Crypto-Currencies and Non-Profits

Posted Monday, March 12, 2018
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The global not-for-profit sector has an estimated value of over $2 Trillion. However, corruption and a variety of scandals related to the misuse of donations has led to recent declines in overall giving. These headline grabbing issues (ranging from the Trump Foundationation's misuse of funds to The Wounded Warrior Fund's lavish parties) are driving a decline in donor trust. Various research sources indicated that 35% of US citizens have little or no trust in charitable institutions, with many explaining that the primary reason for their reduction in donations stemmed from the impact of recent scandals on charities’ reputations.

This has a broader impact on the social impact and employees of many large non-profit organizations, particularly given that over 50% of US charities note that they can not keep up with demand for their services, despite being under-funded. While the broader solution to this issue stems far beyond just the technology, some groups feel that a potential solution lies in block chain technologies. Specifically, creating block-chain smart contracts and using cryptocurrencies, such as bit coin to increase transparency and cut overhead costs incurred by non-profits.

While Bitcoin and other cybercurrencies have minimal reach in terms of overall usage, there are some unique potential benefits including: Increased (forced) Transparency Expanded Tax Deduction Management Advanced Reporting on Donation Impact Reduced Fees Increased Efficienty - Increased Transparency: While there are clear financial and strategic reasons why a non-profit would avoid pure accountability for their fundraising, block-chain smart contracts can hold non-profits accountable at a very granular level. For instance, a non-profit could set pre-determined success targets, key performance indictors or other thresholds that they agreed they would meet. Then, if for any reason the non-profit fell short of that goal, the "donation contract" would be considered void.

At this point donors could opt to have their donation returned, or redeploy the donation to another not-for-profit that did meet their goals. I have worked internally and as a consultant for several large non-profits and I find the likihood of this unrealistic at a macro-level, however, for targeted smaller campaigns, (where shifts in giving or operational variables could be more contained), the concept of this technology-centric accountability provides an interesting opportunity. For example; imagine that a non-profit such as the Red Cross creates a campaign to build raise $50 Million to build 5,000 homes. If at the end of the campaign they only built 4,000 homes, all donors could essentially request a refund on their donation, or redeploy it to another cause.

The operational impact of this, relative to the actual goal creates some unique challenges. In our example, 4,000 or (80%) completion of a goal would clearly have an impact - so how justified are you in asking for all of your money back. Further, the variable costs of building a home (lumber, equipment, labor costs - based on region and a host of other factors) could cause your initial estimate to be unrealistic by the time the project begins. Expanded Tax Deduction Management: Although formal guidance still isn’t available, the IRS treats virtual currencies as non-cash assets and, therefore, eligible to be treated as long-term capital gain property. This provides expanded opportunities for more sophisticated tax management. Additionally, blockchain donations are exempt from several tax/donation requirements because they are publicly traded (and hence viewed as "transparent.") One example ties directly into larger donations in that Cyber-Security donations over $5,000 may be exempt from the appraise requirements set for traditional (cash-based) donations.

 

Long-term management of tax auditing and reporting will be important as cyber-currency donations before more common. This particually relates to IRS tracking and management for both the donor and the charity. For example, a longer-term campaign (such as the home building example above) could provide an opportunity for illegal activity, such as declaring a donation on tax forms based on a donation, and then if a non-profit goal is missed, asking for a refund and never reconcilling the account with the IRS. Tracking and reporting of the impact of your donations. With block-chain contracts, donors would have the ability to track the impact of their donation in real time (especially on those campaigns with strict goal-driven guidelines).

This provides a variety of opportunities; to establish trust with the organization, and holding non-profit staff accountable for reaching the key performance indicators set by leadership in the organization.

For this reason, there are opportunities for non-profits' human resources departments to add a deeper level of evaluation on their employees - based purely on the successful completion of block-chain contract requirements. -

  • Little to Zero fees (or processing costs): While common cyber-currency donations may be years away, a core benefit for non-profits is that fact that money (and donations) go directly to the non-profit, without With traditional donations, money goes through various middlemen, such as government agencies and financial institutions, and fees (approximately 3%) are charged by credit or debit card as well as by clearing houses. Blockchain donations are executed directly, reaching the charity instantaneously and at a fraction of the cost.
  • Efficiency: Thanks to the distributed ledger technology, blockchain donors can track how their cryptocurrency is being used by charities. No record on the blockchain, in fact, can be erased, thereby providing traceable accountability showing the exact flow of any coin in the ecosystem. Non-profits too can use the blockchain to manage resources, reduce overheads, streamline their supply chain, and waste fewer resources.

Non-profit organisations such as The Red Cross, United Way, Greenpeace, Save the Children, and Wikimedia accept bitcoin donations, with all of the charities expressing the benefit of donations being recorded immutably and transparently. Save the Children was one of the earliest adopters of bitcoin, following a devastating typhoon in The Philippines in 2013, with the rest of the charities outlined above following suit in 2014. The crypto community is also bridging the gap between emerging technology and the traditional non-profit sector.

Coinbase, a cryptocurrency trading platform, removed the payment processing fee for non-profits and charitable organisations, furthermore increasing the incentive to donate and accept cryptocurrencies. While $370 billion USD worth of donations go to over 1.5 million charities in the US every year, online donations, only account for 5% of total transactions and the use of cryptocurrencies has yet to grow within the sector. However, by 2025 10% of GDP is expected to be generated by blockchain technology and cryptocurrencies have already reached a total market capitalization of $200 billion. The room for improvement and the unchartered territories of blockchain opportunities are vast.

Even those skeptical of the hype and speculation behind many cryptocurrency investments, Barbas and Zuckerman concedes that cryptocurrencies can push forward the conversation about financial inclusion in many promising ways. The issues plaguing charities worldwide are innumerable and cannot be countered by relying on traditional methods. Nor can we afford to maintain the status quo or harbor doubts about the impact new technologies can actually bring. Wars, climate change, natural disasters, immigration, and the erosion of the welfare state render the services provided by non-profits ever more in demand by billions worldwide.

The solution is, for those in block-chain advocay circules, simple and close at hand – the widespread adoption of blockchain technology by charities and donors alike, which will in time re-sow the seeds of trust, to the benefit of worthwhile charitable endeavors and the most vulnerable in our society.