects?

Since the beginning of this year, we have mobilized more than €3 million to conduct a series of experiments with new financial mechanisms and address some of these issues:

Blockchain and development

In Serbia, we’ve been working with some superstars on everything from AidTech (AidTech winner: Reducing Cash Remittance Fraud for Lebanese Refugees) to designing a proof of concept for transferring money via blockchain, making it cheaper (compared to Western Union) and more targeted (using remittances to pay for electricity, gas, phone bills, food, etc.). There are several similar projects going on around the world (check out this Tunisian startup redefining remittance transfers with blockchain), but this is the first for us at UNDP. In Moldova, we’re testing whether we can provide a more efficient way to manage UN fleets through the Emercoin blockchain in partnership with DeePlace. We were inspired by a distributed transport equipment sharing system in Israel and a shared vehicle system in the city of Arcade. For UNDP’s emergency response work, we have a strong hunch that blockchain can provide a more efficient way to transfer and track funds and allow us to change strategies in response to incidents. This work is still in progress, but we are very excited about it.

We are working with the European Commission’s Joint Research Centre (who have been discussing decentralized ledger technology for a few months now) and have set up a prize for social applications based on blockchain that go beyond the financial sector. The pace of progress in the field of blockchain for our governments is amazing, with new use cases popping up like mushrooms and across multiple industries. For example, the UK government just announced that a digital currency based on a distributed ledger could increase GDP by 3%. Other blockchains include micro-energy grids, land registries (Georgia), election platforms (Ukrainian Parliament), anti-fraud for natural disaster relief funds (Italy), charitable donations, trade management and tracking for SMEs, promoting girls’ education, and the protection of cultural heritage during political conflicts, to name just a few.

Preventive finance: social impact bonds and financial-based forecasting

In Serbia, we have designed a social impact bond with Sitra, the Finnish innovation fund, on youth unemployment. We were inspired by their design of a financial mechanism for public sector attendance, migration and employment, which turned the concept of welfare on its head, based on the cost of government investment in social outcomes. We will have new data on this in the coming weeks, but previous data show that the entire account of wages, expected taxes and social transfer costs will cost 1.5 billion euros per year, not including the cost of treating other unemployed youth, such as depression, alcoholism and involvement in violence. In Belarus, the European Commission has given us money to design a "cost buy-in facility", of which impact bonds will be part, including donations, impact investments, etc. This is a packaged combination of social impact bonds (SIBs) that are best done, but from the future debt calculation, we believe that there are many channels for investment, and the source and control of attracting new funds will depend on the actual results, not just the activities. Obviously, other funding sources have issued the fifth tranche of impact bonds for employment with the Government of the Netherlands, impact bonds for youth transitional home facilities with the Government of Australia, and the International Red Cross has also issued the first humanitarian impact bond with the Government of Belgium, with a value of up to $30 million.

When it comes to predictive finance, we learn from the best existing techniques. Together with the Red Cross/Red Crescent Climate Centre, our team in Bosnia and Herzegovina is designing a FbF mechanism for the Vrbas basin. Ultimately, our goal is not only to minimize risk and gain media support before a disaster strikes, but also to test the feasibility of attracting new sources of funding for the continued recovery of society (such as insurance companies, etc.).

Crowdfunding projects in development

Since we launched the first UNDP Global Crowdfunding Academy in December (click here to view the Crowdfunding Academy in Croatia), we have successfully run 13 crowdfunding projects, mobilizing more than $200,000 in funding, covering areas such as health, energy and entrepreneurship, such as raising funds to build a more inclusive and energy-efficient nursing home in rural areas in Kyrgyzstan, raising funds to start a rural renewable energy project in Indonesia, raising funds to start a healthy food project in public schools in Moldova, and a series of community projects in the context of national conflict in Yemen. We are currently preparing to launch a youth employment project in Bangladesh, and a project in Lebanon to manage traffic and control safety around public schools, which has raised $116,000.

All donations based on these events are a major source of funding for us, and these events have brought new partners interested in our work and offered to help us. For example, our activities in Tajikistan have not only brought in donations from the Australian diaspora, but have also actively explored new funding opportunities for similar projects in the eastern region. Famous commentators Jamie Oliver supported our project to provide fresh fruit to public schools in Moldova, Bangladesh national cricket captain Mashrafe sponsored a youth employment skills training project, Balkan rock star Rambo Amadeus supported a project to build a solar-powered sailing boat in the Adriatic Sea, and Yahoo invested in our project to open restaurants for refugees to solve employment problems, etc.

As for future work in this area, we hope to focus on equity crowdfunding (for community renewable energy investment projects as an example) and peer-to-peer (P2P) lending (for furniture design SME investment projects in Tajikistan), as our intuition is that these mechanisms can help us bring large diaspora funds closer to bottom-up development for community entrepreneurial projects. We will have the opportunity to use this approach to conduct experiments with the United Nations Secretariat (UNFCC) in the crowdfunding of independent renewable energy systems we are designing.

What are your plans for the next step?

We would love to see Open Bank take on a role in our project (donors can track their investment funds through points purchased after participating in crowdfunding campaigns and donating), and we are also happy to work with GrowFund and Fund Club for corporate crowdfunding and peer-to-peer donations. Mobile payments are not yet available in Europe and CIS countries, so we want to explore why this is the case and how to change this situation. We are not sure about this yet, but hope to work with the Disberse team. The Disberse team has some conclusions on this topic, but we have not yet made conclusions about the future of finance, including social cash transfers, impact bonds and payment results, blockchain and transparency. We also got some help from AlliedCrowds and Cambridge Alternative Finance Lab, but it is far from enough.

PS: We would like to thank the first investor of the UNDP Alternative Finance Lab, the Slovak Ministry of Finance.