Saturday 08/12/2018

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Crypto Charity: Will Cryptocurrencies Change the Way We Donate?

Head of Philanthropy

The rise of blockchain technology and the subsequent spread of cryptocurrencies has fueled a debate on the disruptive potential of this technological innovation. Ideas on how this technology can be used range far beyond the financial sector, and even to the philanthropy sector. Swiss foundations are being used to collect funds for new cryptocurrencies, but the question rises whether these funds are actually related to philanthropic goals? And, could the implementation of this new technology in the business model of charitable organizations change the way we donate?


Swiss Cryptocurrency Foundations

Initial Coin Offerings (ICO’s) are the most common way for developers to raise capital for the launch of a new cryptocurrency or to create new blockchain technology. Interestingly, some ICO’s (e.g. Tezos and Ethereum) have used a Swiss foundation for their undertaking which is a legal vehicle traditionally associated with philanthropy. The Tezos foundation is currently facing a US class action lawsuit after being accused of misleading investors into donating to a foundation rather than investing in a company. By doing so, US securities law was circumvented.

The quick developments in this sector have made it difficult
for regulators as well as the general public
to keep up with innovation and pushes
the ethical debate surrounding it further to the background.


The Swiss law regarding the governance of foundations requires them to operate independently and without financial gains for the founders. Swiss foundations that are deemed to be of public utility can apply for tax exemptions which could be one of the pulls of the Swiss crypto valley. The Swiss lawyer behind the idea of using Swiss foundations for ICO’s, has said that this structure is indeed not ideal for future projects with a clear purpose of investment and for-profit.

However, if the parties behind an ICO are not profiting from them, could it be argued that society as a whole might become the beneficiary of the potential success of the new technology? It must be noted that the quick developments in this sector have made it difficult for regulators as well as the general public to keep up with innovation and pushes the ethical debate surrounding it further to the background. The misuse of Swiss foundations to benefit from tax exemptions could create a negative perception of foundations in general to the detriment of charitable organizations.


The Potential of Blockchain Technology for Philanthropy

The current uses of cryptocurrency coins or other applications of blockchain technology are thus different in the field of philanthropy. However, some interesting initiatives and ideas are being developed and tested that have the potential to change the world of charities and non-profits.

  • First, cryptocurrencies could profoundly improve the transparency in donations. With its traceability, donators can make sure their donations reach their intended target. There are even some coins that are  dedicated to philanthropy such as: Clean Water Coin, Impakcoin and Pinkcoin. These coins have, each in their specific way, a built-in mechanisms that make them only usable or strongly encourage their use for projects with societal impact. Unfortunately, this might create a problem for NGO’s to cover their overhead costs, when donators know that their donations are being used to finance the workings of the organizations, instead of creating a direct impact for the organization’s beneficiaries. In this regard, some suggest that blockchain technology could lead to distributed autonomous foundations where algorithms would distribute financial aid, making the organizations and people coordinating the distribution of charitable donations redundant. 

 

  • Second, these new technological advancements can also improve the efficiency of charitable organizations under their current operating model. The Red Cross and Save the children for example are two organizations that offer the possibility to make a donation in Bitcoin, the most widespread cryptocurrency. For foundations and charitable organizations, Bitcoins offer the possibility to transfer money across the world in a near instant, reliable and free manner. For instant relief projects, the possibility to get the money immediately where it needs to be, without incurring foreign exchange costs, helps their work immensely. However, having a Bitcoin wallet under the current volatile state of this coin opens up new risks that would have to be mitigated with traditional payment methods.


Moreover, Bitcoin owners have shown interest in making donations with the profits made from investing and trading cryptocurrencies. Also, from a taxation point of view, donating Bitcoins without converting them to traditional currencies offers the possibility to avoid capital gains tax on their Bitcoin earnings.

In sum, the organizations that currently feel knowledgeable and comfortable to work with Bitcoin are still limited, but the potential for the sector to use this new technology in their operations is high. However, it should benefit altruists initiatives and be driven by ethical practices. These drivers are still to be made clear.

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