An increasing number of charities have started to accept donations through digital cryptocurrencies, such as Bitcoin. But what are cryptocurrencies and how do they work?
Our expert, Dr Stephen Dobson, University of Leeds, looks at the considerations for non-profit organisations of using cryptocurrencies as part of the digital transformation of fundraising, as well as some examples of those in the heritage sector already tapping into this digital form of currency.
A cryptocurrency is essentially computer code which may be converted into legal tender through transactions recorded on a publicly visible online ledger. This ledger is called a blockchain and all transactions are verified between its users through a process called distributed ledger technology. The first established cryptocurrency, Bitcoin, was launched in 2008. Initially it was not widely used, but by 2022, Bitcoin was regarded as the ninth most valuable asset with a market capitalisation of $872.81 billion. There are now many other popular cryptocurrencies such as Ethereum, XRP, Litecoin, Polkadot, Stellar, Binance coin and Doge.
Cryptocurrencies present significant potential for the heritage sector to increase fundraising efforts by broadening donation formats. However, they also present some challenges regarding security and complexity.
Anyone who holds cryptocurrency has a public address (this is like your bank account number) and a private key (this is like your banking password). For the owner of currency to transfer it to you, they need to know your public address. To accept cryptocurrency, an organisation needs to open a wallet with a wallet provider. Many organisations accepting cryptocurrency payments make wallet details publicly available for convenience. However, this is not recommended as best practice since it may allow donors to gift cryptocurrency without your knowledge of the donation source. Another important consideration is that funds held in a crypto wallet will fluctuate in value, so donations need to be converted quickly if they’re to be used. The market as a whole is extremely volatile.
Cryptocurrency transactions can be more cost-effective than traditional currency transfers. This is especially the case for international transactions as there are no geographic constraints or currency conversion costs. There are also no banks and other third-party financial firms to charge fees.
From a reputational perspective, your organisation should ensure that donations are not anonymous and the usual considerations about the donor aligning with your core values and beliefs apply. The Charity Commission guidance (PDF file, 665kb) requires charities to ensure that they know their donors.
In 2019, the UK Jurisdiction Taskforce published the ‘Legal Statement on the Status of Crypto-assets and Smart Contracts’ (PDF file, 2.07MB) to establish a legal basis concerning cryptocurrency and crypto-assets. It established that crypto-assets (including non-fungible tokens or NFTs) should have all the legal status of intangible property. At the time of writing, a crypto-asset may be assumed a taxable asset for capital gains tax and inheritance tax purposes. However, it is important to discuss the implications for your organisation with a representative from HMRC to get the most up-to-date advice available.
A wide range of charities now accept cryptocurrency donations including:
NFT stands for non-fungible token where ‘non-fungible’ means a digital asset that is unique and not interchangeable. NFTs share similar technology to cryptocurrencies in that they also exist on a blockchain which certifies the ownership of the virtual items. An NFT can be anything in digital format such as art, music or virtual objects such as a 3D model of an artefact. So the NFT is like a certificate of authenticity. For this reason, it is not the same as, for example, simply having a screen grab of the image. As an NFT owner you have proof of ownership. Some NFTs are artworks in themselves as opposed to a record of a transaction. Since the cultural and heritage sector often focuses on unique and rare objects and artefacts, NFTs have generated a lot of interest. The sale of NFTs via a website or charitable auction can provide a valuable way of generating donations for those who perhaps are interested in the potential of crypto-assets but would prefer not to regularly deal in cryptocurrency.
The British Museum is one high-profile cultural organisation to start creating and selling NFTs of its exhibits via the NFT platform LaCollection. Recently, Sotheby’s reported sales of $100m generated through its new NFT category. While this is a small proportion of total sales for the auction house, it does demonstrate the increase of attention in the world of cultural heritage that NFTs are creating as an extension of the already popular area of heritage and cultural intellectual property.
For the buyer of the NFT the image, sound or media file may be viewed on any of the following devices:
1. TV monitor, LED screens or audio device
2. PC, laptop, tablet or smartphone
3. Social media platforms and websites
4. 3D printed physical copies
5. Digital photo frames (TokenFrame)
6. VR Headset.
This evidently is an area of interest and growth for the sector, but even though cryptocurrencies and NFTs are virtual and therefore not made from paper, plastic, or metal, they still have a significant carbon footprint. Research from a 2019 article in the scientific journal ‘Joule’ estimated that Bitcoin generates between 22 and 22.9 million metric tonnes of carbon dioxide emissions a year. This is due to the high levels of energy consumption required to validate the blockchain. Developing a greener crypto approach is an important area of research globally and the environmental impact of crypto-assets may be an important factor for your organisation.
- Cryptocurrencies are increasingly used by charities as part of the digital transformation of fundraising.
- The sale of NFTs through websites and charitable auctions are a new way of generating donations.
- The use of cryptocurrencies and NFTs is still evolving. Do careful research and consult a representative from HMRC and make sure you understand the risks and opportunities before you act.
Please attribute as: "Using cryptocurrencies and non-fungible tokens (NFTs) for fundraising (2022) by Dr Stephen Dobson supported by The Heritage Fund, licensed under CC BY 4.0