In September 2023, Mercy Corps Ventures partnered with Fortune Credit, Shamba Network, and DIVA Technologies to launch a pilot to test the use of blockchain-powered smart contracts to deliver anticipatory cash transfers to pastoralist communities in Kenya. This innovative approach employed smart contracts to release funds when vegetation indices indicated impending drought conditions.

Pilot Outcomes and Insights

The pilot demonstrated that the use of blockchain smart contracts led to a 75% reduction in transfer costs and a 90% decrease in settlement time compared to traditional transfers. Moreover, the majority of pilot participants reported improvements in their ability to meet major unexpected expenses. For a deeper dive into the pilot findings, refer to the pilot endline report available here.

Scaling up with Ripple

Building on these promising results, Mercy Corps Ventures is collaborating with Ripple, Fortune Credit and DIVA Donate to expand the reach and efficiency of anticipatory cash transfers. The pilot will utilize Ripple’s new stablecoin, RLUSD, on Ethereum as the payout token, demonstrating its applicability in humanitarian aid and disaster relief. Additionally, the DIVA Donate protocol will utilize the FEWS NDVI dataset, and has updated the trigger computation methodology to be less susceptible to the effects of cloud cover.

“Our mission is to provide products that enhance financial inclusion but we found that some of our target customers such as pastoralists could not afford to pay the insurance premiums we charged…so we decided to seek out partners such as DIVA…, that could enable us to expand our reach to offer solutions to vulnerable populations that are largely ignored by traditional financial institutions”

 

~ Janet Kuteli | Founder & CEO — Fortune Credit

“Since the last pilot with Mercy Corps Ventures, we’ve made several improvements to our DIVA Donate platform to improve the donor experience as well as the robustness of the setup. In particular, we’ve streamlined web3 onboarding with social logins and embedded wallets, improved app performance across the board, and integrated more reliable drought trigger data. We’ve also centralized our blog and added new features like a donor leaderboard to foster transparency. We are committed to building web3-based applications that make a real-world impact.”

 

~ Wladimir Weinbender | Founder & CEO — DIVA Technologies

Call to Action

The pilot campaign has a target of $40,000 which will cover up to 500 pastoralists. Participating in the campaign is simple if you have a browser wallet funded with RLUSD on Ethereum. Just visit divadonate.xyz, connect your wallet, enter the amount you wish to contribute, click “Deposit” and confirm the transaction in your wallet.

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As part of the Bank of England’s central bank digital currency (CBDC) design phase, it explored an offline CBDC for its digital pound. At this stage it was only interested in technology issues, so it tested solutions provided by Thales, Secretarium, IDEMIA Secure Transactions, Quali-Sign and Consult Hyperion. It concluded the solutions were technically capable of delivering final payments, but found challenges relating to usability and the prevention and detection of counterfeits and double spending.

Offline usability challenges

The first challenge was that the offline and online CBDC balances are kept separate in the wallet, which users might find odd given they don’t care about the technical ramifications. Sometimes wifi outages can catch a user off guard. But if they haven’t already moved money into the offline balance, they won’t be able to use the offline functionality unless someone else pays them offline.

Offline payments tend to use secure elements either on a smartphone, a special SIM or smart cards. Given they have limited storage capacity, this caps the number of transactions that are possible before reconnecting to the network. One of the solutions tested was particularly limited on this front.

Imposing transaction limits in order to address potential risks has the side effect of impacting usability. And they are often not practical. For example, any kind of time limits are challenging because smart cards don’t have clocks. On smartphones the time on the clock might be changed. An alternative is to limit the number of transactions, if the secure element is compromised the transaction count could be manipulated. Although in that case, the CBDC has a problem anyway, because the private keys are also likely to be vulnerable.

Preventing and detecting fraud

The primary line of defense against counterfeiting and double spending is the cryptographic keys used within the secure element of the device. However, if somehow these are compromised, there’s a need to detect this has happened.

After executing a transaction offline, when the device is within wifi range it subsequently performs a reconciliation with the online ledger to highlight fraud or double spending. However, this is after the fact, so it doesn’t prevent double spending.

Devices can keep transaction records for later reconciliation. The possibilities are to keep full transaction records, partial records or no records, which renders the transactions anonymous. The Bank of England observed that without transaction records to reconcile with the online ledger, it’s not possible to detect counterfeits and double spending at all. And even when records are kept, the intermediaries need to share the records with each other for detection purposes. Various privacy preserving technologies were tested to safeguard personal information.

Additionally, the trials tested having a centralized system for uploading offline transaction data, using confidential computing to protect personal data. That allowed additional checks, including for money laundering.

The paper concluded that the trials “demonstrated that it might be technically feasible to implement an offline payment functionality for a digital pound but there are security, performance, and user experience challenges which need to be explored further.”

Hence, two major areas where work is needed is for double spending and fraud checks, and what happens if the secure element is compromised. While secure elements are widely used for payments, they are usually combined with simultaneous online checks.

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Galaxy Digital has released a report on the cryptocurrency lending market, highlighting the central role of stablecoin issuer Tether. All the major centralized lenders in the previous crypto boom went bankrupt, and Tether has stepped into the void, becoming the dominant player with around 73% of the market. Since the last boom, the majority of crypto lending has shifted from centralized lending to DeFi lending.

Tether doesn’t hide its lending activities. Its stablecoin report for the end of 2024 shows its reserves include a secured lending balance of $8.2 billion. According to Galaxy’s data, the entire market for centralized crypto loans outstanding at the end of 2024 was $9.9 billion, with Tether having a market share of around 73%. This implies a minority of Tether’s loans are not for cryptocurrencies.

Many countries introducing stablecoin legislation prevent stablecoin issuers from participating in lending. That’s in part because they start to look like banks, including from a risk perspective. Doubtless Tether would point to the $7 billion in equity sitting within the issuer, which would cover a lot of mis-steps. However, the $8.2 billion lending sits alongside several other risky or volatile assets, including almost $8 billion in bitcoin.

Crypto lending: a risky business

The top three centralized lenders are Tether, Galaxy and Ledn, with a combined share of 88.6% of the centralized finance (CeFi) market. Whether or not that’s a good group to be part of remains to be seen, given the graphic showing the number of previous participants that went bankrupt.

However, Galaxy highlighted some of the risks taken by the previous batch of lenders, implying that practices have changed. For example, the previous lenders tended to lend long and borrow short term rather like banks, so they got into trouble when they needed more liquidity. Both Celsius and BlockFi also extended some loans without collateral.

Galaxy also pointed to the entrance of traditional finance (TradFi) players, including Cantor Fitzgerald, formerly led by the current US Commerce Secretary Howard Lutnick. Cantor previously announced plans to start crypto lending with $2 billion of financing initially. That could make it one of the larger players. The report also stated that SAB 121, which prevented banks from providing crypto custody also indirectly blocked them from involvement in lending because they needed to take custody. We’d note that Basel crypto rules for banks also make it tricky, although the rules do allow some hedging for crypto, hence collateralized loans can be partially offset.

Since the previous crypto crises, the balance of crypto lending has moved to decentralized finance (DeFi) which held up well during volatile times. At the height of the previous boom, DeFi made up just over a third, whereas now it is dominant. However, that’s in part because CeFi lending outstanding at the end of 2024 was only around a third of its peak in 2021. The figures exclude crypto collateralized products (CDP) – stablecoins backed by crypto.

With new centralized lenders attracted to the market, the pendulum could swing back.

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