Redefining Charitable Giving in the Digital Age

The integration of digital assets into philanthropy has brought on a surge in cryptocurrency and NFT donations. In 2021 there was a massive increase in crypto philanthropy, reaching over USD 500 million in the United States. The trend is supported by a shift in donor preferences and nonprofit adoption. Donor behaviour is evolving, with a substantial percentage favouring cryptocurrency donations for their efficiency and impact. Charities recognise digital assets as a means of broadening their donor base, particularly among younger demographics: more than 60% of crypto users are under the age of 40, whereas the average age of traditional donors is between 45 and 65. 

Despite cryptocurrency market volatility, philanthropic use of digital assets remains robust. Diversification into stablecoins and NFTs for donations demonstrates the sector’s adaptability and resilience, particularly in the face of market uncertainties.

This expansion in digital asset philanthropy marks a significant shift in charitable giving, reflecting the way the landscape is evolving in line with technological advancements. This development will continue. The GivingBlock, a crypto donation system, has used three years of Comprehensive Philanthropy Allocation Index (CPAI) data to make a forecast. According to their projections, based on the last five years of bitcoin price data, charitable crypto giving to nonprofits — through the GivingBlock platform alone — will come to a substantial $10 billion by November 2032. This represents a noteworthy 2% of the entire current landscape of US charitable giving, underscoring the increasing impact of cryptocurrency on the philanthropic sector. This trend will receive further support from the following developments:

Stablecoins 

Stablecoins have emerged as the champions in terms of crypto donations, capturing a significant market share. In 2022, USD Coin (USDC) took the lead with a commanding 44% of donation volume, trailed by ether (ETH) at 24% and bitcoin, which took third place with 17% of donation volume. These statistics underscore wider market practices and a growing preference for stable-value cryptocurrencies as payment methods and means of asset transfer.

Decentralised autonomous organisation (DAO)

Web3 philanthropy continues to capture attention, with NFT and decentralised autonomous organisation (DAO) philanthropy gaining traction in 2022. Beyond bitcoin, these novel forms of donation organisation are proving to be an impactful way of collecting and utilising funds that is creating ripples of change. Given the Web3 community’s resilience during challenging times such as the Ukraine humanitarian crisis and seismic events in Turkey and Syria, we expect a continued collective response from this engaged philanthropic community.

Crypto has become the norm among leading nonprofits 

Crypto has seamlessly woven itself into the fabric of leading nonprofits, with more than 1,300 global nonprofit organisations now embracing cryptocurrency donations. Some of these crypto-friendly charities are based in Switzerland. They include SOS Kinderdorf, which began accepting crypto donations as early as 2020 and UNHCR, which started collaborating with the Cardano Foundation in 2022 via a charity stake pool created by Switzerland for UNHCR supported by funding of ADA 3.5 million from the Cardano Foundation.

The major advantages of digital assets are their potential for global reach, transferability and higher-value donations.

Before accepting digital assets, charities should consider the business and operational impacts to avoid any operational losses. Considerations range from compliance aspects such as anti-money laundering or terrorism financing to bridging the gap between digital assets and traditional financial systems. Education and raising awareness among employees and stakeholders regarding the complexities of digital assets are crucial.

The following points should be considered:

1. Custody and Safekeeping

Custody and safekeeping considerations are paramount when charities engage with digital assets, particularly given that their current bank relationships may not offer custodial services for these assets. This forces charities to explore alternative crypto custody options such as cold wallets and hot wallets or the option of engaging third-party custodians. Choosing an appropriate custody solution is crucial to ensure the security and integrity of the charity's digital holdings. Making sure that digital assets comply with the relevant accounting and reporting requirements also poses unique challenges. Crypto assets are subject to distinct treatment from both a fiscal and accounting perspective, and these approaches vary across jurisdictions. As a result, charities must navigate a complex landscape, adapting their reporting methodologies in line with the diverse regulatory frameworks governing digital assets. Establishing a clear understanding of custody solutions and navigating the nuanced fiscal and accounting treatment of crypto assets enables charities to effectively manage and report their digital holdings in compliance with the evolving regulatory landscape.

2. AML/KYC Requirements 

When embracing digital assets, AML/KYC considerations remain important – perhaps even more so than with traditional fiat donations given the anonymity inherent in blockchain transactions, which could potentially be exploited by criminals for illicit financial activities such as money laundering or terrorist financing. This means that rigorous adherence to the Anti-Money Laundering (AML) guidelines introduced by the Financial Action Task Force (FATF) is as crucial for crypto donations as for fiat donations, involving:

• Establishing a system for gathering information about donors
• Adopting compliance practices from other companies in the financial sector
• Implementing proper due diligence procedures.

It’s worth noting that taking advantage of the transparent nature of blockchain can also enhance traceability in financial transactions, promoting accountability and transparency. Many third party companies offer solutions for identifying digital asset ownership and the source of funds.

Failure to adhere to AML/KYC measures properly could result in reputational damage, leading to reduced donations or allegations of money laundering. It’s therefore imperative for charitable organisations to stay abreast of regulatory developments, employ advanced monitoring tools and collaborate with regulatory bodies to strengthen their defences against potential financial crimes. By proactively addressing AML and KYC considerations, charities can not only harness the benefits of digital assets but also maintain trust and credibility within the philanthropic ecosystem.

3. Taxation 

Charitable organisations are typically tax exempt in Switzerland provided that they meet certain conditions. Donations to such organisations are therefore not subject to income tax at the level of these organisations, no matter whether the donation is made in the form of fiat money or crypto assets. Likewise, if the digital assets are staked and the tax-exempt organisation obtains staking income, such income is not subject to income tax. 

Charitable organisations may be subject to VAT. This depends on the nature of the benefit received and the return provided by the charitable organisation. In the case of donations, grants, etc., it is necessary to check whether the charity is liable for VAT reverse charge (regardless of whether it is VAT-registered).

4. Risk Management & Liquidity

When charities explore digital assets, they encounter a unique set of risks that must be managed proactively. Given the ever-changing nature of digital assets and the significant consequences potentially involved, existing risk management strategies should be adapted continuously. An effective approach involves implementing controls to mitigate risks, ensuring liquidity considerations are accounted for and staying informed about industry developments. By doing so, charities can navigate the digital asset landscape while maintaining a sensible level of risk management.

5. Partnering

Given the complexity of this financial landscape, charities should consider partnerships with intermediaries when incorporating digital assets. Integrating digital assets requires specialised knowledge and infrastructure, both of which intermediaries can offer. These entities typically provide secure and compliant solutions for managing various digital currencies, ensuring regulatory compliance and mitigating risks associated with this innovative yet intricate form of contribution. Intermediaries also streamline the conversion of digital assets into traditional fiat currency, addressing liquidity concerns and facilitating seamless integration with existing financial systems. However, identifying the right partner can be challenging and necessitates thorough research, possibly involving a request for proposal (RFP) process. Once the ideal partner is selected, further considerations arise, such as determining how to interact with the chosen intermediary. Collaborating with a trusted intermediary not only simplifies the process for charities but also enhances transparency, security and accountability when it comes to handling digital asset donations. This fosters confidence among donors and effectively supports the charity’s mission, though it's important to note that internal expertise remains crucial.

Whilst there are some challenges to overcome, such as the lack of direct ability to pay with digital assets or the necessary operational adaptations for dealing with cryptocurrencies, the potential benefits of accepting digital assets are significant and lead to new sources of donations as well as entirely new donor segments. PwC can help you navigate through these challenges with one-stop services including consulting, tax advice, accounting and more. Our expertise in this field will enable your organisation to harness the advantages of digital assets while mitigating any associated risks.