Monday, June 4, 2018
Do You Know How Blockchain Could Affect Your Nonprofit?
Posted by Paul O'Grady
Remember the early days of the internet? In the 1990s, most of us could not have predicted how that new technology would pervade nearly every aspect of our lives. In many ways, blockchain technology is a similar phenomenon.
Most of us first heard about blockchain as the backbone of the cryptocurrency Bitcoin. While Bitcoin still is the largest implementation of the technology, blockchain is about more than currency, and we continue to see new and exciting applications.
Although it’s still early days, the technology is already impacting nonprofits in a variety of ways. For example:
- Donor-advised fund Fidelity Charitable reported Bitcoin donations of $13.5 million in 2017, up from $4.1 million between November 2015 and December 2016.
- Publiq, a nonprofit media platform launched in 2017, is using blockchain technology to guarantee the authenticity of its content, in part to combat fake news.
- The Gates Foundation’s Level One Project is using blockchain to improve access to financial services for the underserved.
So, does it make sense to consider how blockchain technology could impact your nonprofit? To answer that question, you must first understand what makes the technology so powerful, and what it will allow you to do.
The Basics of Blockchain
A blockchain is a decentralized, digital ledger for tracking all transactions that occur within a particular ecosystem. Unlike a ledger that is maintained by a single organization and exists only in one place, it is distributed across every participant in the ecosystem. Transactions are recorded chronologically, and the data is stored on potentially hundreds or thousands of nodes (computers), which are simultaneously updated. All the nodes keep a copy of the ledger and validate with one another that they are recording the same information.
The ledger can be open to the entire public or just to a limited group. But since the information is stored on multiple nodes, it’s much more secure. It becomes extremely difficult to reverse a transaction or illicitly change the record, short of hacking into all the nodes and changing the information on every single one.
Due to its digital, distributed nature, blockchain has a number of positive characteristics that could be beneficial to donors, nonprofits and those they serve:
- Transparency. Donors like to know where their dollars are going, and blockchain technology is a highly transparent platform. For example, when someone donates cryptocurrency, the donor can see exactly how those funds are used. On the positive side, that transparency can strengthen trust and, ultimately, increase giving. But keep in mind that the increased transparency creates heightened donor expectations around demonstrating both how and why those dollars were used—particularly when it comes to overhead and other non-programmatic expenses.
- Security. A blockchain is a highly secure platform, since recorded transactions cannot be altered. Another factor that contributes to the security of the technology is its decentralized nature. A blockchain uses a large, decentralized network of computers. Traditional financial transactions must clear through the centralized database of a financial institution or government, which can be vulnerable to hackers.
- Anonymity. Cryptocurrency donors typically are anonymous. This anonymity can work to the advantage of some organizations, such as those with missions that are forbidden in certain countries. However, accepting contributions from unknown sources can carry risks. You should consider the possibility that you are accepting funds from donors who are not in line with the mission of your organization. Another unresolved issue is how this new technology will intersect with federal reporting requirements. Currently, nonprofits must identify donors of substantial contributions on Form 990. It is unclear whether the IRS will waive this requirement in cases where the nonprofit received anonymous donations via blockchain.
- Tax advantages. Cryptocurrencies are classified by the IRS as an asset, and as a result they are subject to capital gains taxes—unless they are donated to charity.
- Efficiency. Blockchain makes transferring funds anywhere in the world simple and quick. And because there is no centralized clearinghouse to impose fees, more of those donated funds can reach the intended recipients. For example, in late 2017 the UN World Food Program used blockchain technology to transfer funds to organizations supporting Syrian refugees.
Looking to the Future
Blockchain is likely to have a growing impact on all types of for-profit and nonprofit organizations, so it’s not too early to have it on your radar. Assess where it might enhance your mission and support your development and program delivery goals, and think about how factors such as anonymity and decentralization might be liabilities. This will help your organization take advantage of whatever the future holds for this exciting new technology.
Paul graduated from University College in Galway, Ireland, in 1989 with a Bachelor’s degree in Economics and Political Science. He joined Armanino in 1995. Paul heads up the nonprofit practice group at the firm and also serves on the firm’s Accounting Standards Technical Committee. Paul is a member of the AICPA and the California Society of CPAs. Paul also has extensive for-profit experience.