Rhodri Davies, Programme Leader, Giving Thought

Rhodri Davies

Head of Policy

Charities Aid Foundation

The role of giving


2 November 2017

I have put quite a lot of thought over the last few years to the impact of blockchain technology on charities and philanthropy. I even went into a fair amount of detail on Initial Coin Offerings (ICOs) in a recent post. So I was pretty surprised in recent weeks to see a big philanthropy-related issue arise in the blockchain world that took me totally by surprise: namely the fact that many ICOs are using seemingly charitable structures and hence when people purchase crypto tokens this is often better understood as a ‘donation’ rather than an ‘investment’.

This came to light (for me at least) as a result of the news that a fight had broken out between the founders of Tezos - the start-up at the centre of one of the biggest ICOs to date (which raised $232 million) – and the man tasked with overseeing the Swiss foundation that is the actual beneficiary of money raised through the token sale. The Tezos founders, Kathleen and Arthur Breitman, accuse the Tezos Foundation Director, Johann Gevers, of incompetence and of attempting to divert money from the foundation to pay himself a bonus. Gevers, for his part, accuses the Breitmans of inappropriate interference in the management and operations of the foundation, which is supposed to be wholly independent of Tezos itself.

Swiss flag 275px

I am not going to get into the rights and wrongs of the particular Tezos case. I’m also not suggesting that the use of a Swiss foundation in setting up an ICO in this way somehow constitutes improper behaviour. On both of those questions, I have neither the inside knowledge nor the technical expertise to offer any definitive answers. What was more interesting to me, however, was that this story shed light on the fact that the use of foundation structures has become increasingly common when it comes to setting up ICOs or token issuances.

This has already become a point of some controversy in the crypto world, where people have questioned whether the introduction of a purportedly philanthropic element into the market could have detrimental effects on the development of blockchain and crypto markets. However, it has also raised a number of questions in my mind coming from the opposite perspective: namely whether the use of these structures in this context could have a detrimental effect on philanthropy more widely. That is what I want to explore below.

Before we get to that, it is worth saying a few things in terms of background. Firstly, as already mentioned, Tezos is not the first organisation to use this Swiss Foundation model. The town of Zug in Switzerland has actually become the focal point for establishing ICOs (to the extent that it has been dubbed “Crypto Valley”), many of which are choosing to use a similar foundation model. (Most famously the Ethereum Foundation was set up to support Ethereum - the blockchain platform on top of which many other start ups and ICOs are being built).

Secondly, in practical terms what actually happens is that a foundation is established under Swiss law with a purpose which allows it to justify investing in the particular start-up in question (although, as we shall see, it needn’t be limited to investing in this specific start-up). This foundation is independent and controlled by a board of appointed individuals who oversee its management and operations (including any grantmaking). The foundation takes in the money paid by individuals in exchange for crypto tokens, and then uses the money to support the development of platforms and technologies that can arguably deliver the foundation’s purpose (which is obviously in practice intended to mean funding the start up at the centre of the ICO).

Finally, it is worth noting the wider philanthropic context in which all this is happening. Switzerland has long been seen as a desirable place to establish a foundation, as it has liberal laws and good infrastructure. Hence many well-known international NGOs have established foundations there over the years. However, the Swiss foundation sector has also been criticised in the past for a lack of transparency and many have voiced concerns that these structures are being used for the purposes of obscuring financial activity. The International Center on Nonprofit Law (ICNL), for example, said thatthe Swiss regime is minimalist and... might not be sufficient in terms of setting standards on transparency.”  The sector has attempted to self-regulate to some degree by introducing a voluntary governance code (the Swiss Foundation Code, or SFC) which outlines principles of best practice about how foundations should be established and run, and it is generally thought that this has gone some way toward improving the situation with respect to transparency. The ICNL, for instance, also concluded that: “in terms of the principles and practices related to transparency, the SFC provides a highly important self-regulation tool Switzerland’s philanthropic sector”.

With all of that in mind, here are some questions.


This is the big question that has been causing many in the crypto world to get quite upset, as they believe that many ICOs are clearly being pitched as investments and are understandably annoyed when they are told that actually what they thought was an investment was actually a donation to a Swiss foundation. Some of this might be the fault of those buying tokens, who haven’t taken the time to read the small print. This is certainly the line often taken by those actually setting up ICOs. For instance, an article in the Wall Street Journal about the Tezos controversy reported that “in an interview last week, Tezos co-founder Kathleen Breitman said that money sent to Tezos shouldn’t be viewed as an investment. Instead, she described it as a contribution or donation to a nonprofit network, with the tokens given in return more like a souvenir than a stock certificate."

Similarly, Oliver Bussmann, the Chairman of the Crypto Valley association which has taken the lead in promoting Zug as a world centre for ICOs, was quoted as saying, “Setting up a foundation is almost like setting up a charity to capture donations. Most investors don’t understand that they are donating funds to a non-profit organisation that has limited interest in increasing value of token. There might be disappointment if investors don’t read the small print.”

I suspect that “disappointment” here might be an understatement, as I can’t imagine many of the people who have ploughed millions of dollars into ICOs are going to be that sanguine about being told that their tokens are actually “souvenirs” of a donation they have made. There are certainly stories circulating already that a number of US law firms are offering to take on clients who want to take action against Tezos and other ICOs on the grounds that they were mis-sold as investments. Without wanting to second guess the outcome of any of this, the problem would seem to be that even if those at the centre of ICOs have indeed been scrupulous about making no unwarranted claims and ensuring that token purchases are seen as donations, a whole industry of ICO promotion has sprung up in which people are not so careful or are actively making false claims. This is almost certainly going to develop as an issue over the coming weeks and months.

Even if everyone was clear that token purchases are donations, however, it still seems like they are donations that carry some hope (if not expectation) or getting a future financial return when the tokens increase in value. This raises some interesting questions about risk and timescale: i.e. when does a sufficiently high-risk or long-term investment become a philanthropic donation?

This is an issue I have looked at before in the context of investment in space exploration, as there is a similar dynamic there in terms of big bets on unproven innovations being taken in the knowledge that if they don’t work out they can be written off as a philanthropic donation (on the assumption that some public good has been achieved); and if they do work out they can be hailed as incredibly canny early-stage investment.

When does a sufficiently high-risk or long-term investment become a philanthropic donation?

The same would seem to go for ICOs if they are to be seen as donations. If buyers are being told that they are making a pure donation - and they have absolutely no chance of getting a return in the future - then the only motivation for purchasing tokens is if they believe that the purpose of the foundation or the work of the start up it is funding is in-and-of-itself worth supporting for charitable reasons. But then the money is essentially coming out of the same "philanthropic pot" as all of an individuals other charitabe donations. And the key question is: if this situation is made clear, how many people would actually choose to donate to the development of an open source, decentralised platform for settlements (or whatever it happens to be) rather than supporting the search for a cure for cancer or ending world poverty. Perhaps some, but I suspect not nearly as many as are currently buying ICO tokens.

The thing is, in pretty much all ICO cases even if there is no overt promise of a future return; there is still the possibility of one. And arguably that already means that these donations are not strictly speaking philanthropic, because there is a degree of potential personal benefit (which may not be problematic under Swiss foundation law, but certainly would be in other jurisdictions like the UK). So perhaps even in their own terms, they would be better described as high-risk social investments or impact investments rather than donations? That would certainly seem to make the combination of social purpose and possible financial return more palatable.


 Let’s assume for the minute that we have settled the above question definitively in favour of donations rather than investments. This still leaves open the related question of whether those donations are to be seen as charitable or not. Charity may seem like something that is in the eye of the beholder i.e. we are all free to interpret, based on our own motives, what counts as charitable. However, in reality one particular beholder tends to occupy an exalted position when it comes to determining these things: namely, the taxman. That is because in many countries tax benefits come along with charitable status (both in terms of tax breaks for an organisation and for donors who give to it) so the question of what does or does not qualify as charitable is bound up with the tax system.

This certainly appears to be the case in the Swiss system. There is no particular compunction on a foundation per se to have a charitable aim, unless it is also attempting to claim tax exempt status - in which case it must be shown to pursue a “public utility purpose”. I do not know for certain that the Swiss foundations established for the purposes of structuring ICOs are claiming tax exempt status, but in many ways it would seem odd to bother if they weren’t. Furthermore, the quotes above from Oliver Bussmann clearly imply that the ‘donations’ made through token purchases should be seen as charitable ones.

This raises a fairly fundamental question about whether the development of disruptive new technologies can be argued to provide an inherent public good; so that support for those technologies can be viewed as philanthropic. There are almost certainly those in the tech sector who would contend that we should take this view; as they clearly believe that the development of technologies like blockchain (whether for profit-seeking or non-profit purposes) conveys a clear societal benefit. This may be particularly arguable in the cases where the technology is developed an open source basis (as was recently argued in an article in Stanford Social Innovation Review). However, even in these cases the view that the development of technology represents an automatic public good is an ideological one; and something that we should be careful of accepting unquestioningly. (Which is not to say that we need to dismiss it out of hand either: merely that it needs to be examined thoroughly).  

Does the development of technology in itself constitute a public good, and therefore a valid focus of philanthropy?

One practical upshot of this seems is that if the donations made through token purchases are to be justified as charitable, that has to be with reference to the purpose of the foundation and not the start up that is the intended beneficiary of the ICO. This is because justifying putting money into a particular commercial venture as charitable is much harder than justifying putting money into an intermediary structure that has a wider mission or purpose, but which is still able to pass the money on to that commercial venture in pursuit of that mission. But it is precisely this severance of the direct link between token purchases and the organisation that is the putative centre of the ICO that seems to be causing so much consternation, as it introduces an unwelcome layer of uncertainty into the process.

As mentioned above, there is in principle nothing to stop the Tezos Foundation (or any other foundation set up to enable an ICO) from taking the money they have raised by selling tokens and putting it not into the organisation that was the original intended recipient, but instead into a totally different organisation that could equally be argued to further the foundation’s stated purpose. At this point I come back to my view that whilst one could argue that people who have purchased Tezos tokens as ‘souvenirs of a donation’ should be fine with this in principle, I suspect that in reality if this did happen there would be rather fewer ‘calm donors’ and rather more ‘furious class action lawsuits’.


This is really where the crux of this whole thing lies for me. It would be easy to dismiss this issue (and by extension this blog …) as merely an esoteric kerfuffle in the world of blockchain and cryptocurrency. However, I actually think it points to some wider potential problems about the relationship between the development of technology and the notion of philanthropy: ones we would do well to start paying attention to.

The questions raised above - about whether sufficiently long-term or high-risk investment can be viewed as philanthropy, and whether technology is in and of itself a social good - are ones that go much wider than the current debate about ICOs, and are likely to become more prevalent as an increasing amount of wealth is created in the technology sector and that consequently shapes philanthropy.

Questions about whether sufficiently long-term or high-risk investment can be viewed as philanthropy, or whether technology is in and of itself a social good, are e likely to become more prevalent as an increasing amount of wealth is created in the technology sector and this consequently shapes philanthropy.

Likewise, whilst the use of Swiss foundations in the development of ICOs might well be totally legitimate that doesn't mean there might still not be a knock on effect in terms of general perceptions of foundations elsewhere in the world. People, for instance, might become increasingly cynical about foundations if they think they are merely being used as ways of allowing commercial ventures to get investment outside of existing regulatory structures.

The fact that Swiss foundations are acknowledged to be somewhat lacking in transparency might also be a problem if people perceive that they are being used for ICOs precisely for the purposes of reducing transparency. Whilst the context might in reality be particular to Switzerland, if things go bad, that is not going to stop people extrapolating to foundations elsewhere in the world.

Given that in many places foundations already face significant reputational challenges when it comes to transparency, that may be a cause for concern. It may not just be about extrapolation either: Zug (Crypto Valley) remains the global hub for ICOs currently, but if the bandwagon keeps on rolling then other countries are likely to want to get on board too. So it may well be that foundations in other countries find these problems actually arriving on their doorstep.

I’m not entirely sure how concerned those in the foundation sector or wider civil society should be about ICOs and Swiss Foundations. Maybe not at all (for now at least). But it does seem to raise some fairly fundamental questions about what constitutes a public good and where the distinction between a donation and an investment lies, so I can’t help but think it is worth thinking about. For me, given how much time I have spent thinking about how philanthropy could take advantage of disruptive technologies, it is also a salutary reminder that we should also keep a close watch on how those same disruptive technologies might in the future take advantage of philanthropy.