Social currency: Cryptocurrencies and the promise to charity
It’s fair to say cryptocurrencies and the blockchain technology that underpins them have moved more mainstream, as increasing numbers of people talk about both the potentials and pitfalls of a new form of currency, whose success hinges on replacing trust in a formal banking sector.
It’s a wave that has engulfed many sectors with its supposed transformative properties and that includes charities and charitable giving, whether the sector can sink or swim is the next question.
So just how does the non-profit sector benefit from cryptocurrencies, which ten years down the line since they first emerged, still have a host of issues that are still hotly debated? Issues that include whether cryptocurrencies will live up to their promise, the volatility, their ‘value’ as money particularly given the need to expend so much energy to mine currencies, and the inability to scale.
In spite of the barriers some charities have forged ahead, with a few becoming early adopters accepting cryptocurrencies such as bitcoin for funding because they align with the libertarian values of freedom and individuality espoused. There are currently only 13 verified charities accepting bitcoin.
In 2015, the Charities Aid Foundation (CAF) researched the implications for the sector and examined the state of ‘crypto-philanthropy’. The report found that there were clear opportunities for charities and donors but also noted a few considerable challenges in addition to those touched on above among them were: shielding anonymity, which meant funding from “morally dubious sources” and the problem of money laundering and counter-terrorism when a charity has to meet due diligence requirements.
Not a game changer?
CAF concluded after its examination that cryptocurrencies at that point did not “represent a game-changing development for the non-profit sector”.
It wrote, “In a world where most charities and their donors still struggle to come to terms with the far more mundane realities of charitable giving in an online environment, the idea of getting involved with entirely new form of money which demands both a high tolerance of financial risk and a high degree of technical expertise seems fanciful. And the fact that the overall value of crypto-donations has so far been very small bears this out.”
Small though the value of donations in digital coin form is, it is growing significantly. In 2017, the rate of charitable giving rose to record levels according to a report by Fidelity Charitable, the second-largest grantmaker in the US. Charities received $4.5bn through more than a million grants and that includes close to $70m in cryptocurrency donations such as bitcoin, which was nearly a tenfold increase on the previous year.
In 2017, Fidelity Charitable saw a nearly tenfold increase in contribution dollars of bitcoin and other cryptocurrency. And, while charities benefitted, the increase could be attributed in part as well to the rise in value of bitcoin from just below $1,000 in January 2017 to $19,000 in late December as investors sought to avoid a significant capital gains tax hit.
Still, Fidelity expects cryptocurrencies, as part of non-publicly traded assets in the US, to continue to grow in spite of the significant barriers when it comes to philanthropic as it is complicated both for individuals to give and for some nonprofits to accept.
Charities are happy to take on digital coins for funding purposes but the realities about the administration behind it for many cash-strapped organisations means there is a limit to just what they can take.
For example, BitGive, a charity that was among the first organisations accepting and using bitcoin to focus on specific areas of public health and environment, only focuses on bitcoin. It was a decision made early on by the organisation. Its founder and executive director, Connie Gallippi, said in a recent interview: “There’s a lot of stuff going on out there and a lot of noise and a lot of ideas that may or may not happen, a lot of scams just all sorts of things.”
Gallippi added, “We had a lot of people asking us about Doge coin back then and other kind of spin offs but the security is kind of the main issue and since then all these ICOs and coins and only one can guess at how many they really are. We don’t have the persons to keep up with all of that so we’ve just kind of stuck with bitcoin. I think that we may from time to time revisit this and who knows if over time things may change if we feel comfortable and more resourced to deal with other coins but for now that’s where are.”
Bring me blockchain
Cryptocurrencies is an exciting development but as we see it is an activity limited in scope to those with digital coins. The real prospect for charities is in the blockchain, which has been embraced more enthusiastically. So where will it help? Its decentralised nature is where the revolutionary impact begins.
As CAF describes, “If the predictions of some commentators come true, blockchain technology is going to have a profound effect on the ways in which people and markets operate and interact in the future: and as a result, there are likely to be profound implications for the nature of social action.”
We’ve discussed the advantages of bitcoin and other cryptocurrencies and its decentralisation means as the need for third parties melt away and currency is no longer geographic, then charities working in more difficult parts of the world may no longer have to deal with limited financial services or high transaction fees and are less vulnerable to fraud.
But the other opportunities are myriad and CAF writes a paper that outlines the three large areas where it will have the largest potential impact:
- Reduction of transaction costs through disintermediation
- Automating processes through the use of smart contracts
- Boosting transparency through asset tracking
Transparency ironically is a rather murky area for both charity and donor as it falls under a thornier discussion surrounding operational costs and how much money donors want to see charities are attribute to overheads.
As Gallippi sees it, charities are trying to drive the discussion to achieve results and away from the “overhead myth”. For example, should a charity consider its staff overhead? Gallippi points out that things that are vital to a charity’s mission and that the results actually getting done are sometimes categorised as overhead or admin but they are really direct costs to driving that impact.
However, for donors who want to see just where their money is going the blockchain provides this capability. Donors can trace funds all the way through a charity’s system. This ability could help address issues around trust as real-time financial information becomes readily available. But donors don’t just have to focus on money they can also see on-the-ground results of the projects.
BitGive launched a platform in October last year called Give Track that allows donors to do just this, using blockchain to allow the safe transfer of funds across border in just minutes while tracking all donations on an open public ledger in real time.
Charities are also beginning to look at how to use smart contracts and their potential as a ‘disruptor’. For many charities, there is a long queue between the donors and the end users when money is put to work, particularly in an international context from banks, NGOs, governments agencies and through to law firms. This reduces the amount that is eventually received where it is needed the most.
CAF asserts that blockchain “offers the possibility of disrupting the chain” because it is eliminating the third parties. “Currently anyone with a cryptocurrency wallet can send money to anyone else without regard to geographic boundaries or the need for currency conversion.”
CAF pushes the boat out in its blue sky analysis of blockchain and civil society potential arguing that by resolving the problem of lowering barriers to payment platforms that eventually they may no longer need dedicated philanthropy platforms.
If blockchain goes mainstream then CAF questions reasonably: “If enough people with disposable income are using blockchain, and so are enough people in financial need, can’t they simply interact with other directly?”
It cites two organisations already allowing direct donations through their platforms: GiveDirectly.org and Kiva and suggests that the philanthropic sector may do well as it begins to think about the value of blockchain about where it may eventually lead the sector and to become more clear about its own value as a centralised entity.
“What this demonstrates is that once you start thinking about the true potential of blockchain technology, you have to start challenging many of your own assumptions about the value that is added by centralisation.”
Many faces of blockchain
Transparency under blockchain opens up other avenues such as how charities are created, registered and monitored as the immutable open ledger could mean an end to regulation.
Blockchain is decentralised and this could prove to be a boon for traditional financial service players who have often cited the lack of interoperability and security that prevented them providing services to the world’s unbanked.
The Bill and Melinda Gates Foundation is at the forefront of this change addressing financial inclusion through the rise in digital payment systems and mobile technology. In October 2017, it launched an open-source payment platform, MojaLoop, which is billed as “a blueprint for connecting today’s financial services sector” and can be used as a solution to barriers that banks and providers seeking interoperability have traditionally faced.
Using the MojaLoop blueprint to create payment platforms will allow financial service providers to have access to the currently two billion unbanked people around the world. It may level the playing field certainly as the world’s poorest can carry out their daily transactions without having to rely solely on cash.
But, if blockchain can deliver on its promises of bringing cash digital, helping people to spend and save money more easily and securely, making banking low cost and accessible then it certainly opens up opportunities of access not just to the poor but to providers too.
At play in the real world
Circle, is a fintech blockchain organisation, with a missionary zeal to enable people anywhere to create and share value through the tokenisation of everything to billions of people around the world especially the vulnerable. It has created a peer-to-peer payment network over blockchain.
Marieke Flament is a managing director of Europe at Circle and paints a scenario: “Imagine an Indian farmer wanting security for his land,” says Flament. “He will be able to sell a portion of it directly to consumers with digital wallets using dollars or euros, without any intermediary. On the one hand, the smart contract means the farmer will gain. On the other, it creates a new investment opportunity for consumers who want to participate.”
One organisation delivering tangible benefits direct to the most vulnerable is the World Food Programme (WFP) used blockchain to distribute cash-for-food aid helping more than 500,000 Syrian refugees in Jordan and runs its refugee camp on the technology. Physical money is not required when people shop at supermarkets, instead they look into a camera and an iris scanner connects to their WFP accounts.
In using blockchain, WFP slashed millions of dollars in bank transaction fees by 98%. The UN has calls its payment voucher project Building Blocks and it runs on Ethereum tech funded by a $100,000 grant from the WFP’s startup incubator.
Not only has the company seen a drop in fees to middlemen for transactions, there are added benefits such as increased privacy for beneficiaries and accounts have been quicker to reconcile allowing the organisation to run its own accounts and payments.
Holding the double-edge sword
By 2030 charitable giving is projected to reach around £146bn. Charities, particularly medium-sized and smaller ones, still struggle and face an unpredictable economy, stretched local governments, failing public trust and a need for improving digital skills.
There is no reason that cryptocurrencies will be discounted in the charitable space even if cryptocurrencies prove to be stars that burned brightly for a short time. Charities that want to benefit in the future are currently thinking through how to utilise many of the features and blockchain technology, which could outlast the cryptocurrencies.