Forget the quaint bounced check. Fundraisers at nonprofits where that cryptocurrency is accepted must stay alert to wild value fluctuations and stay attuned to legal and policy considerations surrounding the cybersphere, which includes cryptocurrency, non-fungible tokens (NFTs) and Decentralized Autonomous Organizations (DAOs).
The so-dubbed Web3 — the most recent level of Internet innovation — is here, creating new opportunities for fundraisers and marketers who, nonetheless, need to stay abreast of any regulations, investment considerations and provenance of accepted assets.
Cryptocurrency, DAOs and How Regulators Are Responding To New Fundraising Platforms was the theme of a presentation at the annual Bridge to Integrated Marketing and Fundraising Conference in National Harbor, Md., by attorney Tracy L. Boak, a partner at Perlman + Perlman LLP in New York City and former director of the Pennsylvania Department of State’s Bureau of Charitable Organizations, and attorney Jeremy Coffey, senior counsel for the American Cancer Society is based in New York City.
The presenters cautioned that before embracing cryptocurrency and alternative assets, fundraisers and leaders should consider:
- Uncertainty of regulations
- Provenance of assets
- Record keeping/compliance
- Internal policies and procedures
- Legal compliance by partners (platforms, processors, etc.)
- Energy consumption
- Prudent investment considerations
- Fair market value concerns
“Given the volatility of the market and regulatory and compliance concerns, whether a nonprofit should accept virtual currency and if so, and what to do with it (keep versus liquidate) are important decisions that should be made carefully with the input of the nonprofit’s board and executive team in consultation with expert advisors,” Boak told the attendees.
Virtual currency (cryptocurrency), which began around 2008 and has exceeded more than 10,000 digital currencies, has troubled regulators for the past 14 years. The Internal Revenue Service (IRS) treats virtual currency as property for tax purposes and federal law labels people and entities administering or operating exchanges for virtual currency as money service businesses.
Managers at nonprofits where donations of virtual currency are accepted have to treat those donations as any other type of property. But oversight and regulations might be evolving for years as the U.S. Securities Exchange Commission (SEC) and Commodity Futures Trading Commission continue to explore regulations, the presenters said.
Unlike the American dollar — which has been around since 1792 when Congress passed the “Mint Act” establishing the coinage system and the dollar as the principal currency unit — long-term virtual currency has proven to be a highly-volatile asset, the presenters said.
This past May, the SEC announced the allocation of more positions to the unit responsible for protecting investors in crypto markets. The SEC, since 2017, also has initiated more than 80 enforcement actions related to fraud and unregistered crypto asset offerings and platforms, according to the speakers.
Be aware too, the presenters said, of non-fungible tokens – digital proof of ownership collectibles – that are emerging within the nonprofit sector. MAC Cosmetics recently partnered with the Keith Haring Foundation on an NFT campaign that aims to support HIV/AIDS organizations, for example.
A few entities labeling themselves as nonprofits also are emerging as Decentralized Autonomous Organizations (DAO), which involve a large amount of legal uncertainty, the presenters said.
Boak and Coffey briefly introduced DAOs, or organizations that are constructed by rules encoded as a computer program, controlled by members and not influenced by a central government. These novel but hazy corporate structures minimize overhead and administration by automating certain corporate functions.
“Like crypto and NFTs before them, DAOs represent potential disruption to the nonprofit ecosystem. But like crypto and NFTs, DAOs represent challenges for traditional nonprofits and their boards. Nonprofit managers should use caution if they are considering creating or working with a DAO, since it really is part of the Wild West of fundraising. There are few rules and little precedent,” Coffey told attendees.
In the philanthropic sphere, groups have begun using DAOs to address issues such as ocean health (DiatomDAO), carbon pricing (KlimaDAO), and biodiversity (Bloomeria).