How to use cryptocurrency for fundraising as a nonprofit
27 April 2022
Interest in cryptocurrency donations soared during the pandemic, moving crypto from the fringes of charitable giving to an established form of philanthropy as in-person fundraising events were no longer possible.
The rapid growth of cryptocurrency offers nonprofits a compelling, albeit complex, opportunity to increase their donor base and raise more funds. To be able to tap into this expanding potential, nonprofits need to prepare for the crypto future.
But to be able to do so, they need to make an informed decision about if and when to tap into this opportunity, carefully weighing up the risks and benefits.
One of the decisive factors contributing to the success of cryptocurrency fundraising is how good the team is at learning this new form of fundraising. This guide is designed to equip charities and nonprofits with the knowledge that can help them prepare for the crypto future of giving.
The rise of crypto in nonprofit
The success of blockchain and cryptocurrencies has contributed to the emergence of a new generation of affluent donors. As crypto investors make gains on their investments, their tax expenses increase due to the appreciating assets. By making donations in cryptocurrencies to charities, they can considerably reduce their tax liabilities. For the nonprofit organisation that receives crypto, the donation is usually classified as a non-cash gift.
Although an important propulsive force behind the rise of crypto donations, the tax benefits are not the only factor driving their growing presence in the nonprofit sector.
Many crypto investors are value-driven, wishing to contribute money to support a cause they care about. At the core of the decentralised mindset are values that are often aligned with the missions of many nonprofits. After all, the ethos of cryptocurrencies is deeply rooted in mission-driven values and commitment to using the technology for the greater good.
The growing interest in NFTs
Although there are several ways to raise money through crypto, including direct donations and initial coin offerings, one crypto phenomenon has been attracting interest lately – NFTs.
An NFT, or a non-fungible token, is a digital collectable such as an image, a video, or an audio file stored on a blockchain. Here, blockchain — such as Ethereum — facilitates "smart contracts" allowing users to trade these assets.
Digital art in the form of NFTs is issued by a creator such as an artist, a celebrity, or even a company and purchased by a collector. The role of blockchain technology is to allow users to claim ownership over digital art. Provenance, or the track record of ownership behind that digital collectable since its origin, is ensured as the chain of ownership is logged on the blockchain.
How can nonprofits use NFTs to raise funds?
NFTs can be traded on platforms, many of which have built-in features designed to support nonprofits. Each time an NFT is sold, royalty in a cryptocurrency can be paid to the artist that created that piece of digital art or a designated beneficiary such as a nonprofit.
NFTs can also help nonprofits raise funds by auctioning off these digital creations, with all the proceeds going to a charity. In addition, they can engage with celebrities or individuals with public influence to help generate publicity and, ultimately, raise more funds.
Finally, since an NFT is considered a store of value, it can be a donation, just like any other valuable item. However, this would have complicated tax implications for nonprofits, so many chose to wait until the auction is completed to receive cash instead of a direct NFT donation.
Risks of not participating: Opportunity costs of missing out on the crypto tide
Although growing, cryptocurrency presence in the nonprofit sector is still nascent, so early entrants into the space can carve out a considerable slice of the pie. At present, the crypto philanthropy wave is still the tide that raises all boats. But, as the crypto acceptance expands rapidly, the space will inevitably become more crowded, offering diminishing returns for those who arrive late to the game.
Also, the nonprofit sector is aware that with the demographic shift, the face of philanthropy is changing too. As younger generations come of age, charities need to find an effective way to engage with new, digital-native donors. Since these generations tend to be more cause-driven than their predecessors, this emerging market segment will soon become a considerable untapped potential. If they are too slow to recognise the opportunity driven by generational shift, nonprofits may alienate the fastest-growing donor demographic eager to play an active role in making the world better.
Benefits nonprofits can achieve through cryptocurrencies
Expanding the potential donor base
Appealing to a broader donor base and capturing the emerging generations of charitable contributors is key to ensuring the sustainable flow of funds.
Crypto can be an effective fundraising vehicle that allows charities to engage young donors and tap into the market with a growing capital and a charitable mentality.
Differentiate from other nonprofit peers
In today's nonprofit world that is getting increasingly crowded, accepting cryptocurrencies can be a strong differentiating factor, particularly for organisations that share some of the core values of the cryptocurrency communities.
Less friction and lower costs
Blockchain transactions are typically faster and more cost-effective than those conducted through the conventional financial system since many players who usually serve as intermediaries are eliminated.
This benefit is particularly evident in the case of cross-border donations, where heavy banking fees and paperwork can offset some of the benefits of donations.
With cryptocurrencies, nonprofits are able to benefit from a larger pool of donors through international exposure without many of the disadvantages that often negate the gains of a geographically diverse donor base.
Data that lives on the blockchain is publicly accessible with a network of nodes that validate each transaction. Because the blockchain ledger is public, accountability in money flow exists, allowing transparency into how the funds move around.
Suitable for philanthropists who want to remain anonymous
While cryptocurrencies are considered transparent, the money flow does not have to be personally identifiable since personal identity is not required to conduct blockchain transactions. This is because the exchange of cryptocurrencies takes place between two digital wallets, which do not need to be tied to a social security number of an individual or a legal name of a business.
So, instead of placing trust in the organisation to keep their identity undisclosed, donors who wish to remain anonymous can use cryptocurrency to support their cause in private.
There are many legitimate reasons some donors wish to remain anonymous. Many do not want public recognition as they believe that giving is a personal act. Others wish to avoid public recognition as they shun the spotlight. Still, it is essential recognise that anonymous crypto donations could also come from questionable sources.
Challenges of cryptocurrency fundraising for nonprofits
The need for cultural shift towards better awareness and adoption
The traditional nonprofit culture tends to move more cautiously and is often slow to embrace innovation. As a result, the understanding of how cryptocurrency works and how the sector can benefit is low.
Nonprofits need talent that understands blockchain and how it affects the future of the philanthropic landscape.
Cryptocurrency mining requires a considerable amount of electricity, impacting natural resources that are depleted to produce it. For this reason, acceptance of cryptocurrency donations for charities working in sectors such as environmental protection may be a hard no.
Tax treatment of cryptocurrency is dependent on its legal categorisation — whether it is considered money, property, an asset, or security. Because of this, the wording of the tax treatment related to crypto donations needs to be considered on a case-by-case basis.
How the nonprofit sector can get ready for the crypto future of giving
Here are the steps nonprofits can take when assessing if and how they want to participate in cryptocurrency fundraising.
1. Take time to do research, but don't wait for too long
Nonprofits tend to avoid risks, so they are reluctant to be early adopters. Instead, they often adopt a wait-and-see approach, observing how their more proactive peers think and act when it comes to an innovation that has the potential to disrupt the space.
This is understandable. Before diving in, nonprofits need to perform their due diligence and move into fundraising crypto at their own speed.
Still, waiting for too long can lead to lost opportunities. If your nonprofit decides to enter the world of crypto philanthropy, keep in mind that the crypto world is moving fast. Opportunities that are here today may not last for too long.
2. Start an internal dialogue
Find an internal crypto enthusiast and mandate them with the power to do research and present it to the leadership to spark the conversation around crypto, including questions such as whether your organisation should become a part of the crypto philanthropy landscape and how to get cryptocurrency donations.
Whether your organisation chooses to accept or not cryptocurrency donations, it needs to be an informed and intentional decision.
3. Formulate a strategy and create a clear roadmap
If your nonprofit decides to enter the world of crypto donations, you should not start without a robust cryptocurrency fundraising strategy and a clear roadmap. Revisit your processes and policies, including gift policies, to accommodate crypto acceptance in a way that is aligned with your goals.
First, you want to decide whether to accept crypto donations directly or through a third-party platform specialising in the nonprofit sector.
If your nonprofit chooses the direct route, you will need to open your own wallet and manage crypto assets directly.
Alternatively, you may choose a crypto fundraising platform designed to give nonprofits tools to connect with the world's fastest-growing donor demographic without worrying about the tech and sometimes even legal and accounting side of things. Then, with all that tech-heavy lifting taken off your plate, what remains can be as easy as adding a "donate cryptocurrency" button to your website.
Finally, establish whether you want to own NFP directly or auction off the digital artwork to collect the proceeds. Also, decide whether you wish to collect cryptocurrency or fiat money proceeds.
4. Do your tax due diligence
Although tax regulations differ between countries, crypto is treated as an asset rather than a currency in many jurisdictions, which means that donations are considered in-kind and tax-deductible for the donor.
However, whether a charity receives cryptocurrency donations or is gifted an NFT may have significantly different tax implications. With the increased interest from tax authorities in cryptocurrency declarations, nonprofits want to ensure they have complete clarity over the tax treatment of donations to optimise their tax exposure.
5. Be aware of the risks
Cryptocurrencies tend to be volatile, considerably more so than major traditional currencies or asset classes. Also, since the space is still nascent, regulations are in development, and so are the accounting guidelines.
If you choose to work with a platform, do research before selecting one because they may vary in terms of what they offer to nonprofit clients.
Some will only handle the technical aspects of cryptocurrency donations while the nonprofit remains exposed to other risks, including legal and tax. Others will accept crypto donations and grant cash to nonprofits, allowing them to interact only with fiat currency.
6. Consider external assistance
You can also hire an advisor with crypto experience. In this case, choose someone current on what is happening in the cryptocurrency ecosystem, especially the regulation. Ideally, someone with direct experience.
You may also wish to speak with your nonprofit peers that have already tapped into cryptocurrency donations. There's no substitute for the experience of someone similar to you who already walked in your shoes.
Moving forward with crypto donations
As the stigma around cryptocurrencies and blockchain dissipates, the popularity of this novel asset class has soared, and the cryptocurrency space is expanding at an exceptional speed.
Many enter the space driven by a vision to better the world by challenging the traditional status quo while striving to deliver on the promise of shared economic empowerment. Crypto philanthropy is a natural extension of this ethos.
As investors are becoming increasingly aware of their power to make an impact in the world through charitable giving, crypto philanthropy has been growing into an established form of giving. Nonprofits are becoming increasingly open to this type of fundraising.
However, there remain considerable uncertainties as regulations around cryptocurrencies are still evolving, and nonprofits accepting crypto assets will have to keep up with developments in this space and how they can impact their organisation.