Should Charities be Looking at Blockchain?

One of the real life uses where blockchain will have a great impact in the coming years is in ensuring transparency and accountability for donations to charity – an area where several recent scandals have brought trust and donations to an all-time low.

Issues Charities are Facing Today:

Trust

Trust in charities is at an all-time low.

Charities have been plagued by scandal after scandal; accusations of aggressive cold calling or pushing for donations, the pitiful percentage of money intended for Haiti actually ending up helping anyone, and the disproportionate amount of funds raised spent on inefficient admin, to name but a few.

Charities have very little accountability, high percentages of donations don’t end up with the intended project, and people are increasingly put off donating because they don’t know where their money is going. The recent cases of some charities or their employees seemingly thinking that their donations are better spent on exploiting local women rather than on the projects the donations were intended for hasn’t helped the industry’s case.

Inefficiency

Research studies have shown that charity workers are becoming disillusioned and are leaving the sector because they don’t feel they’re making enough difference.

Charities tend to be inefficient, with up to 75% of donations going on admin, running costs and marketing. Many charities are dependent on the state, and, in a time when up to 50% of jobs are expected to be replaced by automation and outsourcing in the coming years, in the UK, apparently 1 in 30 employees work for charity. This is unsustainable.

Accountability

There is no accountability, and no way of tracking and monitoring where donations end up. This is especially true in times of emergency or disaster – when chaos reigns and even higher percentages of donations are left unaccounted for.

Outdated Model

The old model of charity fundraising isn’t working. Older generations were more likely to give in to doorknockers. After a series of doorknockers being found to be too heavy-handed with defenceless people, and the younger generation not accepting door-knockers or street fundraisers, as well as the declining Brexit economy (for charities in Britain) - charities are increasingly struggling.

The more people are losing trust in charities, the greater the percentage of donations is going to the larger charities that people know and think they trust. It is increasingly more difficult for smaller charities to raise funds. Out of 195,000 charities in the UK, 2500 get 80% of all donations. and 40% of UK charities make less than ￡10k a year.

People have increasingly been turning to online fundraising platforms, where they can donate directly to their chosen cause, often cutting out the charity entirely, as well as setups such as justgiving.com where money is raised directly for individual causes rather than charities.

Unnecessarily large parts of charities’ budgets are going on admin and marketing, as well as on forex and transaction costs. Studies have shown that many more people would be willing to donate to charities, if they had more evidence of impact and evidence for how their donations are spent. Not all charities have also been willing to adopt latest marketing trends, so they are simply not getting in front of the appropriate target market.

Charities are still, however, sometimes the best place to decide where donations are most needed, and we need a way to preserve their expertise and experience.

The Solution – How can Blockchain Technology Help Charities?

Transparency -the Ability to track donations

If donors can track their donations, and see for sure that their donations have arrived at their intended cause, and know that a high percentage of their donation is going directly to their chosen project, then this would increase their confidence, and would also likely lead to higher levels of donations. Blockchain technology allows donors to exactly where their money ends up, and even offers the opportunity to choose which project their money goes to, and when, as well as what their money is being used to support.

Often percentages of donations are lost due to corruption and inefficiency- especially in cross border donations and in disaster relief. Another distinct advantage of sending donations tracked via blockchain is that it cuts out any border and third party entirely – the money is sent in one transaction direct to the intended recipient.

Charities could also choose to make their incomings and outgoings- donations and expenditures- publicly accessible on the blockchain – this might be a huge leap of faith for them – but the added transparency might bring them massive financial benefits.

Blockchain encourages transparency – if people can see your in-goings and out-goings and see that they measure up – i.e. are as stated- people will have more trust in that charity and will be more likely to donate. Blockchain tech also allows donors to track their individual donations and see that they arrive at their chosen cause – this provides a whole new level of accountability for charities. Blockchain effectively provides away for finances to be publicly audited.

Restore Trust in Charities

Confidence in charities is at an all time low and many are struggling to get donations.

Blockchain based transparency might help to restore the reputation of those charities who are managing their funds well.

Lower Admin Costs

Because blockchain and smart contracts automate a lot of processes, charities will be able to save a lot of time and money on admin and internal processes, allowing greater percentages of funds to go to the end projects. Admin and internal processes are some of the biggest expenditures for charities, and blockchain will greatly be able to streamline expenditure on these.

Avoids Middlemen & Third Parties who Control Accounts

Over 300 UK charities had their funds cut off in 2016-2017 – by banks- for being accused of involvement in illegal money flows- because they were innocently sending money to projects in countries with terrorist activity. Banks were scared of being fined – so they instead hurt the charities. With blockchain, there is no dependence on a third party, so no one to close accounts or determine who can send what where. Rather, every transaction can be tracked transparently.

Benefits of accepting Crypto for Charities

Less Fees, and less delay in receiving donations

Practically, sending fiat costs money, especially when coming from overseas. International donors are often subject to high international exchange rates and transfer fees. Foreign exchange fees and credit card processing fees can cost charities from 1- 7.5% of all donations. This is an astronomically high figure, and might put off larger contributors, who don’t want their money going to finance the banks instead of their intended cause.

Whilst these donation methods have made it easier for the mainstream to donate, they still take away from charities’ already thin margins. Not only that, but international transfers especially can take days or even weeks until they reach charities.

Accepting donations via crypto cuts out the third party –the one charging the fees. Blockchain puts charities peer to peer with their donors. It can be free, or much cheaper, to send donations via crypto, and these donations can arrive instantly, or within the space of an hour, depending on which cryptocurrency is used to send the donation. Sites such as BitPay and Coinbase help facilitate these transactions, with Coinbase even allowing nonprofits to accept set limits of donations in crypto with no transaction fees. Sending fees via crypto might cost 1-1.5% of transactions vs up to 5% in sending fiat.

Tax Benefit to Donors

In some jurisdictions, crypto donors are afforded tax benefits. This means that the charity gets the full pre-tax value of the donation, which can mean a lot more in monetary value for them.

In the US, for example, where cryptoassets are treated as property, if those assets have been held for over a year, they can donate those cryptoassets with no tax liability, meaning that donors can write off the full value of that crypto, whereas, if that charity didn’t accept crypto but only fiat, that donor would have to cash out and pay tax on those assets, before giving the donation, meaning they would be able to donate much less in $ value.

Wider Range of Contributors

Accepting cryptocurrency simply opens the door to a wider range of people who might donate.

There are many early Bitcoin miners and investors who have made fortunes – they might not want to cash this out, due to tax liabilities, but might be much more willing to donate by sending Bitcoin directly. For example, the Pineapple Fund was set up by an early bitcoin adopter who suddenly found himself with a vast amount of money they didn’t know what to do with ‘What happens when your ‘play-money’ becomes a treasure chest, and you’re past the satiety point of money?’ – as they write on their site. They donated over 5000 Bitcoins, which when liquidated into cash were worth $55m.

Fidelity, which accepts Bitcoin and crypto donations for their charities, had a 10x increase from $7m in donations in Bitcoin and crypto in 2016 to $70m in 2017.

Many later investors have also made profits trading or investing and might be willing to donate these profits directly- in crypto. Cashing out into fiat incurs costs and tax liabilities- whereas crypto can be sent almost for free.

 Younger generations have until now donated less than older generations- however millennials and young people are heavier into new technologies, such as crypto. A YouGov survey also found that 18-24 year olds are more likely to donate via crowdfunding than to a traditional charity. Accepting crypto makes it more likely that younger generations, or other non–traditional demographics will also donate more.

Accepting crypto also makes economic sense to international donors. Sending fiat, including donations, internationally, incurs high fees. Many donors might not want to pay these high percentages to banks. Many people in countries with high economic volatility or instability also have more of their wealth stored in crypto.

Stand out from Competition

 There is huge competition amongst charities to attract donors- in the UK 40% get ￡10k or less a year- and only the top few charities get the majority of funds thanks to their marketing budgets. Accepting crypto makes a charity stand out- it’s almost free marketing, as well as opening up the donor pool to more people.

In the US, there are 1.5 million charities- it is hard for these to stand out and be noticed by donors, and most fail to do this. It is also hard for new charities to build up the trust and marketing needed to stand out to attract donations. Accepting Bitcoin/ crypto is just one way to stand out from the competition.

Anonymity for Donors

Donating by crypto provides more privacy for donors who might not want their personal information shared regarding their donations. Some might also believe that donations should be fully anonymous.

Cryptocurrencies also allow for anonymity due to the fact that the donors’ name, personal information, and identity is not disclosed within the decentralized ledger and hence, this may conform with the libertarian beliefs of those within the crypto community who could choose to be truly anonymous philanthropists for the very first time.

Advantages of being an early adopter

Donations in crypto, and spending in general, will soon be main steam, regardless if charities are set up for it or not. Those charities who do choose to get set up early, ahead of the rest, to accept donations in crypto, will become recognised in the space, will have the advantage of early crypto media, and will be familiar with the process, and so will be best positioned to accept donations in crypto in 5-10 years time, when this may well be the norm.

Disadvantages / Risks of accepting crypto for charities

Although blockchain is secure, the infrastructure around blockchain and especially around crypto isn’t, necessarily. Wallets and exchanges can and do get hacked, and if a private key is lost, then access to that wallet is lost, unlike with a bank, where new passwords can be set. This doesn’t matter if funds are sent in fiat, but is something to bear in mind for charities accepting donations in crypto and holding donations in crypto as opposed to cashing straight out into fiat.

For charities wishing to hold donations in Bitcoin or crypto, volatility is another major factor to bear in mind.

Charities planning to hold crypto assets must also have a legacy plan in place, ensuring that someone else is able to access the funds from where they are stored – i.e. knows the private key.