Cryptocurrency and Philanthropy: An Introduction

The Red Cross, Save the Children, and United Way—what do these three charities have in common? Besides having people at the heart of their mission, they are also early adopters of cryptocurrency donations. This new funding stream continues to gain in popularity, and in fact, Fidelity Charitable, which houses the United States’ largest donor-advised fund, received $69 million in cryptocurrency gifts in 2017, a dramatic increase from the $7 million received in 2016 and 2015 combined.

It is easy to see the appeal of a cryptocurrency donation—it is a speedy transaction and broadens your nonprofit’s reach to a global pool of supporters. However, a certain degree of caution is warranted, especially while the legal landscape is still evolving. Cryptocurrency lawsuits increased threefold in the first two quarters of 2018 compared to the whole of 2017, according to Lex Machina, a legal analytics firm.

With all this in mind, CEOs and CFOs should know the facts about cryptocurrency gifts before including them among their revenue streams.

Cryptocurrency 101
Let’s start with the basics; what is cryptocurrency? It is a digital currency that is designed to work as a medium of exchange. Since it is virtual, transactions are secured and verified using cryptography, a series of codes used to protect information in a computer system. Unless specific conditions are fulfilled, no changes can be made to the cryptocurrency.

Information related to the value of cryptocurrency, such as transactions or the number of assets, is logged in a blockchain. It is completely decentralized, which means that there are no servers involved and no central authority is overseeing it. A blockchain is a public ledger that is managed by the users of the system, and this technology can be loosely considered as a peer-to-peer network sharing platform.

Bitcoin is a name many people may be familiar with—this cryptocurrency exploded in popularity several years ago. Other forms also include LiteCoin, Ethereum and ZCash. As cryptocurrency makes strides into the charitable sphere, BitHope and PinkCoin are two platforms that exclusively use cryptocurrency to support philanthropy-related causes.

Why Accept Cryptocurrency Donations?

Transparent and fast
Since blockchain technology is a public ledger, it can be viewed by all users to oversee transactions, making the system itself very transparent. The actual transfer process can happen very quickly, sometimes within minutes or even seconds.

Less transaction fees
Cryptocurrency and blockchain technology are owned and managed by the users of the system, so there is no third party needed to process transactions. Transfers are completed through the use of public and private keys for security purposes, and with minimal processing fees, as opposed to traditional bank wire fees.

Global reach
Accepting cryptocurrency donations opens your nonprofit to new funding streams and a larger audience. With no geographic boundaries and increased accessibility to donors all over the world, your fundraising efforts can grow significantly.

Increased engagement and a donor-centred approach
Blockchain technology could help to improve philanthropic engagement. From the charity’s perspective, it is important for a nonprofit to be able to accept donations in a format that is most convenient for their donor. Also, philanthropists who have gained considerable wealth through cryptocurrency can make a donation using a method with which they’re already comfortable.

Why Not to Accept Cryptocurrency Donations?
If your nonprofit organization is thinking about accepting cryptocurrency donations, there are some other considerations to take into account. First, in many countries, a cryptocurrency is considered an in-kind donation, so you may want to consult with a charity compliance specialist to ensure that your nonprofit is adhering to government regulations. You will also want to ensure that you have a clear and transparent record of the transaction.

High volatility and conversion difficulties
A charity can either keep the cryptocurrency donation in its original currency or convert it into fiat money (i.e. legal tender). The volatility of cryptocurrency is incredibly high so it could be a risky investment for your charity to hold onto. Furthermore, there could also be challenges converting a large donation into legal tender in a timely and responsible manner.

Security hacks and source of donations
Although blockchain technology is owned and managed by the users of the system, it is not immune to security hacks and charities will need to take extra precautions to keep their cryptocurrency donations safe. Since it is a virtual currency and many donors choose to remain anonymous, there is a possibility that you may be accepting a gift from someone who conflicts with your nonprofit from an ethical standpoint.

While it remains to be seen whether cryptocurrency and blockchain technology will significantly affect the philanthropic sector, it is undoubtedly an intriguing revenue option. Is your organization considering accepting cryptocurrency as a form of donations? Let S. Sutton & Associates Inc. help you in your evaluation process. Contact us today so we can be your guide and provide you with the right roadmap and the right experts!