Firstly, it’s important to understand digital assets terms. Anything in a digital form that has a value, an established ownership, and is discoverable, is by definition considered a digital asset. Some of the most well-known ones include videos, images, digital books, crypto coins as well as non-fungible tokens (NFTs). NFTs are cryptographic assets on a blockchain that represent an intangible and unique digital item, meaning that they cannot be copied or multiplied. Recently, NFTs have been a rising issue in the art collecting market.
A blockchain chains together blocks of secured data which record the transactions of digital assets. Blockchain technology allows not only the recording of transactions but also for individuals to deal directly with each other in a secure way, without an intermediary such as a bank or a government. The advantage of digital assets combined with blockchain is that they can be issued quicker than paper-based or physical assets, they are faster transacted, and have lower administrative and storage costs.
Recent developments in the digital assets space
The market of digital assets is still in an early stage. Nevertheless, there have been recent developments that facilitate philanthropic institutions to engage in the market.
Although donations of digital assets are still rare, there are several potential routes being used. First, one can donate in crypto assets. A nonprofit would need its own account for crypto assets in order to accept the donation. Afterwards, it may either keep the assets or transfer them into fiat money. Fiat money is backed by a country’s government instead of a physical commodity or financial instrument. This means most coin and paper currencies that are used throughout the world are fiat money.
The second option is to donate an NFT. While the market for crypto coins has been very volatile the interest in NFTs is still growing. NFTs can represent art, integrate rewards, or offer “money can’t buy” experiences, providing future opportunities for philanthropic institutions. In addition, NFTs can be traded via auctions or platforms. Instead of donating cash or crypto coins, a donor might give NFTs to a charity which may license them and create revenues.
Another option is that charities create NFTs on their own and offer them to donors as a reward for donations; for example this could be a ticket to a charity event or a video about the supported project. In Switzerland, a local nonprofit for elderly people successfully auctioned NFTs in order to raise funds for their new branch in the Metaverse. Another recent international example is “Charity Kiss”, a collection of NFTs that could create an endless circle of donations –with the primary sale up to 70% go to charity – and with the second sale 14% are transferred to charitable purposes.
Advantages of digital assets for donors and charities
Applying blockchain technology can be useful in fundraising and donor engagement, nonprofit governance, and provision of services, especially in cross-border philanthropy. The pandemic has accelerated these developments significantly, as physical interactions were limited if not impossible.
The major advantages of digital assets are its potential for access, transferability, and transparency. Donors might follow the money flow from their donation through charities to the beneficiaries based on smart contracts in a blockchain and, thus, be reassured that their donations create a direct impact and don’t end up in corrupt avenues. Additionally, donations of digital assets may offer tax efficiencies compared to selling the tokens and donating after-tax fiat proceeds. However, at the same time these tax benefits limit the opportunity of local governments, especially in the poorest and least industrialised countries, to create own tax revenues.
Another advantage for charities is that digital assets are easy to transfer, and beneficiaries may gain simple access. The major requirements are access to digital networks and a possibility to convert digital assets in local currency.
In recent years a growing number of platforms were established that promote digital assets donations. Some of the most well-known examples are BitGive, Blockchain Charity Foundation, or Give Crypto Foundation. Today most well-known NGOs accept donations of digital assets.
Risks of accepting donations
Whilst there are many benefits, one cannot deny the high risk of volatility of digital assets. Charities accepting donations tend to convert them rather quickly into their local currency. Some charities however may also decide to keep them consciously for reasons of diversification.
Another consideration is the question of reputational risk. For many traditional donors, digital assets have rather negative connotations. Thus, accepting and reporting digital assets might have a negative reputational effect and harm donations from conventional sources.
If charities keep digital assets without converting them, they also face reduced flexibility. Many platforms use their proprietary tokens as currency and offer only restricted options to cash out. Hence, the charities are forced to do transactions via the platform in order to create impact with the donations.
A consequence with broader attention is so called “surveillance philanthropy” i.e., the wish of donors to follow their money limits the potential for charities to react quickly to new demands. With the new opportunities of traceability and transparency for donors, charities become even more dependent on donor influence. At the same time beneficiaries and their representatives lose power of influence.
Hence, innovative matters or urgent needs of beneficiaries might not be supported because they do not fit within the given definitions of donation purposes. This is contradicting another trend emerging since the pandemic as more and more donors have shifted to "trust-based philanthropy” to allow for flexible application of the funds to where they are most urgently needed.
Charities not accepting donations of digital assets are either generally not prepared to hold them as part of a diversified portfolio or are restricted due to the regulatory framework they are operating in (licenses, reporting, custody requirements). Some charities however decline them for environmental reasons. The mining of crypto coins is very energy intensive, which conflicts with some NGO’s environmental protection mission. However, as the technology advances further and announcements such as “green” crypto assets emerge, these reservations may be reduced.
Blockchain technology may serve for more effective nonprofit governance as all functions of charity regulators could be automated using smart contracts. Registration, annual accounts and regular reporting with real-time information via blockchain could reduce costs of surveillance. However, the risk of monopolies and unintended consequences for charities and beneficiaries – such as the above-described donor dominance of purpose definitions – of these mechanisms should not be underestimated.
What is the profile of digital asset donors?
Despite the volatility of the market, the number of investors in digital assets is constantly increasing. Hence, there is not one type of digital asset donor. Most likely though they can be described as the next generation interested in technology, and open to new ways of funding.
This type of donor will be interested in more personal engagement, follow-up options for future activities and direct influence on decisions made in connection to their donation.
Altogether, digital assets have the potential to expand the pool of donors for charities, in particular, to include more younger donors. Studies show that Millennials and Gen Z are more likely than others to own digital assets, and many are starting to get involved in philanthropy while the great wealth transfer is taking place.
This publication is an edited version of recent publications of the Center for Philanthropy Studies (CEPS) at the University of Basel. The views and opinions expressed in this article are those of the author.
Please note: the information provided is for educational purposes only.