A Vibrant future for aid

The UNHCR's decision to make direct cash transfers in stablecoins has lessons for global finance

In mid-2022, the United Nations High Commissioner for Refugees (UNHCR) estimated there were some 103 million displaced people worldwide. Of these, 32.5 million were refugees who had been forced out of their country and, therefore, came under the UNHCR’s mandate. More than 70 per cent of those refugees originated from five countries, namely Syria (6.8 million), Venezuela (5.6 million), Ukraine (5.4 million), Afghanistan (2.8 million) and South Sudan (2.4 million).

Looking after them is a huge logistical and diplomatic exercise, with their locations scattered across various countries. In 2016, the UNHCR instituted a policy of cash-based interventions, making direct cash transfers and thus, giving refugees the agency to set their own priorities on spending. It has delivered $5 billion in direct cash assistance to 35 million across 100 countries between 2016 and 2022.

The UNHCR has now adopted a cryptocurrency solution to disburse cash more efficiently and painlessly and with the least leakage. In December 2022, it launched a pilot project involving blockchain and cryptocurrency to deliver aid to Ukrainians. In March, this project received a “Best Impact Project Award” at the fourth edition of Paris Blockchain Week, which is Europe’s biggest digital assets conference. 

The UNHCR used the services of its sister, the UN International Computing Centre, which manages technology for the UN, to design this solution. A blockchain is used to identify recipients, and to deliver digital cash in the form of a crypto stablecoin.

The blockchain collaborator is Stellar Development Foundation, a non-profit that promotes the use of blockchain networks. The cryptocurrency is a stablecoin called the USDC (US dollar coin), which is managed and distributed by Circle Internet Financial, a New York registered global money transfer firm.

How does it work? The blockchain tracks and keeps records of transactions. It’s tied to a digital wallet app, the Vibrant, which is designed and administered by Stellar. The refugees download a Vibrant wallet on their smartphones. They can then receive and store USDCs in the Vibrant. The USDCs can be instantly converted into paper cash, or electronically converted to US dollars and stored in a normal bank account. Fiat can equally smoothly be converted back into USDC.

A “stablecoin” is by definition a cryptocurrency with a fixed exchange rate. The USDC has a 1:1 conversion ratio with the US dollar. This ratio is maintained by holding the requisite reserves in fiat, bullion, etc., and issuing only as many coins as backed by the reserves. In effect, Stellar uses a currency board model.

Assuming there’s regular, credible, independent audits of the reserves, the USDC is, in effect, a digitised version of the US dollars. Stellar also issues a EuroC, which is fixed at 1:1 to the Euro, using similar currency board principles. When recipients wish to convert to cash, whether it is dollars, euros, or local currency anywhere, they can withdraw fiat at any global MoneyGram location, (including 4,500 MoneyGram locations in Ukraine).

What are the advantages to disbursing aid in this fashion compared to simply handing out US dollars, or making electronic transfers into a bank account? The blockchain allows tight verification and control of where the money is going — there are no leakages.

As with other blockchains and cryptos, Stellar can trace all the transactions made with any given USDC from the instant it is created. The blockchain knows which coin is in whose possession at any given instant. The USDC also cannot be stolen and utilised by a thief without acquiring the passwords to the Vibrant wallet.

Assuming a strong mobile network, transfers, conversions and re-conversions, are near-instantaneous, without the frictions, delays, or bank commissions of fiat cross-border transfers. So this project allows refugees to cross borders, or transfer fungible digital assets across borders to anybody with a Vibrant wallet. Since every coin is traceable, with an immutable transaction record, the tax and regulatory authorities should also be happy.

There are learnings here for the global finance industry, which moves over $700 billion worth of remittances every year. Researchers studying the modalities of universal basic income (UBI) disbursal, and the impact of UBI should also be examining this model. And, it should be of special interest to India, which received over $89 billion of remittances in 2021-22.