Introduction
Donor engagement has never been more important for charities as they seek to raise funds in increasingly challenging times. The growing acceptance and use of cryptocurrencies, especially among the younger generations, presents new avenues to engage with new audiences. Recent research indicates that crypto philanthropists give more frequently and in larger donation sizes than traditional donors. 45% of crypto users donate at least $1,000 to charity each year while only 33% of the general investor population give $1,000 or more to charity annually. The average crypto donation size is also larger in fiat terms, with the Giving Block recording an average of $11,000 per crypto donation as compared to the $128 received by charities in traditional currencies. Charities looking to benefit from this new source of income will need to consider their engagement strategy and grapple with thorny governance questions relating to the source of funds when setting themselves up to receive donations in cryptocurrencies.
Crypto philanthropy
2021 was the year in which cryptocurrency donations to charities reached their highest recorded levels. Fidelity Charitable, a non-profit providing advice on charitable giving, received around $331 million in crypto – by comparison, the equivalent figure in 2020 was $28 million. Long-standing charities such as Save the Children, HHUGS, Royal National Lifeboat Institution, and the Children's Health Unit Fund are now beginning to incorporate crypto philanthropy into their donation strategies.
Advantages of crypto philanthropy
Many crypto philanthropists support similar causes to those who donate with fiat currency. However, there are stark differences in terms of the demographic of crypto donors, as well as the fees involved in making a donation in crypto and administrative ease. For a start, the per capita income of crypto investors ($111,000 in the US) is higher than the average individual, even though the average age of crypto investors is lower than those donating traditionally to the non-profit sector (38 years old vs 64 years old) crypto philanthropy has resulted in 'younger' wealth flowing into the charity sector. Separately, the decentralised nature of crypto transactions can in some cases result in cheaper transaction costs as compared to gifts of fiat. Lastly, using cryptocurrencies affords donors the option to give large amounts of money without having to engage in the legal and regulatory requirements demanded by traditional financial institutions. This means donors are not obliged to fulfil “know your customer” checks and can donate to causes completely anonymously. The flexibility of donating with cryptocurrency has improved access to philanthropy for not only a whole new pool of donors, but also for a new pool of charitable causes, with smaller non-profit organisations able to navigate the technology for their benefit.
Risks of crypto philanthropy
However, it's not all plain sailing when it comes to crypto philanthropy, particularly for charity trustees. As warned by the FCA, cryptocurrencies are considered very high-risk, speculative investments which are only regulated in the UK for anti-money laundering purposes. This means that owners of these cryptocurrencies (such as charity recipients) are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme if something goes wrong. If a charity is holding funds in the form of cryptocurrencies, they should be aware that their extremely volatile value classifies them as high-risk. Crucially, the charity will need to explore whether it has appropriate board expertise and governance policies in place.
Charities and NGOs, like all organisations, are at risk of abuse for money laundering and terrorist financing purposes, especially those operating in high-risk environments. Charities are therefore subject to strict rules which prevent any money donated to them from passing into the hands of terrorist organisations, or from being laundered. The introduction of cryptocurrencies into a charity's financial strategy may exacerbate the risk of money laundering or leave the charity unable to demonstrate an acceptable level of due diligence, on the basis that the identity of the donor and their funds may be unknown or unclear.
Charities may also encounter early adopter challenges when trying to incorporate cryptocurrency donations. Some traditional financial institutions are still wary of cryptocurrencies, with banks known to restrict their customer's payments to cryptocurrency exchanges. Charities may find this challenging in circumstances where it is already difficult to access mainstream banking channels, with one study finding that 79% of charities have faced some kind of difficulty in the past. If charities are associated with cryptocurrencies and mainstream banks are increasingly wary of the cost and responsibilities of anti-money laundering regulations, this may further impact a charity's chance of using the bank's financial services.
Charity trustee duties
Trustees are legally responsible for the charities they manage, and as a result are bound by specific legal duties. The most relevant trustee duties are:
- Act in their charity's best interests. This means making balanced and adequately informed decisions which will best enable the charity to carry out its purposes in the short and long term. This also requires trustees to avoid circumstances where a conflict of interest arises or where the trustee or anyone financially connected may receive a personal, unauthorised benefit from the charity.
- Manage their charity's resources responsibly. Trustees have a duty of prudence – to exercise sound judgement - when making sure the charity's assets are used to carry out its purposes. To do this, trustees must take into account risk factors, sale and spending restrictions, exposure of assets and consequences of over-committing the charity when making financial decisions.
- Act with reasonable care and skill: Trustees are expected to make use of their skills and experience in decision making and take advice when necessary. The factors that are taken into account when deciding whether a trustee is acting with such care and skill are whether the trustee has specialist knowledge and/or whether they are paid to be a trustee. The bar of what is considered "reasonable care and skill" will be higher for specialist and/or paid trustees.
- Ensure they are held accountable: There are statutory accounting and reporting requirements that trustees must comply with, which vary depending on the size and formation of the charity. Not only this, but charities must also consider what their stakeholders say and use this information to inform decisions about the charity's services.
Trustees who act in breach of their legal duties can be held responsible for the consequences that result from such a breach and for any loss the charity incurs as a result. This may include regulatory action through the Charity Commission, which can require that a trustee reimburses a charity for any loss of funds.
Guidance
If trustees are considering the use of cryptocurrencies, they must therefore be mindful of their legal duties as set out above. They can help manage risks associated with cryptocurrency by adopting the below guidance.
- Trustees should carry out sufficient due diligence on their crypto donations and third-party facilitators: Trustees should be reasonably assured of the provenance of the donated funds, the people/organisations that are donating, and the risks associated with the donations. To ensure due diligence is adequate, charities should have clear Anti-Money Laundering and Code of Conduct policies in place, carry out Know Your Donor checks, check sanctions lists and provide training to employees in relation to all the above. Trustees may need to take extra steps in their due diligence process when receiving cryptocurrency donations from outside the UK. For large donations, they might want to consider instructing experts to verify that the crypto has not been linked to illicit activities.
- Trustees have a duty to mitigate the financial risks of accepting crypto donations: Charities should be clear about the capacity in which they are using cryptocurrencies. They may not be suitable as medium to long term investment assets (depending on the type of cryptocurrency) but this is not to say that they should not be used as a means of exchange in situations where traditional currencies encounter barriers i.e. with international payments. Trustees may want to consider setting a cap on the number of cryptocurrencies they are willing to receive a year, or to only accept, or hold stable coins (cryptocurrencies backed by a reserve asset, such as Tether).
- Trustees should be aware of cyber-security threats of cryptocurrencies: Trustees should consider how their cryptocurrencies are stored and the risks associated with either 'hot', 'cold', 'hardware' and 'software' wallets. Online/hot wallets are more susceptible to hacking attempts whereas cold wallets are not connected to the internet, and as a result can be more secure. Hardware wallets are physical so are dramatically less likely to be hacked, but of course, can be damaged or lost. Trustees should take advice as to the most prudent custodian structure for their investment portfolio.
- Trustees should include cryptocurrencies in audits and financial records: Charities must make sure they keep accurate records showing money received and spent, as well as the assets and liabilities. The Charity Commission expects charities to value their bitcoin assets at the end of each financial year-end based on their fair value, that is, the value for which the charity could dispose of the asset. Trustees may find it hard to accurately value their charity's cryptocurrencies when their market value can change dramatically day-to-day and may want to seek independent expert advice when doing so.
- Trustees should consider the use of cryptocurrencies in line with their charity's purposes: The trading and mining of cryptocurrencies impact the environment by causing electronic waste, emitting carbon and using energy. While sustainable solutions are on the rise, trustees of charities, especially those in the environmental sector, should consider whether the use of such technology directly goes against their purpose.
- Trustees should report serious incidents to the Charity Commission: This includes suspected incidences of money laundering, terrorist financing, or loss of your charity's money or assets. Reports to the Charity Commission should be made sooner, rather than later.
For further information or related enquiries, please contact a member of Mishcon Purpose or the Philanthropy and Charities team.