Nonprofits: Should They Embrace Crypto Investment Opportunities?

Cryptocurrency is a highly discussed trend, and its use as a donation method for nonprofits is becoming increasingly popular. Cryptocurrency is a completely digital form of money that is logged in a blockchain, a technology that decentralizes data by spreading all of the information in a database across multiple internet-connected devices. This makes it more flexible and secure, as people no longer need to rely on financial institutions like banks to hold their money. Cryptocurrency is also highly attractive to donors for tax-planning purposes. However, due to its high volatility, it is unlikely to be a substantial part of a nonprofit's investment portfolio. This article will explore the topic of nonprofits and their relationship with cryptocurrency, including the benefits and risks of accepting it as a donation method.

Cryptocurrency's volatility

Cryptocurrency is widely considered to be a volatile asset class. This volatility is a result of its newness as an asset class, its decentralised nature, and its speculative value.

Newness as an Asset Class

As a relatively new asset class, crypto is still in its high-growth phase. The market, investors, and speculators are still finding their feet. The price of crypto will continue to fluctuate as new participants enter the market and try to establish a consensus on the fair value of digital assets.

Decentralised Nature

Crypto is decentralised, meaning it is not controlled by a central authority. This means that the price is more susceptible to the actions of large holders, often called "whales", who can buy or sell significant quantities of a particular asset, potentially sending its price soaring or tumbling.

Speculative Value

Crypto is not intrinsically valuable, as it is not backed by gold, diamonds, or any other physical asset. Its market value is based on speculation, which is essentially educated guesswork. This makes its price incredibly sensitive to even slight changes in investors' expectations or perceptions.

Volatility as a Risk

The more volatile an asset is, the riskier it is considered to be as an investment. This is because volatile assets have the potential to offer either higher returns or higher losses over shorter periods of time than less volatile assets.

Nonprofits and Crypto

Due to the high volatility of crypto assets, they are unlikely to be a substantial part of a nonprofit's investment portfolio. If a nonprofit board wants to maintain cryptocurrency as part of its organisation's investment assets, it must carefully consider the application of prudent investment laws and data security issues.

Strategies to Limit Downside Impact of Volatility

For less risk-tolerant investors, there are strategies that can be used to limit the downside impact of volatility, such as dollar-cost averaging. There are also now cryptocurrencies specifically designed to have low volatility, called stablecoins, which have their price pegged to a reserve asset like the US dollar.

Tax compliance

Cryptocurrency is considered property by the IRS and donating it is a non-taxable event. This means that donors do not have to recognise capital gains and, if they itemise deductions, they could potentially deduct up to the fair market value of the donated asset.

If a nonprofit decides to accept cryptocurrency, it must include it in its gift acceptance policy. This will guide the finance team in knowing whether to accept the transaction and the steps to take after it is received.

A contribution of cryptocurrency valued at more than $250 requires a standard non-cash donation receipt. For donations over $500, the donor must file Form 8283, Noncash Charitable Contributions, to receive a charitable deduction. If the contribution is valued at more than $5,000, the donor must receive a qualified appraisal prepared by a qualified appraiser to substantiate the valuation, and the organisation must sign Form 8283.

An organisation that sells cryptocurrency within three years of receiving it will be required to complete Form 8282, which could impact the donor.

If your organisation decides to accept cryptocurrency, be sure to include it in your gift acceptance policy. This will guide your finance team in knowing whether to accept the transaction and the steps to take after it is received.

Donor anonymity

To address donor anonymity, nonprofits can utilize various strategies. One approach is to use an intermediary 501(c)(3) organization, such as a donor-advised fund (DAF), to accept crypto donations on their behalf. This allows the nonprofit to receive cash grants without directly engaging with the donor or taking custody of the cryptocurrency. Another option is to use a crypto donation processor or a cryptocurrency payment gateway, which can automate receipts, facilitate conversion to cash, and, in some cases, provide enhanced donor information. Additionally, nonprofits can create crypto-specific donation pages on their websites, clearly explaining the need for donor information and assuring donors of the organization's privacy practices.

By implementing these strategies, nonprofits can navigate the challenge of donor anonymity while still reaping the benefits of accepting cryptocurrency donations, such as engaging a new donor base and tapping into a rapidly growing asset class.

Crypto regulation

The cryptocurrency market has exploded in recent years, with Bitcoin alone valued at about $653 million as of March 2021. This has prompted governments worldwide to explore ways to regulate it. As of 2024, some governments have created frameworks to protect users, while others are still deliberating. The high volatility of cryptocurrencies means they are unlikely to be a substantial part of a nonprofit's investment portfolio. However, nonprofits can benefit from accepting cryptocurrency donations due to their tax-deductible status and the potential for high returns.

The US has been slowly approaching regulation, but the process has been mired in court battles. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have been given powers to regulate, and the SEC has taken action against crypto-centric businesses with a string of lawsuits and complaints. Despite this, the US still does not have a clear stance on crypto, and the battle between regulators and the crypto industry continues.

California has enacted the Digital Financial Assets Law (DFAL), which will come into effect on July 1, 2025. This law establishes a licensing regime for crypto companies operating in the state, demonstrating a significant shift in California's approach to digital asset regulation. The DFAL includes consumer protection measures such as mandated disclosures about the risks of crypto investments and cybersecurity measures to protect against hacks.

• The European Union was the first to adopt measures to prevent illicit crypto uses, and the UK has recognised crypto assets as regulated financial instruments.
• Canada does not consider crypto as legal tender but has been proactive in regulating it, becoming the first country to approve a Bitcoin exchange-traded fund (ETF).
• Japan takes a progressive approach, recognising cryptocurrencies as legal property, while Australia and South Korea classify them as legal property subject to capital gains tax.
• China has taken a hard line, banning crypto enterprises and Bitcoin mining.
• Brazil has passed a law legalising cryptocurrencies as payment methods, and India remains undecided, with a bill to prohibit all private cryptocurrencies yet to be voted on.

The regulatory landscape for cryptocurrency is still evolving, and while some countries have taken steps towards governing its uses, it remains a slow and controversial process.

Crypto's environmental impact

Cryptocurrency has a large environmental impact. It requires energy, equipment, internet, and a global networking infrastructure to be useful. Some networks use as much energy as small countries to maintain a blockchain.

The largest country for Bitcoin mining is the United States, which accounts for more than one-third of Bitcoin mining activities. Bitcoin and Ether combined represent more than 60% of the total crypto-asset market capitalization. The dominant consensus mechanism, Proof of Work (PoW), is used by the Bitcoin and Ethereum blockchains. The PoW mechanism is designed to require more computing power as more entities attempt to validate transactions for coin rewards, and this feature helps disincentivize malicious actors from attacking the network.

As of August 2022, Bitcoin is estimated to account for 60% to 77% of total global crypto-asset electricity usage, and Ethereum is estimated to account for 20% to 39%. The energy efficiency of mining equipment has been increasing, but electricity usage continues to rise.

Global electricity generation for the crypto-assets with the largest market capitalizations resulted in a combined 140 ± 30 million metric tons of carbon dioxide per year (Mt CO2/y), or about 0.3% of global annual greenhouse gas emissions. Crypto-asset activity in the United States is estimated to result in approximately 25 to 50 Mt CO2/y, which is 0.4% to 0.8% of total US greenhouse gas emissions. This range of emissions is similar to emissions from diesel fuel used in railroads in the United States.

Cryptocurrency mining also generates significant electronic waste, as mining hardware quickly becomes obsolete. This is especially true for Application-Specific Integrated Circuit (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies. According to Digiconomist, the Bitcoin network generated about 10.52 kilotons (annualized) as of August 2024.

Cryptocurrency mining is often located where energy is abundant, reliable, and cheap. However, processing cryptocurrency transactions and minting new coins do not need to be energy-intensive. Bitcoin could be adjusted to use a non-competitive block proposing and verification mechanism. The proof-of-stake (PoS) consensus mechanism is an alternative to cryptocurrency mining that does not use extensive computing power.

The environmental impact of cryptocurrency is significant, and it is important for nonprofits to consider this when deciding whether to accept cryptocurrency donations or include them in their investment portfolios.

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