Cryptocurrency is emerging as a mainstream form of currency, which opens the door to new fundraising opportunities for nonprofits. Some organizations have already begun accepting donations in virtual currency.
However, nonprofits must remain cautious about the acceptance and use of virtual funds. Because cryptocurrency is a relatively new technology, the law has yet to define clear rules surrounding its use, especially for nonprofits.
What is Cryptocurrency?
Cryptocurrency is a virtual currency. Its name is derived from the word cryptography, or the study of secure communication techniques. The hallmarks of many cryptocurrencies are their secure and semi-anonymous nature.
Crypto transactions occur through blockchain technology – a shared immutable ledger that facilitates the process of recording transactions (in other words, the blockchain is a large and decentralized database recording every transaction involving cryptocurrency).
Virtual currencies are heavily decentralized. It is not created, nor is it able to be effectively regulated, by any government. This means that no one entity controls or creates cryptocurrency or the blockchain.
Instead, cryptocurrency is created and verified through a process called mining. Mining is performed by computers that attempt to solve extremely complex computational math problems.
When a computer successfully solves a problem it is rewarded with cryptocurrency. Anyone who has a computer powerful enough to solve these complex math problems can mine. This means that computers located everywhere in the world are constantly creating smaller and smaller amounts of cryptocurrency until a certain limit is reached. In the case of Bitcoin, for example, only 21 million can exist.
Solving complex math problems serves a different purpose as well. The problems are actually cryptocurrency transactions. Once a computer solves the problem, a transaction is completed. This means that computers from all over the world race to solve problems so they can be rewarded with cryptocurrency; and in solving a problem they facilitate a transaction. This illustrates one reason why cryptocurrency transactions are so secure because no one knows who is facilitating the transaction until it has already occurred.
Advantages of Cryptocurrency
Nonprofits of all sizes should consider accepting crypto-donations because it opens the door to additional fundraising. Additionally, cryptocurrencies make it easier to transfer funds directly between two parties.
The need for trusted third parties, such as banks or credit card companies, is becoming obsolete due to the secured nature of these transactions. Fund transfers are even completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for traditional transfers.
Disadvantages of Cryptocurrency
Cryptocurrency is still a new technology. Although more and more businesses have begun accepting them, it has yet to become ubiquitous. Because of this, once received, nonprofits typically convert these virtual donations into traditional fiat money. This creates an extra step for the nonprofit after donation, which may be inconvenient, especially for smaller organizations.
It is important to note the IRS treats cryptocurrency as property. This means that your nonprofit must follow the appropriate procedures for accepting noncash charitable gifts. For example, if a donor makes a gift of a cryptocurrency over $500 in value, they must file a Form 8283 with their tax return.
Cryptocurrency technology is a new and exciting arena for nonprofits. It provides for an additional mechanism of fundraising for organizations of all sizes. But it does require a little bit of additional work to implement.
Because of this, prudent nonprofits should implement a Cryptocurrency Donations Policy outlining their procedure for handling these unique donations. If your nonprofit is considering accepting donations in the form of cryptocurrency, remember to consult with an attorney for advice specific to your organizational needs.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.