Crypto-philanthropy: How Bitcoin and Blockchain Are Disrupting the World of Giving

Much of the growing interest in bitcoin and other digital currencies has focused on individual financial gain. At the same time there is an exciting trend toward leveraging so-called cryptocurrencies for philanthropic purposes. Not only are a number of charities accepting bitcoin and other digital currency donations, but new philanthropic entities are emerging which utilize digital tokens and their underlying cryptography-based technology, called blockchain, in powerful and innovative ways. Over time these bold experiments have the potential to transform and upend the philanthropic sector.

Bitcoin fundraising

Over the last few years a number of charities and foundations have been trialing bitcoin donations. These include such well-known organizations as the Red Cross, Save the Children, United Way, the Wikimedia Foundation, and the Electronic Frontier Foundation. Once established, an online “wallet” allows charity institutions to accept bitcoin and other cryptocurrency donations and to exchange them for fiat currencies such as the dollar. In some cases online wallet providers offer 0% processing fees for nonprofits, compared to the 2% or more required by traditional donation processors. This means that potentially 100% of donations can end up in the pockets of charity organizations or donation recipients. Bitcoin donations to charity are also tax deductible and offer donors the added benefit of avoiding capital gains taxes on the dollar amount value of their cryptocurrency donations.

While it is difficult to say how much money has been generated through bitcoin and other digital currency donations in the United States, there is evidence to suggest that bitcoin giving is on the rise. Fidelity Charitable, which houses the nation’s largest donor advised fund, reportedly received $69 million in cryptocurrency donations in 2017, up from $7 million received in 2015 and 2016 combined.

In addition to direct digital currency donations, there are a variety of other innovative and unique platforms and projects underway in the emerging “crypto-philanthropy” space.

First among these are new crowdfunding platforms such as bitgive, bithope, and helperbit, which allow donors to make bitcoin donations to selected charities for their fundraising campaigns. To date most campaigns have only raised in the hundreds or low thousands of dollars per initiative, but this compares favorably with the annual average of $568 raised by nonprofit crowdfunding campaigns in the U.S.

In addition, a number of new platforms that leverage the technology underlying digital currencies (the aforementioned blockchain) are being adapted to address the issue of transparency in giving. Blockchain offers an immutable, secure, and publicly available database of transactions accessible by anyone online. Recently launched blockchain tools like Givetrack and Alice are able to openly track the flow of donations from donor to donee. According to Raphaël Mazet, CEO of Alice, “[As] donations can be made conditional to impact, and because everything is recorded immutably and transparently, anyone can verify what charities have achieved.” Even the private sector is getting in on donation tracking. China’s e-Commerce giant Alibaba created a blockchain charity tool called Ant Love in 2016. The system connects Alibaba’s 450 million users with more than 1,000 charities and is able to track transaction histories to help donors understand where and how their money is being used.

Charity Coins

Beyond cryptocurrency donations and tracking, a number of social purpose digital coins have been created to support specific nonprofit programs and endeavors. Clean Water Coin, for example, was designed to raise money for the nonprofit Charity:Water. The impakcoin is meant to raise money for social impact projects. Pinkcoin, a philanthropy coin which allows investors to both donate to charity and earn a return on their investment, is listed on major cryptocurrency exchanges and has performed well in comparison to other commercially traded digital currencies like Bitcoin and Ethereum (the number two cryptocurrency). Digital currencies such as Pinkcoin can be bought and sold for profit on these online exchanges, increasing in value when demand rises. Investors can also suffer a loss when demand for the coins decreases, but this is the same risk investors face when making other social impact investments with an expected financial return.

While most social purpose coins were developed externally to fund designated charity causes, at least one has been created by a nonprofit itself to fund both its own projects or those of other nonprofits. The RootProject has issued its own currency, called Roots tokens, which can be sold and exchanged for dollars to help fund self-run or partner poverty alleviation projects. Some Roots tokens will even be reserved to support a pension fund for project workers. The RootProject’s presale of Root coins generated 400% of their goal, or more than $400,000, while aiming for just $100,000.

Crypto-foundations

Another new arrival in the cryptocurrency for charity space is the “crypto-foundation.” One anonymous bitcoin investor, who first bought bitcoin when prices were in the single digits, established a foundation to give away 5,057 bitcoins — $86 million at the time. The motto of the donor’s charity, the Pineapple Fund, is: “Because once you have enough money, money doesn’t matter.” As more of the cryptocurrency nouveau riche think about ways to give back we may see more bitcoin and other digital currency philanthropies, in the same way that donor advised funds and community foundations have arisen to serve the giving interests of tech entrepreneurs and other wealthy individuals.

Further down the road we may even see a type of local, national, or global autonomous and decentralized foundation or fund, in which grant and financial distribution decisions are not made by foundation or aid agency staff, but through the votes of holders of foundation created tokens. Such a “Distributed Autonomous Foundation” would be governed by an external collective of shareholders with the right to direct donation flows and even produce and fund project ideas, potentially through majority token rule. This liquid and decentralized organization would live primarily in the cloud, minimizing or eliminating the need for institutional infrastructure and staffing. Digital currency donations would be made directly to recipient organizations or individuals in an automated fashion. The impact of donations could be measured by the types of tracking tools described above, informing next-round donation voting.

New Opportunities

One obvious benefit from the rise in crypto-philanthropy is the availability of new revenue streams for charity. Because direct-to-charity bitcoin donations are relatively easy to manage, bitcoin presents an attractive first-step opportunity for the giver and receiver. Studies show that millennial givers, in particular, want to have greater control over their giving and greater clarity on its impact. Blockchain-based donation systems offer effective systems for both. Importantly, it is expected that one in three millennials will own cryptocurrency by the end of 2018. As millennials become the largest group of givers in history, their rising level of comfort with digital currencies and blockchain technologies will likely make crypto-philanthropy more acceptable.

Blockchain-based systems may also help to improve the reputation of charities. According to recent studies, 1 in 3 Americans are said to lack faith in nonprofits, many believing that these institutions spend too much of their budgets on overhead and too little directly on programs. Reduced overhead spending due to improved operational efficiencies and disintermediation through blockchain technologies (e.g., direct donor to beneficiary giving) could help restore faith in charitable giving among skeptical givers. This in turn could lead to increased philanthropic engagement and a rise in overall giving.

In addition, new charity revenue streams could come from increasingly profitable blockchain companies, many of which have tremendous commercial potential, through the donation of a portion of their profits and currencies to charities. In fact one blockchain company called MFV already sets aside 1% of its tokens for charity donations.

In the future more charities, and even foundations, could produce their own cryptocurrencies, the sale of which (similar to Roots tokens) could enable a new sustainability model. A charity token exchange, developed exclusively for the buying and selling of charity tokens, may one day bolster a new market-based approach to philanthropy in which both philanthropists and charities make money from trading “digital currencies for good.”

Not only could nonprofits and foundations produce their own charity tokens, but also engage in fundraising through token mining. Mining enables cryptocurrency purchases through the computer-based validation of token transactions, and rewards the validators with bitcoin and other cryptocurrencies. One experiment in philanthropic mining is already underway. UNICEF’s Game Chaingers project recruits gamers to use the processing power of their computers to mine the Ethereum currency (Ether) to raise money in support of Syrian children.

Challenges, Challenges

Despite unlimited opportunities, there are many challenges and unanswered questions that could inhibit the growth of crypto-philanthropy and jeopardize its usefulness. Digital currency donations and blockchain anchored philanthropic systems are still new, and to date there is limited awareness and interest among individual givers, charities, and foundations.

One key barrier to adoption is the fact that blockchain technology is difficult to understand and explain. Some have likened it to trying to explain the Internet and its value back in the early 1990s, when there were few Web-based interfaces and tools to help ordinary users make sense of it. With the modern Internet, simple interfaces (e.g., Google) and use cases (e.g., social networking) make the value of the technology clear. This is not yet true with cryptocurrencies and blockchain technologies.

Second, the cryptocurrency market is extremely volatile and largely unregulated, with wild swings of currency values of 10% or more on a daily basis. Those charities choosing to hold onto bitcoin or other digital currency donations in hopes that their value will rise, or those dependent on them for predictable revenue streams, could be in for a rude awakening. (Note: The challenge of predictability can sometimes be mitigated by the immediate exchange of digital currency donation to fiat currencies, which is the practice of the Fidelity bitcoin fund).

Finally, some of the benefits that blockchain offers, such as reduced costs through automated and self-managed philanthropic systems, also threaten charities and charity intermediaries. For example, blockchain-enabled “smart contracts” required by token holders could potentially control how charities and charity intermediaries spend their money. Theoretically these smart contracts could allow the giver to allocate and release their donations only for specific line items in a charity budget. If “smart” donations are mostly or only allocated for program related expenses and not toward overhead expenses, donors could effectively control charity expenditures. This scenario could make it much harder for organizations to manage their own finances and to cover critical overhead costs.

The Future of Crypto-philanthropy

In the short term it is unlikely that cryptocurrency and blockchain platforms will significantly disrupt or displace traditional philanthropy, but they will drive further innovation and experimentation in the sector.

As donations through bitcoin and other digital currencies become more acceptable and commonplace, crypto-philanthropy will grow. The expansion of specialized crypto funds established by large charity funding institutions like Fidelity Charitable will help popularize and expand cryptocurrency giving. No doubt there will also be more testing of smart contracts and blockchain managed giving and tracking which, if successful, could establish a new norm for transparency in philanthropy. Among donors, the further implementation of these tools could lead to new expectations regarding who should have greater control over funding flows (the giver or the giving intermediary?) and raise demands for proof of impact. Ultimately, as givers and beneficiaries interact more directly, we may see diminished roles for charities, aid agencies, and foundations — in some cases even the removal of these entities from the philanthropic equation.

On the flip side, if greater transparency in giving and impact does lead to increased confidence in charities, Millions (or even Billions) of dollars more could be generated for the social sector.

Now is the time for philanthropists, foundations, and nonprofits to come together with social entrepreneurs, blockchain visionaries, and technologists to collectively guide the direction of crypto-philanthropy. The future of giving is for all of us to imagine and create, built on our common love of giving back.

For more resources on crypto-philanthropy and blockckain for the social good see here.