Blog / Grantmakers & Donors

Cryptocurrency and Philanthropy: New Donors and New Questions for Nonprofits

by Julie Couturier
Cryptocurrency and Philanthropy: New Donors and New Questions for Nonprofits
Front cover of the "11 Trends in Philanthropy for 2022" reportThis article was first published in our 11 Trends in Philanthropy for 2022 report. Explore all 11 trends in the full report.

In late 2017, an anonymous post on Reddit read, “I’m … donating the majority of my bitcoins to charitable causes” (para. 2). The donor was known only as Pineapple Fund — their true identity has never been revealed. The Pineapple Fund ultimately donated 5,104 bitcoins worth over $55 million to 60 charities (2017).

For many nonprofits, this was their first experience with cryptocurrency, but the need to understand how to move digital money in philanthropy has since intensified.

More Crypto Donors Means More Urgency for Nonprofits

Five years on, nonprofits are still struggling with the idea of cryptocurrency. The concept still feels alien and difficult to grasp. The asset itself can be volatile, the technology behind it confusing, and new cryptocurrencies are created all the time.

“[Cryptocurrency] still feels alien and difficult to grasp. The asset itself can be volatile, the technology behind it confusing, and new cryptocurrencies are created all the time.”

Meanwhile, a new segment of donors who got rich quickly in the crypto market is now emerging in the sector in a big way. Cryptocurrency contributions to donor-advised funds (DAFs) at Fidelity Charitable Trust (2021) more than doubled from $13 million in 2019 to $28 million in 2020. According to The Giving Block (2021), the value of total cryptocurrency donations is now over $300 million annually — and is only expected to grow.

What is Cryptocurrency — and Why Should Philanthropy Pay Attention?

Cryptocurrency is the unit of account for a digital payment network called a blockchain. No central bank or government is regulating the crypto market, and as with most currencies, cryptocurrency has no inherent value beyond what people collectively agree to.

Crypto is a borderless currency, making it cheaper and easier to execute international transactions, as no exchange rates or international financial regulations are involved (Matharu, 2019). There are more than 7,000 different cryptocurrencies, including Bitcoin, Ethereum, and Dogecoin, whose popularity and price soared in early 2021 (Conway).

The emergence of this digital, online market provides new opportunities and challenges for the philanthropic sector. Cryptocurrency gifts offer two particular benefits:

  1. In U.S. tax terms, cryptocurrencies are like any appreciated asset, including securities and real estate. Donors owe no capital gains taxes when they donate these assets to charity, usually resulting in larger gifts for nonprofits (Sullivan, 2021).
     
  2. Blockchain technology can offer greater efficiency and transparency. International transactions can be completed within minutes for just a few dollars (Sullivan, 2021). Donors and others can refer to the blockchain to track donations from anywhere in the world and ensure contributions are being used for their intended purposes. Nonprofits have the potential to raise more funds based on increased transparency and trust.

Cryptocurrency Expands the Who and What of Philanthropy

On the donor side, individuals have discovered new giving opportunities using cryptocurrency DAFs. Crypto DAFs can keep donors’ identities anonymous, even while the transactions of the DAF are recorded in the blockchain and viewable to anyone. This interesting combination is appealing to some donors, and also helps address the lack-of-transparency criticism that exists for traditional DAFs.

Donors are also using cryptocurrency where traditional giving is not available or federal policy is still catching up. The University of New Mexico Medical Cannabis Research Fund, for instance, relies heavily on donations to support its clinical research into the effects of cannabis use. Cannabis research is largely excluded from federal research funding, and federal law currently prohibits banks from facilitating cannabis-related transactions. Companies like 420coin are using bitcoin’s market independence to get around these restrictions to fund the University of New Mexico’s research (UNM, 2021).

Cryptocurrency is also supporting the rise of a new demographic of donors. Young (millennial and Gen Z), male investors are more likely than others to own cryptocurrency, and many are just starting to get involved in philanthropy. Even considering those venturing into philanthropy for the first time, according to a survey from Fidelity Charitable Trust, people who invest in cryptocurrencies were more likely than traditional investors to donate at least $1,000 to charity in 2020 (Theis, 2021).

What to Do With a Cryptocurrency Donation?

Nonprofits entering this space must determine whether, when crypto gifts arrive, they will sell immediately, hold indefinitely, or diversify part of the donation.

Each strategy has value. In October 2019, UNICEF launched the CryptoFund, which allows it to learn more about digital assets as it receives, holds, and disburses cryptocurrency. In its first year, CryptoFund made twelve investments in eight different countries (Lomozzo, 2020). UNICEF discovered that by keeping crypto in its native form, UNICEF, donors, recipients, and the public can track where the money is going and how it is being spent. Appreciation in the value of the digital asset is just a bonus.

“Nonprofits entering this space must determine whether, when crypto gifts arrive, they will sell immediately, hold indefinitely, or diversify part of the donation.”

For those nonprofits that want to convert crypto gifts into cash immediately to cover operational expenses, third-party intermediaries are stepping in to help. One example is Endaoment, a cryptocurrency public charity, which sponsors DAFs and accepts over 150 different cryptocurrencies. Robbie Heeger founded Endaoment to make it easy for people to give cryptocurrency without the hassle of selling it first and for U.S. nonprofits to accept it as cash (Stiffman, 2021).

Crypto Philanthropy Is Not Without Risks

Even as philanthropy learns how to use cryptocurrency for the public good, challenges remain. Crypto donations recorded in the blockchain can be transparent, but anonymous, making it difficult for organizations to cultivate relationships with supporters. Donor anonymity can also expose the beneficiaries of crypto-largesse to great risk if the source turns out to be questionable — there is a high risk for reputational damage if donations are seen as tainted, or even legal jeopardy if nonprofits are found to have participated in money laundering (Moody & Pratt, 2020).

Additional challenges stem from the asset’s unregulated and volatile nature. A crash in the crypto market could have a major impact on nonprofit holders. Tax laws and federal regulations surrounding the crypto market currently lag other assets and are still catching up. Even more challenging, fraudulent initial offerings of cryptocurrency have entered the market (Cohn, 2021).

Despite its challenges, estimates are that over 300 million individuals are users or investors in cryptocurrency (Triple A, 2021). With stories like Pineapple Fund still in recent memory, and new stories making headlines – like Ethereum’s co-founder Vitalik Buterin making a $1 billion crypto donation to the India Covid Fund (Bambysheva, 2021) — philanthropy needs to continue to navigate the opportunities and risks of cryptocurrency to move toward new ways of doing good.

Julie Couturier, CPA
Julie Couturier, CPA
Director, Operations
Julie Couturier joined the Johnson Center in 2006 and currently serves as the director of operations. In this role, she is responsible for managing departmental human resource and operational processes, and all financial reporting, budgeting, and financial analysis for the...
References

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