How Crypto is Changing Philanthropy

As cryptocurrencies lick their wounds after a steep selloff, some HODLers are turning their attention to the nonprofit sector. Cryptophilanthropy has exploded in the past two years. Fidelity Charitable received around $330 million in crypto in 2021, up from $28 million in 2020. The Giving Block, a crypto donation platform, reported $69 million in total donation volume last year, an impressive 1,558% increase from 2020.

Despite the uptick in giving, crypto critics aren’t sure nonprofits should hitch their wagons to a technology that may need some guardrails. Like almost everything else, Covid changed the ideal approach to fundraising. Personal events were almost impossible at times. Although these have largely resumed, the shutdown led to an acceleration of digital giving, forcing nonprofits to develop bigger and better digital presences. This culminated in charities considering a crypto-donation strategy.

The Giving Block is both a payment processing company for nonprofits looking to accept crypto- and NFT-related donations, as well as a marketplace to connect crypto-donors with their favorite crypto-accepting nonprofits. The company told Morning Brew that it works with approximately 2,000 customers. With the total number of nonprofits in the United States at 1.8 million, it’s a small but potentially impactful number that looks set to grow.

“The average crypto user has an income of around $110,000 a year, which is quite a bit higher than the average person in the country,” said Alex Wilson, co-founder of The Giving Block. “They also give significantly more,” Wilson said, noting that the average crypto donation is $10,000, which is more than 100 times the size of an average online donation processed on a credit or debit card. He also said that crypto philanthropy is attracting younger donors, who have traditionally been a hard-to-reach demographic for charitable giving. “It’s quite an appealing combination,” he said.

One of The Giving Block’s biggest success stories is an organization called Orangutan Outreach, a non-profit organization with a mission to protect and care for displaced orangutans until they can be returned to their natural environment. They started accepting crypto through The Giving Block two years ago and raised a million dollars in crypto and NFT-related donations in the first year, tripling their operating budget. They even ended up being the recipient of large donations from the Bored Ape Yacht Club community, with many “apes” donating NFT sales profits to the non-profit organization.

NFT-related donations have exploded in the past year. Wilson says they account for 20-30% of donations on The Giving Block. NFT giving is unique because not only can you dedicate, say, 25% to 50% of the original sale price to automatically go to a charity, but you can also have future royalties built into the donation process. Donors can choose to program NFTs in such a way that, each time they are resold, 5% of the resale price goes to a specified charity, creating a recurring and sustainable donation stream.

In addition, there are tax advantages for the donor. Since the IRS defines crypto as “property,” donors do not have to pay capital gains taxes on the appreciation of the asset.

“[Donors] get a fair market value deduction at the time of the donation, and because the nonprofits are also tax-exempt, that means they don’t pay taxes on the donations they get either,” Wilson said, “So that means the nonprofit gets about twenty or thirty per cent more money, and the donor gets a twenty or thirty per cent higher deduction, and [are] able to give more. So it’s a win-win for both sides, versus if they had to sell the crypto and then donate it. …It is much more tax efficient than writing a check or wire transfer.”

Yan Pritzker, co-founder of Swan Bitcoin, turned to bitcoin to raise funds for the non-profit organization Ukraine TrustChain during the early days of the war during a funding crisis. “So they call us on a Saturday and they say, ‘We need money.’ We are trying to help these families. We ran out of funds,” he said.

Pritzker explained that he was able to convert funds from dollars to bitcoin and send them over Kuna, a Ukrainian exchange, convert them back to Ukrainian currency and push it out to the debit cards of volunteers for Ukraine TrustChain.

“We were able to complete the entire transaction cycle on a Saturday night, no problem, and they wanted the money within an hour,” Pritzker said. He identified another upside: “The beauty of it is that you don’t really have that minute-to-minute volatility problem. I mean, that’s pretty good,” Pritzker said.

Of course, Ukraine TrustChain is not the only charity in the country that accepts bitcoin. Less than two weeks after sharing the bitcoin wallet address on TwitterUkraine received “close to $100 million” in crypto donations, according to Alex Bornyakov, Ukraine’s deputy minister of the Ministry of Digital Transformation.

But there are still many critics who remain unmoved by cryptophilanthropy. They not only have problems with the technology behind crypto, but also with crypto itself.

“Blockchains in particular are pretty slow,” said reporter and vocal crypto critic Jacob Silverman. “They provide a permanent record, but the bitcoin throughput and transaction speed is very slow — far slower than anything other than Visa or Mastercard or the conventional financial network.” (Bitcoin’s throughput rate, or the amount of service provided in a given time frame, is around 4.6 transactions per second. By comparison, Visa’s is 1,700 transactions per second.)

Nicholas Weaver, a computer security expert at the University of California, Berkeley, said that for payments, crypto “has never worked and will never work because of two factors: volatility and irreversibility.” Weaver noted that what charities actually want is “real money” or cash, not crypto, and that is backed by reality.

Most nonprofits don’t keep the crypto they receive: They convert it to fiat. It is one of the most important services The Giving Block offers. “They can either keep it [in crypto] if they want, but the majority of our customers choose a feature that offers instant liquidation to cash,” said Wilson. “They have no risk of volatility, and it’s just converted to cash automatically, and then transferred to their bank account. So they get the value at the time.”

“I think it can be used to sometimes transfer value in the short term, maybe as a quasi-currency, but it’s so volatile,” Silverman agreed. “The only case where I would recommend a non-profit to accept cryptocurrencies is if they can immediately convert it to fiat currency.”

The other problem that Weaver notes is irreversibility. Consider if someone breaks into a bank account and transfers money. There are guardrails that protect the owner of the bank account, and steps that can be taken to get the money back. This is not the case with crypto – once a transfer has occurred, it is irreversible.

“The cryptocurrency community likes to call this a feature, but it’s really a bug,” Weaver said, “and it’s a bug because you can’t reduce fraud.” (One of the things the traditional financial system actually does well is this mitigation.)

With charities expected to maintain strict ethical and financial standards to retain their tax-exempt status, this lack of anti-fraud and this irreversibility is a major concern for some non-profits looking at crypto adoption.

Plus, if your charitable interests are environmental, crypto is probably a bad choice, since crypto mining emits a huge amount of carbon. “That’s like half a percent of the world’s electricity for a system that can process three to seven transactions per second,” Weaver said. “Being public about cryptocurrency has a real risk of backlash because, well, you’re talking about a system that is not only an economic cancer, but is literally designed to boil the earth.” (This is why Ethereum recently started the transition to a proof-of-stake system to combat the extensive amount of processing power required to mine cryptocurrencies with the current proof-of-work system used.)

With all these problems, there is still uncertainty about the future of crypto, especially in philanthropy. In other words, most charities do not pay their suppliers in dogecoin. However, crypto supporters believe that over time innovation will solve these problems and that the technology behind crypto will prove to be revolutionary. – RAW