Economy & Business

Blockchain Could Upend Welfare Programs

(Illustration: NRO)
It allows for peer-to-peer charity and lower administrative costs.

Americans have long stood out for their willingness to give generously to support their less fortunate neighbors, as famously noted by French political scientist Alexis de Tocqueville in the 1830s. But this spirit of community care began to erode in the 1930s with the rise of the welfare state. Americans still give, but the idea that person-to-person charity will meet social needs has been greatly diluted by government welfare programs that provide aid via cold, faceless bureaucracies.

What if we could cut government out of the process and restore a stronger connection between donors and the people who benefit from their donations? What if we could provide a helping hand to people in a way that produces better outcomes for recipients, greater accountability, and more substantial personal connections for the people who put up their hard-earned money?

Imagine a welfare system in which people contribute voluntarily, sometimes because they know the people who benefit from the donation. Imagine, also, that the people who benefit are more accountable because they can spend the money only on certain items and under certain conditions. Finally, imagine that none of this requires a government bureaucracy, saving the billions of dollars presently lost through government overhead and red tape.

We believe blockchain technology can help fulfill that vision. At its simplest, a blockchain is an electronic means of making and storing a record whenever money changes hands. Each transaction made on a network that uses blockchain technology is stored as a block of data that every individual on the network can see. With access to a complete historical record, everyone on the network can verify the exchanges everyone else makes, ensuring that no one can exchange something they do not own.

Blockchain technology has the potential to make life better for individuals and their communities and reduce administrative costs for stores, health-care providers, and government agencies. It is already fundamentally changing banking, data storage, real estate, crowdfunding — indeed, nearly every industry that involves exchanges of goods, services, or money. It can do the same with government welfare, if only we choose to use it.

The greatest benefit of this technology is that it can eliminate the need for the third parties we use in our interactions. For example, we rely on banks and their credit cards to verify many transactions. The credit card lets a merchant know that a customer can be counted on to make good on a promise to pay. In real estate, we rely on our broker to hold our title or escrow throughout the transaction. In welfare programs, we rely on the government to distribute our taxes to the needy.

Blockchain technology uses “smart contracts,” which are simple computer programs, uploaded to a network. Like many computer programs, they do one thing only if certain conditions, laid out in the program, are met. (Think of your chip-enabled credit card; it authorizes a purchase only if the card issuer verifies your creditworthiness.)

Experts in the financial sector, retailing, and other parts of the economy herald blockchain as a great disruptor. And one place where disruption is desperately needed is in the governmental distribution of welfare. The official welfare apparatus has long been seen as the lesser of two evils, an inefficient safety net that is better than no safety net at all. Still, welfare programs such as the Supplemental Nutrition Assistance Program (known more colloquially as food stamps) are often accused of fostering dependency rather than independence and are burdened by hefty administrative costs at each stage of the program. Blockchain technology could address both dependency and inefficiency, if government and society were willing to embrace the fundamental restructuring of welfare it will allow.

Some proposals have already shown how blockchain technology could secure welfare participants’ personal information, verify eligibility for programs, and otherwise make recordkeeping more accurate and useful. We at the Idaho Freedom Foundation propose a system that fully uses blockchain technology for a more fundamental change.

Modern welfare programs could be replaced by plug-and-play smart contracts that operate on a blockchain network. This smart contract would be the programmable digital mechanism to replace the role played by government entities.

Private donors, such as businesses, individuals, or churches, would voluntarily put their own money into a smart contract to be used by a person in need. Governments could encourage donors by giving them tax credits, since the tax money would no longer be needed to administer existing programs.

A donor could program various conditions into the smart contract (such as “complete a session in nutritional counseling”) as well as its terms (“disburse the money on the first of each month”). Once predetermined conditions are met, the smart contract would calculate the amount each program participant should receive. After calculating the proper amount, the contract would automatically transfer the money directly to the digital wallets of the intended recipients.

Blockchain programs could vary based on the needs of each participant. Each person would have a unique digital wallet, allowing them access to donor money.

Rather than receiving dollars in their digital wallet, participants would receive a blockchain token, with each token representing a dollar. The tokens allow for more control over how the funds are spent. Cash can be spent on anything, including something contrary to the wishes of the donor, but a smart contract can lay out rules for how its tokens can be used. Thus, a blockchain can ensure that tokens can be spent only on healthy food, appropriate housing, or whatever the donor specifies.

Merchants such as grocery stores would have to modify their point-of-sale systems to accept these blockchain tokens. But then they could automatically exchange the tokens for the original dollars held by the program. Charity recipients would walk away with the goods or services they need; the providers and stores would walk away with dollars.

This new blockchain framework would have many benefits over the current welfare system. First, it would be highly customizable. Current welfare programs are monolithic, forcing all participants into a one-size-fits-all solution. The new charity-care program would allow donors and participants to find the best solution for the challenges they are trying to overcome. For instance, a nonprofit could address a specific client’s difficulty sticking to a budget by programming the wallet to dispense supplemental welfare only once the participant has presented proof he adhered to last month’s budget.

By encouraging greater peer-to-peer charity, we could return to a society built on private giving, reduce inefficiency, and promote better outcomes for all.

Second, this new framework would reduce the overhead costs that are lost in the current welfare system. Before welfare recipients ever receive a benefit, the money cycles through numerous layers of government — the IRS, the U.S. Department of Health and Human Services, state treasuries, state departments of health and welfare, etc. With each layer, money that is earmarked for the poor and the needy ends up diluted. This new framework, by contrast, would require just a fraction of the operating costs, paid for by taking a small percentage of each donation.

Third, blockchain tokens could reduce the need for audits and inspections, freeing up even more money for the needy. Because the information on the blockchain is distributed across each individual on the network, committing fraud would be nearly impossible. Trafficking in the tokens — akin to someone selling food stamps for cash — would be curtailed by the security measures that could be imposed on each recipient’s digital wallet. These security measures could include biometric identification for each purchase and limits on what items may be bought.

Finally, the most important benefit of a blockchain approach to welfare is a moral and social one. With monolithic government welfare programs, private individuals lose their involvement in the lives of those around them. This new charity-care framework, on the other hand, would ensure that benefits are available to those who currently rely on government welfare programs, while establishing a personal connection between donors and recipients. This personal connection would give recipients someone to thank other than a faceless government bureaucracy. And donors would be able to invest more in someone’s life than just money.

Blockchain technology is disrupting countless industries, cutting out the middlemen from our daily exchanges with one another. There are few places where cutting out the middlemen would be more beneficial than in providing financial help to the needy. By encouraging greater peer-to-peer charity, we could return to a society built on private giving, reduce inefficiency, and promote better outcomes for all.

— Phil Haunschild is the policy researcher at the Idaho Freedom Foundation. Janae Wilkerson serves as the assistant to the president at the Idaho Freedom Foundation.

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