FROM HODL TO GIEV? THE OPPORTUNITIES AND CHALLENGES OF CRYPTOPHILANTHROPY

1 March 2018

NB: Just to be clear- in this blog I’m not talking about any of those wider applications of blockchain technology, or about any of the increasing number of “charitable cryptocurrencies” that are out there. The focus here is on mainstream cryptocurrencies (insofar as that isn’t an oxymoron…), what potential there is for encouraging donations using them, and whether that is a good idea or not.

Let’s look at this from the persepctive of both charities and potential crypto-donors, and assess some of the pros and cons for both. And since I’m guessing that the reaction of most people in the charity world to the idea of taking donations in cryptocurrency is likely to be somewhat negative, let’s start by addressing the obvious downsides.

My suspicion is that this is at least partly by design: cryptocurrency, more than most technologies, has an entire subculture that has sprung up around it. And like any community, it is defined just as much by who isn’t a member as by who is. This means that there are plenty of people in the crypto world who are keen to make it all seem as complicated as possible, and the use of jargon and shared memes and language is a big part of this. (At this point, it seems apt to recall Groucho Marx’s comment that “I wouldn’t want to join any club that would have me as a member”…)

It is probably worth saying that whilst making cryptocurrency seem forbiddingly complicated might not be that helpful, it is equally problematic to pretend that getting involved requires no knowledge at all. One of the worst aspects of the recent upsurge in mainstream interest in cryptocurrency is the emergence of an entire industry of unscrupulous people and companies trying to convince those who have little or no understanding of what cryptocurrencies are or how they work to invest in them on the basis that there are ‘guaranteed returns’. But this is obviously a total lie: cryptocurrencies as they stand are best understood as highly volatile and sophisticated investment assets. No-one should be getting involved in them without at least some basic understanding of how they work, and they certainly shouldn’t be investing any money that they aren’t comfortable with losing. But despite this, there many worrying stories of people maxing out their credit cards or remortgaging their houses to buy Bitcoin; which is why financial regulators and consumer protection agencies around the world are getting decidely twitchy.

Having said all that, it doesn’t necessarily mean that charities should just stop reading now and give up on the idea of taking cryptocurrency donations. Most of what I have said applies primarily to investing in or holding crypto (and I don’t think many charities should be thinking about doing either of those things at this point), but it needn’t be necessary to do either of these things in order to take crypto donations.

All that is really required is a crypto wallet to receive donations into (a wallet is basically just a unique cryptographic address that payments can be sent to). And whilst it used to be necessary to hold a wallet on your own computer, there are now numerous online wallet providers who provide a cloud-based version. If a charity set up a Bitcoin wallet (for example), it could direct any donors who wanted to give Bitcoin to that wallet address. The charity could then sell the Bitcoin in order to turn the donation back into fiat currency (i.e. pounds, dollars, euro etc.) in very short order.

To take it one stage further, some providers now offer “Instant Exchange Wallets” as a service for vendors. These are cryptocurrency wallets that automatically turn any payments back into a designated fiat currency and send them straight to the wallet holder’s traditional bank account. If a charity used one of these, it could essentially take crypto donations without ever actually holding any crypto. It is worth noting that this is how Fidelity Charitable has been enabling donations of bitcoin into its Donor Advised Funds (DAFs) since 2015. They have a partnership with Coinbase (other wallet providers are available…), who turn any bitcoin donations into Fidelity’s wallet into dollars (and even waive their fee for doing so, apparently!) and then pass them on to Fidelity, who credit the relevant donor‘s DAF with the equivalent amount.

2. Volatility

The second objection might be that even if a charity grasps enough of what cryptocurrencies are and how they work to feel confident getting involved, they might feel that these assets are just too volatile to fit within acceptable risk parameters. It should be fairly clear from point 1 that I think this is basically right: I wouldn’t recommend that any charity embarked on buying cryptocurrency as an investment. Apart from the fact that most CFOs and trustees would probably turn green at the very suggestion, it just seems impossible to justify with respect to the relevant fiduciary duties etc.

A slightly different question is what to do if a charity has a donor who wants to give them a donation in cryptocurrency for whatever reason, but again - as outlined above – I think they should really be thinking in terms of using an exchange wallet or turning the crypto back into fiat as quickly as possible. (An honourable exception here might be an organisation like the RNLI, who started taking Bitcoin donations back in 2014. In that case, given the subsequent increase in value, there is probably a good argument for ‘HODLing‘ the donations they did receive for now!)

(NB: For the uninitiated, who might be assuming that I just can’t spell ‘hold” properly, I should flag up that “HODL” is one of those memes or bits of terminology that have become part of the language of the crypto community as outlined above. It comes from a Dec 2013 post on the Bitcoin Forum message board, where a seemingly well-oiled contributor announced that “I am Hodling”, and it has subsequent been adopted as the motto of those who want to proclaim their desire to stick with Bitcoin for the long termin the face of the regular sharp drops in value.)

3. KYC/AML/Crime links

A final objection might be: “isn’t cryptocurrency all anonymous and linked to crime and the dark web, so how would we meet Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements?”

This is a difficult one to answer in a light-hearted and breezy way in a blog. I certainly wouldn’t want to downplay the issue: KYC and AML are extremely important for charities in terms of ensuring that they aren’t handling money from dubious or criminal sources, which is a vital part of maintaining the trust and confidencde of the donors and supporters. It is also true that many in the financial and regulatory world are concerned about the AML and KYC challenges posed by cryptocurrency, but no-one has all the answers yet and there are vigorous debates on this topic going on right now across the world. However, there are a couple of things it might be worth noting.

1. The link with crime is weaker than it was. Yes, it is still true that many transactions on the dark web take place in cryptocurrency (although apparently Litecoin has overtaken Bitcoin as the favourite). However, as crypto moves further into the mainstream there also are far more ‘normal’ people using it, so the assumption that all crypto holders must be dubious in some way is no longer justified.
2. Most crypto isn’t actually anonymous. That’s right- it is pseudonymous i.e. you can easily trace transactions to a given wallet address (particularly given the underlying blockchain provides an immutable record that enyone can view) - you just can’t necessarily link that wallet address to an individual or organisation in the real world. Of course, there are cryptocurrencies that are fully anonymous by design (e.g. Zcash, Monero), and this point doesn’t apply to them. But I’m going to assume for now that pretty much no charities are contemplating taking donations in any of these currencies, so we can park this question for a later date.
3. KYC/AML might actually be easier with cryptocurrency. Following on from the point above, if we are talking about pseudonymous cryptocurrencies like Bitcoin, then the underlying public blockchain allows any interested party to see all of the transactions associated with a particular wallet, or to track the history of individual units of crypto all the way back to their creation. Assuming that you could also link a wallet to a person or organisation in the real world, then you would actaully have a much more powerful capability for tracking the provenance of money than is available in the current financial system. And this could lead to much more effective KYC and AML controls.

This does, of course, put a huge emphasis on being able to link crypto wallets to a real-world owner. However, one possibility could be for charities that are interested in harnessing crypto to stipulate that they would only accept donations from wallets that can be reliably linked to an individual and organisation in the real world This might be off-putting for some donors who have an ideological belief in the semi-anonymous nature of cryptocurrency, but one would imagine that most donors with nothing to hide would be happy to divulge the relevant information in order to be able to make the donation. And if losing out on a small number of potential crypto donations from those unwilling to compromise on pseudonymity is the price charities had to pay for meeting KYC and AML requirements, then so be it.

WHY WOULD CHARITIES WANT TO ACCEPT CRYPTO-DONATIONS?

So far, we’ve looked at various reasons that charities wouldn’t want to accept cryptocurrency donations. And it may sound to some as though it is pretty clearly too much like hard work at this point. But before you totally rule it out, we should consider the positive case for why charities might want to negotiate the challenges outlined above in order to harness crypto donations.

The main reason is because there is clearly money in this world - and lots of it. This may also be a pool of wealth that provides particularly fertile ground for philanthropic fundraising. This is partly because there are still relatively few organisations vying for donations from this source. But it is also because many of the people who have made it big in cryptocurrency have done so primarily by virtue of being early adopters - due to an interest in the technology or the libertarian ethos behind cryptocurrency - and have subsequently found themselves sitting on fortunes that they never expected to have. Assuming there is some truth in the maxim of “easy come, easy go”, it seems as thought there is a decent chance of convincing at least some of these crypto-rich individuals to put a bit of their wealth towards good causes (’easy come, easy give’, as it were).

There are already some positive signs that this kind of ’cryptophilanthropy’ has real potential. As mentioned above, Fidelity Charitable in the US have been accepting Bitcoin donations into their Donor Advised Funds since 2015, and recently announced that in 2017 they received $69m in Bitcoin (and, in fact, Ether) donations in 2017, from 169 different donors. This made it their fastet growing asset class. There was also the curious story in December 2017 of the Pineapple Fund. This concerned a mysterious Bitcoin early adopter calling themselves only “Pine”, who announced that they were setting up a philanthropic fund with $86m worth of donated Bitcoin, and inviting applications from interested charities and other groups. Unsurprisingly, the fund was inundated, and announced in January 2018 that new applications were no longer being accepted.

There is almost certainly going to be more of this kind of thing in the future, and if charities want to be in a position to take advantage they need to think through their approach to crypto donations now. At the moment, the majority of the direct crypto donations that have been made public have been to organisations that are themselves technology-based in nature and thus perhaps more likely early adopters (e.g. The Electronic Frontier Foundation, The Wikimedia Foundation). However, there is no reason that more “traditional” charities couldn’t get in on the action as long as they had sorted out the relevant logistics. (Or is there? We’ll look in the next section at whether the situation is actually a bit more complicated than this).

WHY MIGHT SOMEONE WITH CRYPTO WEALTH NOT WANT TO GIVE TO CHARITY?

One answer to this question is clearly: for the same reasons that any other kind of wealthy person might not want to give to charity (as there are still plenty who don’t). But are there also particular characteristics of crypto-rich people that might pose a challenge in terms of charities trying to get them to give? It is obviously impossible to say with any certainty, as no-one has yet done an overview of the landscape of potential crypto-donors (as far as I am aware). Which is probably not that surprising, given that many of these people are, by design, almost impossible to identify. So what I am about to say is all merely speculation, but since that has never stopped me before, let’s crack on!

One question is whether organisations representing more “traditional” causes might not resonate as much with potential crypto donors. We saw above that many of the donations to date have been to organisations with some sort of technology angle. Now, it may be that this merely reflects the fact that those organsiations have existing profile in the crypto world and are in a position to take donations; but it is also possible that they would continue to attract the lion’s share of donations in the future too, simply because they are more aligned with the interests and world view of people who have made a lot of money in crypto. This is a trend we have historically seen in philanthropy: where donors adopt approaches to giving which reflect a belief that the way in which they have made their money also contains the seeds of solutions to social problems. Hence the link between private equity and venture philanthropy, or the enthusiasm of the new breed of Silicon Valley tech billionaire for philanthropic approaches such as Effective Altruism, which espouse a focus on data and analysis that is very much in line with the mindset those donors have adopted in their commercial operations.

Another issue is trust. Lack of trust in the way that charities operate or use donated money is often cited as a key barrier to giving, and there is a question as to whether charities might encounter a particular challenge in getting potential crypto-donors to trust them. Consider (as highlighted above) that those who have made really significant amounts of money in cryptocurrency are likely to have been early adopters; and that this suggests either an interest in the technology for its own sake or some degree of ideological belief in decentralisation or, particuarly in the case of Bitcoin, libertarian political philosophy.

If it is either of the latter, then this is likely to be accompanied by some degree of scepticism and mistrust of traditional intermediaries and institutions. This attitude is usually directed towards governments, central banks and the traditional financial services indsutry, but it is easy to see that the same scepticism could also be aimed at charities- who might be seen as ’bureacratic’, ‘wasteful’ or ‘part of the establishment’.