41: Crypto philanthropy – response to Ukrainian government appeal underlines the power (and the challenges) of cryptoassets for charities

By 11 March 2022, according to blockchain analytics company Elliptic, $63.8 million (approximately £48 million) had been raised in cryptoasset donations by the Ukrainian Government. This raises many questions, including whether charities should now be actively engaging with this new pool of philanthropists. Do reputational, governance and operational challenges out-weigh the potential benefits?

The influx of donations, part of an ongoing campaign, was a direct response to the Ukrainian Government’s twitter plea on February 26 2022, imploring people to: ‘Stand with the people of Ukraine. Now accepting cryptocurrency donations’. Notable donations include a £5.8 million donation from Gavin Wood, co-founder of Ethereum, and a ‘CryptoPunk’ NFT (non-fungible token) worth approximately £200,000. The Celsius Network (a crypto fund manager), founded by Ukrainian born Alex Mashinsky, also pledged to give each of its 3,742 Ukrainian users $25 in cryptocurrency to assist with the crisis. Modes of giving are evolving.

The ease with which these assets have moved, and the ability directly to fund organisations and individuals across borders, without the need to engage with traditional financial intermediaries, underlines both the attraction of cryptoassets and the associated challenges.

What is cryptocurrency?

This is a very jargon-heavy area but, essentially, cryptocurrency is a type of cryptoasset; comprising digital currencies which use cryptography and ‘blockchain’ technology to encrypt and verify transactions. The most well-known, and first, example would be Bitcoin (also known as ‘BTC’), created in 2008 by Satoshi Nakamoto. There are now hundreds of different cryptocurrencies, collectively referred to as ‘Altcoins’.

‘Blockchain’ is a type of decentralised digital ledger (i.e. a digital system recording transactions in multiple places at the same time) comprising ‘blocks’ of information, used to record transactions, arranged chronologically in a ‘chain’. Crucially, there is no need for a central authority or intermediary (like a bank) to process, validate or authenticate transactions. The potential applications of blockchain technology are far wider than cryptocurrency and it is likely to form the basis of new ways of working in the future across different industries. In the meantime, however, the potential utility of digital currencies for philanthropy and fundraising in the charitable sphere (whether donations or legacies), quite aside from other potential uses for cryptoassets and the underlying technology in charity operations, is hard to ignore.

Fundraising

To get a sense of scale, it is worth looking across the pond. The Giving Block (a US-based online platform facilitating cryptocurrency donations) estimates that $300 million of cryptocurrency is donated each year; with donors largely comprising Millennials and Gen-Z who are more likely to be invested in ‘crypto’. There are numerous examples of US-based charities and global not-for-profits receiving cryptocurrency (The Water Project, Save the Children, to name but a few), and actively encouraging crypto-giving, whether directly or via a giving platform.

The growth of crypto-giving may be partly the result of more settled tax treatment in the US. The IRS treats virtual currencies as property which receives the same tax treatment as stocks. This means that donating crypto in the US can be tax efficient on the basis that donors receive a tax deduction for the fair market value of the crypto.

While the direction of travel may ultimately be the same in the UK, the treatment of cryptoassets (including cryptocurrencies) remains fluid, with tax policy evolving as the sector develops. The tax treatment will depend on the type of cryptoasset and donors should seek proper advice before settling on the mode of giving, for example, in relation to legacies.

In March 2021, HM Revenue & Customs published a cryptoassets manual which it updates regularly to set out the current position. If an individual donates cryptoassets to charity (more specifically referred to by HMRC as ‘tokens’ in this context), they will not have to pay capital gains tax (unless they fall within the ‘tainted donation’ rules). The manual confirms that, ‘HMRC does not consider cryptoassets to be currency or money’,  so donors need to understand that a gift of cryptocurrency won’t, therefore, qualify for gift aid.

Whilst there has been less obvious uptake by charities established in the UK, a few pioneers have dipped their toes into the market, including the RNLI and Sands. These organisations have approached crypto-donations in different ways. RNLI has its own digital ‘wallet’, directly accepting Bitcoin under a pilot scheme, whereas Sands and other charities, notably Children’s Heart Unit Fund, have partnered with The Giving Block, which gives charities the option to receive donations as crypto or auto-convert to US dollars (and potentially other currencies).

One motivation for exposure to this new form of giving appears to be the perception that crypto-philanthropy is indeed one of the new frontiers to cross in the race to diversify income streams, but it remains unclear the extent to which digital giving will become convention, with critics quick to point to the speculative nature of the crypto ‘bubble’ and the risks involved.

What are the challenges/ risks?

As with all things, charities need to ensure they have good governance in place to enable them both to consider and, potentially, adapt to this new form of giving, or decide not to accept such donations. In particular Boards should consider:

• Technical capabilities – does the board understand what technical and practical steps would need to be taken before the charity can accept cryptocurrency? The concepts and language are new and that, in itself, can be off-putting. Assessing an organisation’s technical capabilities, will include consideration of whether the charity might accept cryptocurrency directly (with the associated due diligence, technological expertise and security required), or through an ‘exchange’ platform (which enables users to buy or sell cryptocurrencies), or simply require that the gift is converted to a fiat currency (eg pounds sterling) before it is transferred (albeit donors may be reluctant to do this given the potential for capital gains tax). If cryptocurrency is to be accepted directly, what will the charity do with it? Should it be immediately converted into cash or be retained? If it is to be retained, does the charity have the power or expertise to be invested in such a volatile asset class? Similarly, what processes will the charity need in place to ensure access to and security of the asset? Boards may need to tap into suitable expertise to understand what it is they are engaging with and what is possible / permitted.
• Due-diligence and knowing your donor – Most cryptocurrency is pseudo anonymous, meaning that whilst the identity of the donor may be hidden, transactions can be traced to a given online ‘wallet’ address. Whilst there is yet to be any crypto-specific guidance from the Charity Commission, the regulator advises a risk-based and proportionate approach to due diligence in general guidance, depending on the nature of the risks in the particular circumstances. The greater the risks, the greater the mitigation required and the primary drivers will be to ensure that the board is acting in the best interests of the charity and safeguarding its assets (including its reputation).

On the question of anonymity, there is no rule against receiving anonymous donations per se but charities are required to ‘look out for suspicious circumstances and put adequate safeguards in place’. The Fundraising Regulator has said it may include guidance on charities accepting cryptocurrencies as donations when it reviews the Code of Fundraising Practice later this year.

Good due diligence can help to assess the risks, and set parameters on what is acceptable in a charity’s given circumstances (eg with enhanced processes applied to donations over a certain level before they are accepted). For example, is there a level at which it would be appropriate to engage with the Charity Commission prior to accepting funds? If the charity has its own ‘wallet’, should the details be kept private to avoid crypto donations being made before you have the opportunity to do your due diligence (returning donations is harder in practice than refusing them in the first place)? The risks can also be reduced by using online exchange platforms (the larger ones typically requiring their customers to identify themselves before setting up an account) or by using an external organisation to assist via sophisticated analytics (for example being able to track crypto currency transaction history). The charity will need to assess the risks and adopt its own policy to manage them.

• Environmental concerns – trustees need to understand the environmental impact associated with digital currencies and how they are created. It is common knowledge that the ‘mining’ of cryptocurrencies (ie the process of generating new ‘coins’ and verifying transactions) requires vast amounts of energy, and there is the associated carbon footprint of the power plants providing the energy to be considered. Novel green solutions are emerging, such as using agricultural animal waste to power crypto mining rigs, or, in the case of Ukraine prior to the outbreak of war, the use of nuclear power supported and encouraged by the Ukrainian Government. However, the environmental impact remains a significant concern. Charities should understand the environmental issues and consider their approach. For some charities, accepting this form of philanthropy might be considered inimical to their charitable objectives, for others it may simply be too difficult to reconcile with the climate change agenda more generally. The risk of association with crypto-philanthropy needs to be considered in the round.

• Reputation – the environmental concerns noted above are not the only reputational concerns associated with crypto-philanthropy. The HMRC manual points out that ‘on its own, owning and using cryptoassets is not illegal in the UK and does not imply tax evasion or other illegal activities’. However, it would be naïve to ignore the potential for criminals to use cryptocurrency as a means of carrying out illegal activity, and laundering the proceeds of crime. Whilst the use of digital currencies to support Ukraine has been welcomed, there will also undoubtedly be those using the same freedoms inherent in a borderless, and largely unregulated, peer-to-peer system to avoid the imposition of sanctions and asset-freezes intended to put the squeeze on Russian oligarchs. Clearly charities will want to avoid being associated with the proceeds of crime, or with other unsavoury or illegal activity, or morally dubious donors. Being aware of the risks, and having good governance around receipt of donations and due diligence, as above, can help to mitigate these challenges.

• Regulation – The crypto-sphere initially sat largely outside the regulatory net in most jurisdictions, but that is changing. Regulation is coming and governments are increasingly taking actions to address risk and support innovation arising from cryptoassets. Since 20 January 2020, the FCA (Financial Conduct Authority) has been the anti-money laundering and counter terrorist financing supervisor for businesses carrying out certain cryptoasset activities under the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (as amended to implement the Fifth Anti-Money Laundering Directive) in the UK. Authorisation or registration is therefore already required for businesses performing certain services, including exchange providers; and custodian wallet providers and exchange providers are required to undertake customer due diligence when entering into a business relationship or occasional transactions. Enhanced due diligence is required when dealing with customers who may present a higher money laundering / terrorist finance risk. Increased government and regulatory scrutiny of cryptoassets may give charities more confidence, in future, to engage in this form of fundraising.

Conclusions

As the power of crowdfunding via cryptoasset donations to Ukraine has shown, there is vast wealth invested in crypto which can be mobilised at short notice and to good purpose. The opportunities are tangible but there are clearly a number of risks to be assessed and understood before jumping on the bandwagon.

The sheer volume of new language surrounding the crypto sphere can be off-putting, but it is worth boards educating themselves on the fundamentals so that they can make an informed decision about their charity’s approach and are ready to answer questions as they arise.