White Paper

Michael V. Pratt, Sasha Shtern, Coury Ditch, Kent Barton

Executive Summary

This proposal describes a charitable giving program that distributes donor money to participants in a homeless recovery program in Denver using Bitcoin. Existing programs for the homeless are focused on providing emergency services like food kitchens and shelters and donated goods such as clothing and toiletries. This program is distinct in that it puts funds directly in the hands of participants and enables them to make decisions about the resources they need while spending money at local businesses. Bitcoin enables online deposits, convenient money storage, and tracking participant spending against a list of approved vendors. The goal of this program is to help homeless people in Denver on the path to housing and show a use case for digital currency.

What is Bitcoin?

Bitcoin is the first and most widely used cryptocurrency, first described in a whitepaper in 2008 (Nakamoto, 2008) and released as open source software shortly thereafter. Over the last 8 years, a diverse ecosystem of wallets, exchanges, and payment processors has developed. The market capitalization of Bitcoin in early 2017 is $16 billion and the network processes more than 200,000 transaction/day.

The properties that make Bitcoin useful for this project are: (1) Bitcoin is peer to peer. Like cash, no financial intermediary is needed for storing or transacting in bitcoin. (2) Bitcoin is easily stored on a smartphone – it’s secured by a passphrase (more precisely a private key).
(3) Bitcoin transactions are posted on a public ledger called the blockchain which records transaction amounts and the sending and receiving addresses.

Bitcoin has some properties of fiat money and some properties of a commodity. Like fiat money, Bitcoin is useful as a medium of exchange, because it is fungible, durable, divisible and recognizable. It is also potentially useful as a store of value. However, Bitcoin is less useful as a unit of account or measure of value. Unlike fiat currencies, the monetary supply of Bitcoin is not determined by a central bank, but rather by an algorithm hard-coded in the software. There is a fixed inflation rate that decreases by half every four years, until the last bitcoin is mined in 2140. This means the supply of bitcoin can’t be changed in response to changes in demand as is typically done by modern central banks to maintain price stability.

Because Bitcoin can’t serve all the functions of money some interaction with fiat currency will be needed.

DGP In a Nutshell

The Distributed Giving Project (DGP) will consist of a fundraising team, a program administrator, approved vendors, and participants (aka clients). The ideal participant is an individual taking measurable steps toward achieving long term stable housing. This might involve taking classes in job skills, money management, relationship skills or participating in a twelve-step program for substance abuse recovery.

The program administrator might be a shelter or substance abuse recovery program. This organization will select clients and activate or deactivate accounts based on program criteria. The DGP will partner with vendors such as convenience stores, second hand clothes providers, and public transportation providers to accept bitcoin payments. Custom software will match client purchases to these approved vendors. Deposits can be paused or ended if the participant spends too much at non-whitelisted vendors or fails to meet other program criteria. Spending data can be used to improve program management, provide donor confidence, and conduct social and economic research.

The DGP will utilize smartphones as the means for storing and transferring bitcoin for participants and vendors. Due to technological advancements and government subsidy programs, smartphones are now widely accessible, even to low income individuals. In 2006, the FCC Lifeline program was expanded to cover cellphone plans and in December 1, 2016, the minimum standards were updated to include 500 minutes and 500MB for $9.25/mo. It’s now common for providers to set up shop in downtown Denver to get people signed up. A decent Android smartphone can be purchased for $30. These subsidized phones are commonly known as “Obama phones” on the street.

Individuals experiencing homelessness don’t have a permanent address and likely don’t have convenient access to deposit accounts or lines of credit. Credit history, criminal record, or lack of ID could prevent this population from accessing mainstream financial services. Because bitcoin is peer to peer, recipients won’t need to have a bank account to accept it. In addition, Bitcoin wallets open an avenue for clients to receive money over the internet from friends or family members that may live far away.

Challenges

Temptation Goods. A common concern with direct giving programs is that the funds may be spent on drugs or alcohol. A survey of programs in the developing world showed that spending on temptation goods did not significantly increase, particularly when a condition is placed on the money, such as clients participating in a program (Evans, Popova, 2014). Social messaging encouraging positive use of funds was correlated with reduced spending on temptation goods.

Unintended Consequences. Consideration should be given to the warnings put forth by Robert Lupton in his 2012 book Toxic Charity. Lupton writes in Toxic Charity that one-way giving can be counterproductive by harming the dignity or producing dependency among the recipients. Involving participants as partners that help make decisions and contribute to the success of the project can mitigate these concerns.
Merchant Acceptance. Merchant acceptance of bitcoin is not widespread in the U.S. today. Credit cards and debit cards are ubiquitous, convenient and relatively low cost. But there are services such as BitPay which allow vendors to accept bitcoin at point of sale if they wish. The bitcoin is converted to USD and deposited to their bank account. This mitigates bitcoin volatility and streamlines the process of accepting bitcoin.
Governance. Bitcoin is not run by a company or formal non-profit. It is an open source project whose development is dependent on the work of volunteers. Some developers are sponsored by private companies and others are individuals working without compensation. Lack of formal hierarchy can result in a longer decision making process and uncertain development progress. Social consensus is required from diverse stakeholders to change the Bitcoin protocol. Currently the community is split into two main camps that disagree about how to scale the capacity of the Bitcoin network. This could result in delayed development or even a hard fork (resulting in two separate currencies) if the parties can’t come to consensus.

Reputation. Potential partners and other stakeholders may have a negative perception of Bitcoin due to its association with darknet markets. In 2013, the shutdown of the Silk Road marketplace, a platform used to buy and sell illegal drugs, was widely reported in the media. As a permissionless, censorship resistant currency, it’s not too surprising that bypassing legal restrictions was one of the first use cases for this currency. This reputation should be kept in mind when discussing the project with stakeholders. It may help to view Bitcoin as a tool that is just as easily utilized for legitimate cases.

Technical Risk. As a relatively new technology, Bitcoin comes with more risk than traditional forms of money. In late 2016, demand for the Bitcoin network began consuming all available block space for the first time. This resulted in rising transaction fees as users competed for a limited resource. Rising transaction fees will tend to decrease its usefulness for small retail payments. Other risks include denial of service attacks, spam transactions, or 51% attacks. Any business or charity that uses Bitcoin in a key role should take these risks into account and have sufficient mitigations in place.

Should Bitcoin fail to gain adoption as a retail payment solution, other cryptocurrencies might fill this role. Possible candidates include Dash, Ethereum, or one of hundreds of lesser known alt-coins.

Related Programs

This section describes some related programs in the areas of direct giving and cryptocurrency charity.

BitGive Foundation. BitGive is a 501(c)(3) founded in 2013 that partners with international relief efforts and local charities focused on public health and the environment such as Save the Children and The Water Project. They accept Bitcoin donations. Their GiveTrack platform for nonprofits provides transparency and accountability to donors by sharing financial information and project results. www.bitgivefoundation.org

Give Directly. Founded in 2012, Give Directly sends money directly to people living in extreme poverty using mobile payments. A study released in 2016 by Haushofer and Shapiro analyzing a Give Directly program showed large increased consumption and psychological well-being among recipients. The study also showed monthly transfers were more likely to improve food security whereas lump-sums were more likely to be spent on durables. www.givedirectly.org

Universal Basic Income. A form of social security in which all citizens receive a regular unconditional sum of money. Proponents argue that this method could replace numerous welfare programs with one income while providing improved transparency and administrative efficiency.

Hypergive. The Hypergive project is described in a whitepaper (Burke, 2016). This program gives cards printed with Bitcoin addresses to homeless people so they can accept peer-to-peer bitcoin donations instead of cash. The money can then be spent at local food retailers.

Existing Services

There are many existing services for the homeless and low-income populations in Denver. This section contains a partial list.

Shelters – There are several shelters serving the Denver homeless population, such as the Denver Rescue Mission (www.denverrescuemission.org), Samaritan House serving women (www.samhousedenver.org), Urban Peak serving youth (www.urbanpeak.org), and The Action Center www.theactioncenterco.org. Typical shelter services include beds, food, clothing and toiletries. Shelters may be considered “emergency services.”

Substance Abuse Recovery Programs – Step Denver (previously Step 13) is a residential recovery community in downtown Denver that emphasizes sobriety, work, and self-sufficiency. Participants must maintain a full-time job and pay $10/day to stay at the facility. www.stepdenver.org

Section 8 Housing – Payment of rental housing assistance to private landlords on behalf of 4.8 million low income households as of 2008. The program is administered by the U.S. Department of Housing and Urban Development.

SNAP – The Supplemental Nutrition Assistance Program, formerly known as the Food Stamp Program, provides food purchasing assistance for low and no income people living in the U.S. The program is administered by the U.S. Department of Agriculture. In 2016, it spent $70.9 billion and supplied 44.2 million Americans with an average of $125/person/month. In the 1990s stamps where phased out in favor of Electronic Benefit Transfer (EBT) debit cards. Food items are permitted and alcohol and tobacco are not permitted. Payment is made to retailer via ACH at the end of the day.

Job Training – Bayaud Enterprises is a Denver non-profit that provides employment training, assessment, coaching, placement and job mentoring services. www.bayaudenterprises.org

Proof of Concept

This section describes a 1-month proof of concept to demonstrate feasibility of the project. Participants will be selected from members of Denver Rescue Mission’s Next Step community. These are individuals who are taking practical steps to transition out of the shelter environment and into stable housing. In Next Step, they participate in professional development, money management and relationship skills classes. In addition, they are responsible for on-site duties such as kitchen work or reception, and must pass bi-weekly drug tests.

Clients

Clients will receive $5/day for 28 days, for a total of $140. These funds are distributed each night via an automated script. There are three rules for the money: (1) funds should not be spent on alcohol, drugs, or weapons, (2) no more than 25% of the funds should be spent outside of approved vendors, and (3) any funds not spent at the end of the month are automatically returned to DGP.

DGP will be used as an opportunity to teach budgeting skills by encouraging participants to plan how they will spend the money and evaluate at the end of the month how actual spending matched planned spending.

Vendors

Vendors will offer approved products such as food, toiletries or clothing and they should be within walking distance of the Denver Rescue Mission or accessible by bus line. Vendors will also need a smartphone or tablet to accept payments using BitPay and may need a Wi-Fi hotspot for Internet access if cellphone data coverage isn’t available by participants.

Tracking Spending

Spending is monitored for the three reasons: (1) to ensure that funds are spent at approved vendors and (2) determine which approved vendors are most in demand by clients, so that improvements can be made to the program in the future.

DGP will retain a copy of the client private keys (HD seed phrase). This allows DGP to determine in advance which addresses will be used for purchases. When a purchase is made at a partner vendor, DGP is notified via the BitPay API. Software then examines the sending address to see if it matches a client address, and if so, the transaction is marked as valid.

Tax Considerations

Virtual currencies are treated as property for federal tax purposes. This means that spending bitcoin is a taxable event and may result in a tax liability (capital gains). This is outlined in IRS Notice 2014-21 on virtual currencies.

Bitcoin given as a gift generally does not generate a tax liability for the person giving the funds (up to $14,000 in 2016). However, capital gains are transferred to the person receiving funds. For example, if a participant receives $5 worth of bitcoin that was originally purchased at $3 by the donor, the participant would have a capital gains of $2 when the money is spent.

Short term capital gains are taxed as ordinary income while long term capital gains are taxed at 0% for incomes under $37,950/yr. and 15% above $37,950/yr. (in 2016). It will be advantageous for donors to give bitcoin that has been held longer than a year to minimize the likelihood of capital gains liability on participants.
Conclusions
This proposal describes a novel approach to charitable giving that uses recent advances in cryptocurrency and widespread availability of smartphones to help individuals experiencing homelessness in Denver. The goal of the program is to empower participants to problem solve their own resource needs and make progress toward achieving long term stable housing.

Some related programs in direct giving are described and existing services for the homeless population in Denver are surveyed. The challenges of implementing DGP are explored, some solutions provided, and an outline for a 1-month proof of concept is presented. Although the challenges are many, no show stoppers have been identified.

The next steps should include consultation with experts in the field of social work with experience in the causes of homelessness and evidence based practices to eliminate homelessness. Possible resources include University of Denver Graduate School of Social Work and the Metro Denver Homelessness Initiative. These consultations should determine if this program is worth pursuing or if any changes should be made.

References

Burke, Scott (2016), “Ending Homeless Hunger with the Blockchain”,
Available at: https://www.scribd.com/doc/311176125/Ending-Homeless-Hunger-With-the-Blockchain#fullscreen&from_embed

Evans, David K., Anna Popova (2014), “Cash Transfers and Temptation Goods: A Review of Global Evidence,” The World Bank Policy Research Working Paper 6886. Available at: http://documents.worldbank.org/curated/en/617631468001808739/pdf/WPS6886.pdf

FCC, Lifeline program, Available at: https://www.fcc.gov/general/lifeline-program-low-income-consumers

Haushofer, Johannes, Jeremey Shapiro (2016), “The Short-Term Impact of Unconditional Cash Transfers to the Poor: Experimental Evidence From Kenya,” Available: https://www.princeton.edu/~joha/publications/Haushofer_Shapiro_UCT_2016.04.25.pdf

Lupton, Robert (2012), Toxic Charity: How Churches and Charities Hurt Those They Help, And How to Reverse It
Nakamoto, Satoshi (pseud.) (2008), “Bitcoin: A peer to peer Electronic Cash System”, Available at: https://bitcoin.org/bitcoin.pdf

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