Controversial Currency Being Converted To Cash
July 2, 2014 Zach Halper
The University of Puget Sound in Tacoma, Wash., often receives donations from alumni so it wasn’t a surprise to Sherry Mondou, the university’s vice president of finance and administration, when 2007 graduate Nicolas Cary expressed interest in donating to the school.
The revelation was the form in which he wanted to give. Cary’s $10,000 donation was to be made in Bitcoins, specifically 14.5 Bitcoins.
Bitcoins are a virtual currency launched in 2009 that is quickly gaining popularity and controversy. Cary is chief executive officer of the Bitcoin firm Blockchain, which is one of the many so-called “wallets” that act as banks where users can store their Bitcoins.
The school’s leaders were already hesitant to accept foreign donations, let alone virtual ones. Mondou had some reservations. “We were proud and grateful that this young, successful alumnus wanted to give back to Puget Sound and we were intrigued by Bitcoin as a new paradigm,” said Mondou. “At the same time, we needed a better understanding and risk assessment of Bitcoin and needed to determine how such a gift transaction could take place.”
Part of the concern had to do with the negative press the currency has been getting in recent months. Mt. Gox, a Bitcoin exchange that was based in Tokyo, Japan, announced in February that 850,000 Bitcoins valued at $450 million at the time had gone missing and trading was suspended. Although 200,000 of those Bitcoins have since been found, the remaining 650,000 were still missing at presstime and there has yet to be a concrete explanation of how they disappeared.
At the time trading was suspended, the currency was valued at $565 per Bitcoin, less than half its value in November.
“Unfortunately there were some bad business practices there,” said Stephanie Wargo, vice president of marketing at BitPay, a payment processor for Bitcoins. “With an emerging technology not everyone is going to be successful.” Wargo also made a point that the price of Bitcoins has “rebounded nicely” since the Mt. Gox crash. Mondou, too, said that the value of their donation increased since it was originally made.
The Mt. Gox incident was soon followed by the death of a 28-year-old American woman living in Singapore who ran the First Meta Bitcoin exchange. Police ruled that the death was “unnatural” and was thought to be a suicide, though the reason for that remains unclear. More negative press followed when an article in Newsweek purported to identify the creator of Bitcoin. The problem is that person — Dorian Nakamoto — strongly denies the claim. He told media outlets he had never heard of the currency and claimed he was subject to harassment because of the article.
Despite this volatility, Mondou said the school felt comfortable dealing with Bitcoins, mostly because they would not have to keep the currency on hand. Instead, they could immediately convert it into cash. There was one problem, however. Having never accepted a donation of virtual currency, they had to find an exchange agent. Cary recommended the school use BitPay, a Bitcoin payment processor.
“Using [BitPay] made the gift transaction simple to process and eliminated the exchange rate risk,” Mondou said. ”The Bitcoin gift was immediately exchanged for U.S. dollars and funds were transferred to our bank account the next business day.”
The university has received three more Bitcoin donations, though Mondou declined to identify the donors. Combined with the initial gift, the school has received $12,570 in Bitcoins. Mondou said she anticipates receiving more Bitcoin donations and that the university will continue to examine other forms of digital currency.
“Because digital currency is in its infancy and is evolving, our assessment will be ongoing,” she said.
Cary said that he decided to make the donation as a “thank you” to the university. “I always wanted to give back to them [University of Puget Sound] when I was in a position to do it,” he said. “I was the grateful recipient of a lot of student aid.”
Cary added that due to Bitcoins, he has been able to pay off 100 percent of his student loans nearly a decade earlier than he would have been otherwise able. This is partly because, in his words, he is “dedicating [his] life to Bitcoins.” He first learned of the digital currency in 2011 from a friend and after doing research, he quickly learned of what he considers its benefits. One of the perceived benefits is the small transaction fee when compared to credit cards. Some Bitcoin processors, such as BitPay, will charge no transaction fee so long as the nonprofit provides the proper documentation.
BitPay Vice President of Marketing Stephanie Wargo said that they chose to have no transaction fees for nonprofits as a way to encourage organizations to get involved. “That’s one of the things we like to do to support nonprofits and to allow the Bitcoin community to work with their favorite nonprofit,” she said.
“The Bitcoin community is also incredibly giving,” added Cary. “With Bitcoin, anyone can instantly share their address and take donations from anyone, anywhere on planet Earth.”
The process for accepting Bitcoin donations with BitPay — or any other Bitcoin processor — is similar to any other payment processing company. Set up a donation widget on your website to add Bitcoins as a donation method. After you receive the donation, you can either choose to keep the Bitcoins or have BitPay process them into cash, which typically takes one business day.
“We act like any other payment processor. In this case, we only facilitate Bitcoin payments,” Wargo said.
For Bitcoin processors that don’t waive transaction fees, the price is still low when compared to credit card or PayPal transactions. For example, BitDazzle, which creates online stores for organizations to sell products for purchase with Bitcoins, charges a 1 percent transaction fee. PayPal charges 2.2 percent plus 30 cents per domestic transaction for nonprofits. The average fee for credit card transactions is between 1.95 and 2 percent.
“This is a worldwide payment method,” said Hieu Bui, CEO of BitDazzle. “You’re opening yourself to a world you didn’t have access to before.”
Mondou said that the university’s experience with BitPay was very good, and she said that the fact the transaction fee was waived helped make easier the acceptance and selection decisions. “Using a payment processor like BitPay simplifies the process for the nonprofit and donor alike,” she said.
Although dollars are the only accepted form of legal tender in the United States, Bitcoins are able to be legally traded and exchanged. Adam Levine, editor-in-chief of LetstalkBitcoins.com explained: “Legal tender laws require you to accept dollars, they do not restrict you from accepting anything else. If I want to pay you in seashells, and you like the idea nothing stops us although it must be reported as a barter trade.”
Jason Shim, digital media manager at Pathways to Education in Canada, which accepts Bitcoin donations, likened it to gold. “You could post on an online forum and look for people who are buying/selling or you could find an online exchange, in which you can buy and sell for fiat currency and have it deposited it directly into your bank account,” he said. “If you are a merchant, you could use something in which they would accept the Bitcoin, sell it, and convert it into cash, which is then deposited into your bank account.”
When a donor makes a gift to an organization, they count on a receipt that they can use for tax purposes. One of the concerns some organizations have is how they can guarantee this for a virtual currency. That’s why Pathways to Education took it upon themselves to become the first national organization in Canada to issue tax receipts for Bitcoin donations.
Shim said they started looking into Bitcoins as a donation method in March 2013 and fully launched their initiative in November. “Our main concern was how to handle tax receipting but the rest of it was pretty straightforward,” he explained. What Shim found out was that as long as they can establish fair market value they can issue a receipt for the donation.
In a release from April 2013, the Canadian Revenue Agency (CRA) announced its own position on Bitcoins, stating that any transactions involving the currency would be treated as barter transactions and that Bitcoin-related gains could be treated as income or capital depending on the circumstances.
Receipts are also given to donors through BitPay, said Wargo, and other Bitcoin accepting organizations are starting to follow the same path. This is all in an effort to bring more legitimacy to a currency that, while not officially recognized as legal tender by the Internal Revenue Service (IRS), is still subject to taxation, according to a recent notice published by the agency. Bitcoins are treated as “property” under U.S. tax laws and thus would be subject to capital gains taxes.
“A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property,” the IRS stated.
Bitcoins held for more than a year would be taxed at a maximum of 23.8 percent under capital gains and, according to Levine; normal capital gains rates are applied based on your tax bracket. This might not be a worry for nonprofits, however, as they are under no obligation to hold the Bitcoins and many choose not to, because of their perceived volatility.
Pathways to Education in Toronto, Ontario, Canada has received $2,200 in Bitcoin donations, with the majority of that activity happening during the online day of giving called #GivingTuesday.
The Lois Merrill Foundation (LMF) in Encinitas, Calif., is another organization that is beginning to accept Bitcoin donations and, like Pathways to Education, immediately sell off their Bitcoins.
The organization partnered with BitDazzle to create an online store where they sell their products for Bitcoins. According to Bui, it took only “a matter of days” to get their store up and running. “The idea that we could get something up and running on their behalf, it was a really attractive thing for us to do,” he said.
As they only just recently had the site set up, LMF Founder Angela Merrill said the group has not received any “significant” contributions as of yet, but they are very optimistic about the future.
“We feel that there’s a lot of potential with Bitcoins, and we wanted to be an early adopter of it,” she said.
LMF, like many organizations investigating Bitcoins, paid close attention to the Mt. Gox incident and did have some concerns about the currency’s volatility. They were ultimately swayed by the fact that they would never have to hold on to the Bitcoins.
“Once they learn they don’t have to ever touch a Bitcoin if they don’t want to, that gets them over the hurdle pretty quickly,” said BitPay’s Wargo. She added that the current cash value of Bitcoins is locked in for 15 minutes on their site.
“We felt we could convert [to cash] fast enough where it wouldn’t be an issue for us,” said Merrill, explaining how they got over the volatility issue.
“Bitcoin can be volatile but we mitigate that by not holding any Bitcoins. We immediately sell them off,” said Shim. The volatility is only an issue if you are speculating or investing in them, he said. “Look beyond the news and do research into it. There’s a rich story behind it beyond all the sensationalism,” said Shim.
Mondou of the University of Puget Sound echoed that point, saying that she thinks the popularity of Bitcoins is just starting to grow. “I can imagine that donors holding and transacting in Bitcoin will want to make their donations in that form due to the convenience and low transaction cost,” she said.
Bui said that there really is no downside for a nonprofit to accept Bitcoin donations since they will never have to handle a Bitcoin. And, if the price continues to grow, an organization can choose to hold onto them and sell them for the increased value. “It’s like a mini investment,” he explained.
If you do plan to hold onto Bitcoins instead of selling them immediately, Cary recommended following security best practices and to keep an eye on the value of the currency to figure out the best time to sell.
“It’s true that Bitcoin is prone to fast value changes. I would never advise anyone to invest more money into something than they are comfortable losing,” he said. “That being said, in the entire history, over the long run, there has only been about an 11-week period [the Mt. Gox incident] where you would have lost value.” E