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Introduction
On 19 December 2022, the Charity Commission for England and Wales opened a statutory inquiry into the charity Effective Ventures Foundation (EVF UK), formerly known as the Centre for Effective Altruism. The inquiry was launched after EVF UK reported the bankruptcy of FTX in the US to the Commission as a serious incident on the basis that the Charity received substantial funding from FTX-linked entities (including the FTX Foundation) and individuals.
Overview
In line with the Commission’s guidance on filing serious incident reports, charity trustees are required to file reports in certain circumstances. Serious incidents include those where there is an adverse event, whether actual or alleged, which results in or risks significant loss to charity assets or harm to a charity’s work or reputation. From a charity law perspective, it is also important to note that a Charity Commission inquiry in and of itself is not a determination of wrongdoing, rather the exercise by the Commission of a statutory power to institute inquiries where certain criteria have been met.
For charities which may have been the recipient of crypto-philanthropy or have had other involvement in this area (or considering such involvement), the inquiry raises three important reminders for trustees:
governance – whatever the context, it is important to ensure that the Trustees apply the principles of good governance to their decision making, ensuring they are acting in the best interests of the charities they serve and taking care to safeguard the charity’s assets. This includes acting independently and ensuring any conflicts of interests which may arise (including conflicts of loyalty) are identified upfront and managed properly;
due diligence and knowing your donor – the Charity Commission advises a risk-based and proportionate approach to due diligence. The greater the risks, the greater the mitigation required. Navigating the cryptoasset landscape (including getting familiar with the associated jargon and complexity) brings additional challenges, not least because it remains a largely unregulated area; and
ethical considerations – the use of cryptoassets can pose risks including the potential for fraud, money laundering, and other illegal activities. There are also environmental concerns regarding the impact associated with cryptoassets and the energy-intensive way in which cryptoassets are typically created. Charities need to ensure that they have considered any reputational risks involved through association with this sector, particularly in the context of their own objectives, values and stakeholders.
Whilst the context is new (cryptoassets and associated currencies were understood by few until relatively recently) the principles to be applied by charity trustees are familiar. Charities should approach cryptocurrency and potential uses for the associated technology in the same terms as any other activity, with the Board taking reasonable decisions in line with their trustee duties.
As the Commission noted in its cautious first blog on Cryptocurrencies: what are they, and should charities use them? (published 12 July 2022), trustees should follow its guidance, as standard, on core trustee duties, on making effective decisions, and investment guidance when taking decisions in this area. It goes without saying that trustees should ensure they have carried out appropriate due diligence on donors and associated organisations, whatever the form the donation may take. Specific guidance from charity regulators such as the Charity Commission and the Fundraising Regulator is, at this time, confined to preliminary blogs only which highlight that that this remains an emerging area where policy (and law) is yet to be defined.
Background to Inquiry
In early 2022, US cryptocurrency exchange, FTX, was valued at $32 billion. After filing for bankruptcy protection in November of the same year, the organisation remains under investigation; its new chief executive having never seen,
‘such a complete failure of corporate controls and such a complete absence of trustworthy financial information’.
FTX’s co-founder, Sam Bankman-Fried, a high-profile figure in the cryptocurrency world, was also a proponent of ‘effective altruism’, an intellectual philanthropic movement aiming to identify the most effective ways of helping others through impartial research. Associated with this movement is the idea of making as much money as possible in order to maximise charitable donations, known as an ‘earn to give’ strategy.
In pursuit of this strategy, Bankman-Fried had promised he would eventually donate most of his net worth, and had already donated large sums of money to charities, including the FTX Foundation and FTX Future Fund. He had also made a series of well-publicised political donations before FTX collapsed. Although the full ramifications of the crypto giant’s collapse are as yet unknown, they are wide ranging, and Bankman-Fried now faces criminal charges relating to fraud.
In January the Commission’s announcement stated that the initial scope of the inquiry was two-fold, examining:
‘the extent of any risk to the charity’s assets and the extent to which the trustees are complying with their legal duties with regard to the protection of the charity’s property [and]
the governance and administration of the charity by the trustees, including relationships between the charity’s trustees and its funders and the identification and management of conflicts of interest and / or loyalty.’
Following the Commission’s announcement, EVF UK issued a statement stating that the Charity was not reliant on FTX-related funds for its future operations and that the trustees would continue to cooperate with the Commission.
Providing further background and context, a blog post was then issued by the Charity’s interim CEO, which noted the Charity, in context, was not particularly surprised by the decision to open an inquiry. On the matter of conflicts of interests (including loyalties) the blogpost acknowledged several links between EVF UK board members and donations from FTX. This included one member serving on the board of both EVF UK and the FTX Foundation in the UK, as well as a UK board member in an advisory role to the US Foundation. Both board members are now ‘…recused from all board decisions that concern FTX’.
Whilst the Commission will clearly be considering the management of such conflicts of interest and / or loyalty, this is not to say that those conflicts are inappropriate. However, this level of scrutiny is a reminder that trustees need to be able to evidence that the integrity of their decision making is not impacted where such conflicts exist.
Impact
Whilst the content of EVF UK’s initial report to the Commission is unknown, on the face of it, the collapse of FTX carries, at the very least, the risk of adverse reputational impact on EVF UK (as does the opening of a Commission inquiry, which will take up significant time and resource). Following reports that FTX will be seeking to recover funds donated by its founder and associated individuals to US politicians, there could also be a question as to whether FTX might somehow seek to claw back funds donated to charities, although this seems remote in the case of EVF UK. More widely, other charities in the FTX orbit and other charities which have been the beneficiary of crypto-philanthropy, may now be reviewing their own decision-making processes and security of assets, to satisfy themselves that they have discharged their duties properly and not exposed their charities to undue risk.
As to the reputational point for EVF UK, there has already been a degree of media interest prompting the Charity, for example, to confirm that it did not use any funds from FTX or affiliated individuals or organisations to purchase Wytham Abbey near Oxford, which was on the market in 2021 for £15 million, with a view to turning the Abbey into a convening centre for the Charity. Being on the backfoot is difficult for any organisation, and the dramatic manner of the FTX collapse means it is inevitable that the Charity should now find itself under scrutiny from both the Regulator and the public.
Conclusion
Undoubtedly, whilst there may be many positive uses for cryptosassets (including cryptocurrency) unfortunately there are also significant opportunities for criminal activity and reputational risk when things go wrong.
Overall, charities and their trustees should remain cautious in relation to how they interact with cryptocurrencies and associated technologies, as well as organisations connected with those technologies. As the collapse of FTX has shown, this area remains largely unregulated and – as with any industry with the potential for high gains – is susceptible to bad players, no matter how good their intentions may appear to have been. The usual principles of good governance apply and, if trustees follow those principles, they will protect themselves from challenge should things go wrong.
'...undoubtedly, whilst there may be many positive uses for cryptosassets... unfortunately there are also significant opportunities for criminal activity and reputational risk when things go wrong...'
