Non-Profits, NFTs and Cryptocurrency

Friday, September 24, 2021

Ever since Bitcoin’s meteoric rise to fame in 2012, cryptocurrencies have been used in an increasingly diverse array of transactions.  One of the most recent and notable expansions of their use has been into the world of non-profits and philanthropic giving.

It is extremely appealing for individuals with crypto investments to make crypto donations to non-profits because by doing so they can avoid capital gains taxes.  This idea is attractive however, it doesn’t really occur that way.  If capital gains are not recorded properly then they will be taxed at the rate at the time they are assessed for taxes and not at the time of purchase.  Instead of paying taxes on assets that have appreciated when exchanging their wallets back to USD, they can simply write off the full amount of their donation on their taxes.  However, these donations can be risky for non-profits because of donor anonymity and the volatility of digital assets.

Anonymity of Donors and Transparency

Some organizations have suggested that because of the immutability of crypto transactions on the blockchain and the fact that transactions are visible to the public, the blockchain could increase the transparency of a non-profit’s operations.  However, the main issue with this proposal is the fact that even though crypto donations are recorded on the blockchain, donors do not need to disclose their real identities.  Instead of increasing overall transparency, it allows non-profits to accept donations from potentially tainted sources, including funds obtained as the result of criminal activities.  In the fall of 2020, a group known as “DarkSide” extorted millions of dollars using cyber-attacks and ransomware.  They subsequently donated $10,000 in Bitcoin to Save the Children and The Water Project respectively, leaving the organizations with a complicated legal and moral dilemma.  The Water Project made no comment, while Save the Children announced that it would not keep funds donated by hackers.  Further all compliance laws still apply to cryptocurrency and the federal government still has jurisdiction over activities involving cryptocurrency.

Volatility of Currency

The volatility of cryptocurrencies also makes them inherently risky for non-profits.  By the time a donation is made and exchanged to USD, the value of a particular coin could have already severely fluctuated.

In an extreme example, the donation of large amounts of certain “meme coins” to charities has the ability destabilize the value of the entire currency itself.  Meme coins are currencies that were created satirically but have gained widespread popularity due to influencers and social media.  Vitalik Buterin, the creator of Ethereum, donated 500 ETH and over 50 trillion SHIB (Shiba Inu), a meme coin, worth around $1.14 billion, to the India COVID-Crypto Relief Fund in May of 2021.  This prompted investors to panic and led to a 35% drop in SHIB’s price.  The founder of the Crypto Relief Fund released a statement saying that the fund would liquidate the fund in a thoughtful and gradual manner so as not to jeopardize the value of the coin.  However, this stipulation somewhat inhibits the fund’s mission of providing emergency relief to those currently suffering from COVID.

Non-Profits in the NFT Space

In addition to the rise in popularity of crypto donations to “mainstream” non-profits, there has also been the recent creation of non-profits that specifically cater to NFTs.  As a refresher, an NFT (Non-Fungible Token) is a digital image intended to be preserved as art whose ownership can be tracked using blockchain technology.  They are bought and sold using cryptocurrency.

These non-profits claim to help NFT artists promote their work through community building and guidance, but require donations from the artists themselves in order to use their services.  In one organization, several of the “featured artists” that donors would purportedly be supporting were also listed as founders of the non-profit.  If donated funds were truly going to be used to promote the careers of the non-profit’s leadership and founders, this would be a clear example of inurement.

Furthermore, some of these “non-profits” are not registered as such with the IRS in the US meaning that they are also not legal.  Soliciting donations while passing an unregistered organization off as a charity is a violation of charitable solicitation registration laws and can lead to charity fraud charges.  The NFT space is full of artists and collectors who want to “get rich quick.”  However, this also makes it a prime space for organizations who are purportedly there to help members of the NFT and crypto community, but in reality are also trying to make a profit themselves and to line their own pockets.

Conclusion

While the intersection of charitable giving, cryptocurrencies, and NFTs has the potential to be positive, there are legal issues that must be considered by donors and by non-profits before transactions occur.  Keep in mind that just because transactions happen on the blockchain does not make them inherently trustworthy and transparent, and be suspicious of organizations that look like they have been designed as a mechanism for digital artists to solicit donations that end up in their own pockets.

Lindsey Dennis
202.454.2854
dennisl@butzel.com

Teresa Taylor
202.454.2885
taylortn@butzel.com

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