Brave New World: How Cryptocurrencies and the Blockchain Are Changing Philanthropy

Blockchain technology and cryptocurrencies like Bitcoin that rely on it are becoming more prevalent in many fields. When you see a technology being used in diverse arenas like regional voting trials, major retail, NASA research projects and refugee ID initiatives, it’s not surprising to find that funders and nonprofits are also getting in on the game.

Here, we look at some of the interesting ways blockchains and cryptocurrencies are changing philanthropy, along with some of the challenges and pitfalls.

What Are Cryptocurrencies and Blockchains?

If you already know, skip ahead! Cryptocurrencies are digital monies secured through encryption, which are typically not controlled by central banks. Blockchain technology is diverse and quickly evolving, and this is just a very general overview. A blockchain is essentially a ledger that has records (like the details of a digital money transaction) locked in groups called blocks.

The blockchain is often called a distributed or decentralized system because it keeps copies of these blocks on a spread-out network of computers, rather than on a centralized server. Every computer in the network has a matching copy of all the blocks and is said to be “running the blockchain.” The blocks of records are verified, added to the chain, and secured through cryptography, the encrypting of information. “Crypto-mining” — a complex and energy-guzzling computer process that we won’t fully cover here — both verifies the encryption of many blockchains and mints new cryptocurrency.

Though not infallible, these systems are considered very difficult to tamper with, because that would require all the connected computers in the global blockchain network to be compromised at the same time. While blockchains can be now designed for many purposes and programmed for applications in almost any field, they are often used for secure, traceable record keeping and quick peer-to-peer virtual currency transactions.

Crypto-Donations

Many nonprofits now accept cryptocurrencies like Bitcoin or Ethereum, including the United Way, Red Cross, and Save the Children. All three receive digital monies through a Bitcoin payment processor called BitPay.

Save the Children, along with the Water Project and other groups, has also received donations through the BitGive Foundation, which in 2013 became the first nonprofit organization specializing in using bitcoin to fund charitable works. BitHope is another example of this type of foundation. BitGive’s campaigns have thus far raised modest thousands, making its programs similar to average crowdfunding endeavors. It also has a blockchain-based transparency initiative called GiveTrack that seeks to make donation processes clearer for all involved. (We’ll look at that in more detail below.) Citing the benefits of cryptocurrency fundraising, founder and Executive Director Connie Gallippi said, “When you don’t have to go through the traditional system of banks and governments, the money gets there a lot faster, it is much less expensive, [and] it is also cryptographically secure, so you know it is getting to who it was intended to get to.”

On another scale altogether, Fidelity Charitable, which holds the nation’s largest donor-advised fund, received nearly $70 million in cryptocurrency in 2017—10 times more than the year before.

“It is one of the fastest-growing assets that we are seeing wanting to be contributed to charity. Many people who own bitcoin or other forms of cryptocurrency do want to be philanthropic,” vice president Amy Pirozzolo said.

In 2014, for tax purposes, the IRS categorized digital monies not as currencies but as properties, similar to stocks or bonds. Donating these assets protects the giver from capital gain taxes (taxes on the profit of a sale) and gives them a tax deduction for the donation to boot. Just as many philanthropists get big tax benefits from donating stock, donors can now do the same with cryptocurrency holdings.

In the political realm, candidates can accept bitcoin as an “in-kind” donation, according to the Federal Election Commission (FEC). A handful of politicians are on board, but with some FEC guidelines creating potential gaps (like no reporting requirement for donations under $200), the totals are hard to track. Missouri Republican Austin Petersen is believed to have received the largest single digital currency donation in federal election history—0.284 bitcoin, or $4,500 at the time of donation. He used BitPay to receive the gift. Democrat Brian Forde's congressional campaign in California's 45th District received multiple bitcoin donations worth more than $66,000 in August and September 2017.

"A number of members of Congress have asked for my advice about how they can accept bitcoin, as well,” Forde said.

Big Crypto-Philanthropists

Several blockchain and crypto-based organizations and funders have made big payouts to nonprofit organizations. The Pineapple Fund, backed by an anonymous successful crypto-investor going by “Pine,” is a well-known, but now spent-out, star in the crypto-philanthropy sphere. The fund’s motto is, “Because once you have enough money, money doesn't matter.” It has committed 5,104 bitcoin and donated $55.7 million to 60 diverse charities including the Water Project, Give Directly, the ACLU, the Tennessee River Gorge Trust, and Women Who Tech.

In March 2018, San Francisco-based global blockchain banking platform Ripple gave $29 million to fund all the donation requests on the teacher fundraising site DonorsChoose.org—the biggest known single donation ever made in cryptocurrency. As we’ve reported, Ripple also recently committed $50 million to expand academic research on blockchain “with top universities around the world.”

Also in early 2018, decentralized payment provider OmiseGO and ethereum blockchain founder Vitalik Buterin partnered with the nonprofit GiveDirectly to send $1 million to refugee families in Uganda. GiveDirectly “allows donors to send money directly to the poor with no strings attached,” and its site shares extensive research showing the power of direct cash donations, which are usually well-spent by those in poverty. More than 12,000 households benefited from this crypto-donation, which was exchanged from the OmiseGO digital tokens into local currency.

The reduction in intermediaries that characterizes GiveDirectly’s funding structure makes it a great fit for the peer-to-peer, decentralized nature of blockchain transactions. And, blockchain and crypto-finance, which are often accessible with very low fees through a smartphone app, can empower people who don’t have established traditional banking systems in their communities. As we’ve covered, the Gates Foundation has been backing innovations using blockchain systems to boost financial inclusion for several years now.

In June 2018, Brian Armstrong, CEO of leading digital currency exchange Coinbase, started GiveCrypto.org, “a nonprofit that distributes cryptocurrency to people living in poverty.” Similar to the GiveDirectly model, this organization seeks to place funds right into the hands of people in struggling economies, where they can convert crypto into their local currency, carry out crypto-transactions, or hold it (“hodl” in crypto-slang) over the long term. Armstrong already donated $1 million himself to the organization, which has now raised $4 million in total. He hopes the fund will grow to $1 billion within two years.

Armstrong pointed out in a blog post that like many quick-rising tech entrepreneurs, crypto-investors amassed large amounts of wealth very quickly. He wrote :

[The] reputation of the crypto community has been dominated by images of ‘bros in Lambos,’ whose antics get a lot of attention. This doesn’t represent the best of our community. Most people I respect and know in the crypto-ecosystem believe we have a responsibility to help this technology reach a much wider audience.

Other Crypto-Giving Formats

Charity coins are cryptocurrencies that are usually created to fund specific causes. For example, the nonprofit Charity:Water is raising money through the sales and mining of its own digital currency called the Clean Water Coin. Similarly, the RootProject sells its Roots Tokens and uses them in crowdfunding campaigns to support various “social good” projects and nonprofits around the world, including those relating to homelessness, education and reforestation. And some charities like UNICEF Australia ask backers to donate extra computer power to mine various cryptocurrencies.

Then there is the new GiveTrack system from BitGive. It aims to use a public blockchain to offer supreme transparency, a trait often coveted within the philanthrosphere. “GiveTrack is a platform nonprofits use for taking donations and sharing with donors exactly how their contributions are used, while tying donations directly to a project result,” the site states. It is currently in beta and uses an “immutable and transparent” blockchain ledger to provide financial transaction information in real time. For example, a nonprofit would identify the specific costs for a program, and once funded in bitcoin, all of its purchases would then be viewable on GiveTrack.

“Project results are tied into GiveTrack through a reporting mechanism that provides notification of project milestones and written updates from the charity's representatives in the field,” the site states, which enables “donors to watch the progress of the project all the way to completion.”

While this initiative aims to be the epitome of precise and accountable programmatic funding, it may leave little room for nonprofits to be flexible or responsive during a project, and is a long way from the general operating support that many organizations crave. Still, the intention to provide transparent record keeping and tie donors more directly to a project’s progress is certainly interesting, and many types of works are now being funded on the platform, including wildlife crime scene training for African rangers, kids’ vision screening, and sustainable agricultural initiatives.

Downsides of Crypto-Giving

Each transaction on a public blockchain like Bitcoin’s can be viewed online, but the parties involved can remain largely incognito, carrying out their business with the use of numeric public addresses and private keys (other privacy measures for some blockchains also exist, but we won’t explore those now). The secrecy of blockchains is an interesting feature to consider in the realm of philanthropy, potentially adding another layer of shadow giving to a sphere where donation sources often remain hidden. Within blockchain interactions, an individual’s transactions are sometimes linked to their real identity somewhere in an online account and/or can sometimes be traced to an IP address, so they are not considered 100 percent anonymous.

Blockchain-based currencies can both cloak personal finance and be adopted for criminal uses like investment scams and money laundering. Regulations on cryptocurrency are complex and controversial, varying widely from country to country. For example, China banned cryptocurrency exchanges and initial coin offerings (ICOs). South Korea banned anonymous crypto-trading, and Japan blocked the trade of certain “privacy-rich coins.” Meanwhile, Venezuela launched a state cryptocurrency in October 2018, and central banks in Norway and Sweden are considering taking this step, as well.

In the E.U. and U.S., regulations are still in development. Branches of the U.S. government refer to digital currencies alternately as properties, securities, commodities and funds. New York opted to create its own BitLicense system to regulate in-state crypto-businesses.

In addition to unclear and developing regulations, market volatility can be a major deterrent to many who are considering transacting with cryptocurrencies. Bitcoin’s meteoric rise in 2017 and significant crash in 2018 is a prime example of the sharp value fluctuations these unregulated money markets can experience. A crypto-donation's value could change after being sent to a nonprofit. Of course, charities can choose to sell/convert the digital currency into fiat or government-issued money immediately upon receipt. Because tax-exempt charities don’t have to pay capital gains taxes, if they sell the crypto, the full value of the gift persists.

And, like all technologies, blockchains and digital currencies are not perfect. For example, blockchains can become congested with traffic and cryptocurrency exchanges and wallets can be hacked.

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Despite complications, imperfections and growing pains, the diversity of applications for blockchains and cryptocurrencies speaks to the core technology’s usefulness, adaptability and endurance. Around the globe, innovations in this space continue to move forward as regulators play catch-up, and they don’t show any signs of stopping. Blockchain systems can move funds in a direct, secure, and egalitarian manner, and seem to many like a fertile area for philanthropists and nonprofits to keep (cautiously) exploring.