Many thought cryptocurrencies would be a flash in the pan.
However, over 10 years on, crypto is still dominating our headlines and increasingly, our financial markets. With the value of the crypto market estimated to be over $2 trillion, the development and growing user base of these digital currencies continues to take the world by storm.
Charities have generally been hesitant in embracing crypto – are they running the risk of missing out?
Alongside the growth of cryptocurrencies has been the development of crypto philanthropy. At its simplest, crypto philanthropy is the practice of making donations in the form of cryptocurrencies (instead of via traditional cash payments) to support charitable causes.
Binance Charity set up a crypto fundraising project called “Crypto Against COVID” that has already raised approximately $10 million to help combat the ongoing effects of COVID-19.
The Giving Block, a cryptocurrency fundraising platform, also reported $70 million of crypto donations in 2021 via their website – a staggering increase of 1,558% from the previous year.
With so much potential to tap into a new-found source of funding, it is easy to see why some charities have started to incorporate crypto philanthropy into their operations.
UNICEF Global was one of the early front runners, setting up a CryptoFund in 2019. Through this project, UNICEF Global is hoping to be able to receive, hold and disburse cryptocurrencies by investing in various projects.
It has already used the CryptoFund to invest in numerous start-up companies working to mitigate the hardships of COVID-19 on children and youth across the globe.
Should charities be looking to endorse this new era of crypto philanthropy?
Crypto philanthropy pilot programmes have started to demonstrate that it can be an effective source of income and can be used to implement effective relief and aid in areas where it is needed.
Should more charities be looking to enter the space? We consider the advantages and potential disadvantages.
Untapped sources of wealth.
Crypto philanthropy creates an opportunity for charities to tap into new wealth and new donors.
Crypto donors tend to be younger than traditional donors and may be giving for the first time. In some cases, crypto-wealth is recently earned and unexpected – which can result in more generous charitable giving. The average size of a cryptocurrency donation was $10,455 on The Giving Platform.
A lasting lesson from the pandemic is that seemingly consistent methods of producing income will not last forever. Charities need to look to innovative ways of fundraising. Cryptocurrencies could offer an alternate profitable source of funds.
Bypass traditional financial infrastructure.
A key feature of cryptocurrencies is the revolutionary way it bypasses traditional financial infrastructure. There is no need to rely on third parties, such as banks, to verify and process payments.
As a result, crypto donations can be used to get financial aid into areas that would otherwise be difficult to reach. A prime example is aid donated to the ongoing Russo-Ukrainian conflict. In recent months, the Ukrainian government raised millions of dollars for its war effort via cryptocurrencies.
However, a current limitation to this benefit is the “last mile” problem. Essentially, as crypto assets have no inherent value, the recipient must find a way to exchange it for local currency in order to, for example, buy essential items.
The normalisation of these currencies is reducing this issue. In the aftermath of cyclone Harold in Vanuatu, Oxfam took part in a pilot scheme project whereby crypto donations were used to distribute assistance to over 35,000 beneficiaries via a cash and voucher scheme.
The success of this scheme has led Oxfam to expand its use into other areas affected by natural disasters, with similar programmes being launched in Papua New Guinea.
It is also now possible to trade on platforms where crypto donations are automatically converted into actual currency, called a “fee out”, as soon as possible. This cash can then be put to use for whatever purpose necessary.
One of the main features of the block chain technology underlying cryptocurrencies is the transparency it provides. This can be beneficial to charities in two ways.
The first is that charities can identify their source of donations.
The importance of this was most recently highlighted by the Prince of Wales's Charitable Foundation coming under fire for accepting a cash donation of £2.5 million. If done properly, the technology underlying these cryptocurrencies can make funds more traceable.
The second is that donors are able to see exactly how their donation has been used. This could create an increased level of trust and engagement by donors.
The obvious challenge for charities holding cryptocurrencies for any length of time is that they are volatile assets, subject to massive fluctuations in value.
In November 2022, the largest cryptocurrency in the world, Bitcoin, lost a tenth of its value in the space of four hours. This volatility risk presents a challenge for charities.
The methods of facilitating cryptocurrency transactions and creating new crypto coins (a process called ‘mining’) are incredibly energy intensive.
It is estimated that the global annual energy consumption of the current crypto market is the equivalent of more than 19 coal fired power plants operating continuously, with a study by the University of Cambridge suggesting that, if Bitcoin (one of the largest cryptocurrencies) was a country, it would be in the top 30 energy users worldwide.
The environmental impact of all charities’ investments has come under increasing scrutiny, and cryptocurrencies are no exception. This will be particularly important for charities that have environmental objects or have adopted net zero commitments.
In fact, earlier this year WWF terminated a fundraising event where non-fungible tokens were to be sold, due to the resulting impact on their carbon footprint.
Crypto philanthropy is currently ineligible for GiftAid relief, as HMRC does not recognise cryptocurrencies as legal tender.
However, it is noted that if an individual donates tokens to charity, then they will not have to pay capital gains tax in certain circumstances.
What is the view of the regulators on crypto donations?
Both the Charity Commission and the Fundraising Regulator have recently commented on crypto philanthropy. They acknowledge that charities should aim to keep up with innovations and that crypto donations can bring benefits to charities.
That said, they have highlighted the risks of engaging with this type of technology, pointing out the recent plunges in the value of cryptocurrencies as an example.
The regulators encourage trustees looking to engage in crypto philanthropic activities to:
- review the Charity Commission guidance on core trustee duties, on making effective decisions, and on investments.
- take appropriate independent legal advice where necessary; and
- document how decisions concerning cryptocurrencies donation were reached and set out how the trustees considered their legal duties and responsibilities and did not put charity’s assets (including its reputation) at risk.
Who dares wins?
Charities will need to consider carefully the benefits of accepting crypto philanthropy and whether they outweigh the potential drawbacks.
Beyond this analysis, it will also be important for trustees to consider whether incorporating cryptocurrencies into their operation model aligns with their ethos and overall brand.
If charities do decide to engage, steps will need to be taken to ensure that they have mitigated the relatively unique risks posed. However, for those charities that do move quickly, the potential rewards are great.