As we develop our strategy for the next five years, the Fundraising Regulator has been thinking about the impact of technology on the future of fundraising. A topical issue that was raised at our recent annual event is cryptocurrency and non-fungible tokens (NFTs) and the possibilities they offer charitable institutions for both donations and engagement with new donors.
What is cryptocurrency?
The world of cryptocurrency and NFTs can be confusing, so let’s start with some explanations of what we mean:
- Cryptocurrency is a form of digital or electronic currency which uses secure technology to record the transaction history and for making payments between users. It is made possible by use of blockchain technology, a ledger for transactions that is owned and maintained by all the users of the system rather than being controlled by a single authority.
- NFTs are unique digital artworks that can be created or sold to fundraise or raise awareness of a charitable cause. An NFT is usually a digital image or video, which is stored on a public blockchain, with a unique identifier that cannot be replicated. NFTs are sold via auctions and they are built on the same technology of ledgers that are used for cryptocurrencies.
What are the opportunities?
Cryptocurrency and NFTs offer several opportunities for charities. Some charities in the UK already accept cryptocurrency donations or accept the proceeds of sales of NFTs. They are newer source of funds for charities to tap into and new donors may be found in those people who engage in cryptocurrencies or NFTs. As cryptocurrency is unique and identifiable, it is possible to trace funds through supply chains, meaning that donors would be able to see in detail how the charitable institution had spent their donation. This makes it possible to draw a clear link between a donation and the charitable activity that it funds, which could improve donor engagement.
What are the drawbacks?
There are particular issues around transparency, volatility and the environmental impact of producing cryptocurrencies or NFTs. For cryptocurrency, the transaction ledger often only lists the online profile of the user, so people can hide their true identity if they wish. Of course, charitable institutions will be used to handling donations from anonymous sources, particularly cash donations. However, the lack of transparency means that cryptocurrencies may be used to hide illegal activities. Charities need to be able to account for where donations come from and to show that they have undertaken reasonable due diligence for their donations to ensure that they are not used for money laundering or for transferring money to criminal enterprises. Cryptocurrencies make achieving these two things more difficult.
Cryptocurrencies can be extremely volatile because there is a limited supply, lack of central bank and possibility of countries introducing laws which affect their value. Last year, the value of Bitcoin fluctuated significantly after a crackdown by China on cryptocurrency mining and trading. This volatility means that the value of the donation could change significantly, potentially overnight, leading to difficult decisions about whether to accept the donation in cryptocurrency or ask for it to be converted into money.
There are also concerns about the environmental impact of producing cryptocurrency as the process of producing the currency can be deeply energy intensive. They are created by ‘mining’ which involves computers solving algorithms. Those algorithms are complex, requiring intensive computer processing to solve them, thereby using significant amounts of electricity. Some cryptocurrencies created more recently are designed to have less of an impact on the environment and there are moves to make existing cryptocurrency less damaging to the environment.
However, charitable institutions, particularly those linked to the environment, will want to consider whether it is appropriate to accept cryptocurrency donations given the environmental impact. Some charities are already abandoning cryptocurrencies due to their heavy carbon footprint. There have also been concerns about the environmental impact of NFTs because the major marketplaces for selling this art conduct their sales through Ethereum, a blockchain-based software platform. Ethereum maintains its records of transactions through mining and there is therefore a link between NFTs and the environmental impact of mining.
Is accepting donations of cryptocurrency or engaging with NFTs right for my charity?
The Code of Fundraising Practice provides a useful framework for considering whether the acceptance of cryptocurrencies or engaging with NFTs is in the interests of your charity. The standards you should particularly think about are:
1.1.1 Your [charitable institution or third-party fundraiser] fundraising must be legal and must be open, honest and respectful.
2.1.3 You [members of the governing body of a charitable institution] must act in the best interests of your charitable institution.
2.1.6. You [members of the governing body of a charitable institution] must act reasonably and carefully in all matters relating to fundraising. If you are not experts in fundraising, you must take appropriate advice.
2.2.1. You [members of the governing body of a charitable institution] must take reasonable steps to assess and manage any risks fundraising poses to your charitable institution’s activities, beneficiaries, property, work and reputation.
Trustees should seek appropriate advice and think about the code as they decide whether to accept donations of cryptocurrency, or to engage with NFTs to support their fundraising. You can also share your experiences of handling these issues by contacting us.