Considerations for Non Profits and Cryptocurrencies

The continued growth, development, and adoption of cryptocurrencies has forced many organizations around the world to consider how the influx of the asset class may impact them in the future. Organizations from Corporations, Governments, and even Non Profits have to take careful note of these considerations given the uniqueness of the technology and the asset class. Regulation, accounting, security, and taxes are key areas where organizations need to have policies in place to handle. After reading an article recently, I will try to highlights some of these aspects for Non Profits.

Specifically, Non Profits depend largely on the gifts they receive for funding their operations. Given the way taxation for charitable contributions and donations work, they may be highly sensitive to accepting cryptocurrencies as an asset. Given the increase in cryptocurrency usage and wealth after 2017, there are more cases being made for Non Profits to accept them as gifts.

First, it is expected that this type of property could be held for the long term given its continued development and adoption. However, it also makes the organization consider how to get a third party to accept and safeguard the asset. Second, donors may want to gift assets that have appreciated in price like cryptocurrencies without recognizing the gain. This is perfect for those newly minted crypto millionaires that have arised. Third, it is really just another asset class with only the need to understand how to convert it to cash in order to use it when needed. Lastly, having innovative systems in place to accept these assets could attract more sophisticated donors to the organization.

If the Non Profit decides to take that step, four steps that should be considered are as follows:
-Review and update the organization's gift acceptance policy;
-Set up systems, accounts, policies, and procedures to accept and secure this class of asset;
-Adopt accounting policies and adjust the chart of accounts as necessary to properly account for this class of asset if it cannot be readily converted to cash; and
-Understand and implement systems for gathering information needed to comply with all reporting requirements associated with accepting this class of asset.

Once accepting the new type of asset, the organization must consider the most effective way to safeguard these assets as they are not the same approach as centralized and custodial assets that are seen in traditional aspects like banks and securities. As widely reported, cryptocurrencies are prone to hacks if private keys are not adequately protected. Most will opt to leave assets on exchanges but we know that it is probably not the best choice. Therefore, a number of ways to protect the organization is to (1) use multiple wallets, (2) only hold small amount in web wallets, and (3) never share private keys with anyone. Given the governance of Non Profits, it may be easier to coordinate good policies surrounding private keys.

Another key consideration for Non Profits are the Reporting Issues associated with them. In particular, tax reporting is highly important considering the amount of documentation required for accepting gifts in these organizations. Current guidance from tax authorities treat these contributions as noncash donations which obligate the parties to value them at the time of the transfer. This brings Form 8283 (for the US) which acknowledge receipt of the assets in addition to the customary Donor Acknowledgement Letter. This has led to another concern regarding cryptocurrencies for Non Profit Organizations in that they often have feature not necessarily attractive to Non Profits. They are risky assets with high volatility which may lead to risks of loss if dependent on the funds. Some cryptocurrencies could have liquidity concerns and therefore are not readily convertible to cash which could highlight some concerns for the organization and its use of the funds. Even if they immediately convert to cash, it will count as two separate transactions for reporting purposes as well. Lastly, some Non Profits cannot accept anonymous gifts which lead to a number of governance issues considering the potential of cryptocurrencies being private to secure the identities of those transacting them. These concerns could lead to organizations not accepting them at all!

Accepting assets other than cash and securities has been a growing opportunity for Non Profits so I believe that many are watching carefully the advancements being seen in the asset class. We have already started to see even political campaigns accepting cryptocurrencies as a way to broaden the funding opportunities. Given the billions of dollars in the Non Profit Organizations, I will not be surprised if the asset class become a more important driver of contributions in the future as blockchain technology itself has the potential to disrupt and improve the accountability and transparency in that sector as well.