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Tuesday, July 30, 2019

Blockchain for Nonprofits: Greater Trust, More Donors, Lower Costs

Posted by Clayton Lowery

Blockchain will revolutionize a wide range of industries in many ways. Its potential to change nonprofits goes less noticed than some other use cases, but its ultimate impact on nonprofit organizations will be substantial. Some of the significant changes are still in an experimental phase, but there are many immediate benefits to preparing a nonprofit for this digital future.

The basics of blockchain

Blockchain is a decentralized, immutable ledger in which entries are secured by cryptography. Each transaction must be agreed to by the majority of participants/nodes to make it into the ledger. Among blockchain’s notable benefits are:

Decentralization:  The network is “trustless” and is not controlled by a single, centralized party.  In public blockchains, anybody that meets the hardware requirements can run a node and participate in the network. In private chains, permission is granted to new nodes by the existing nodes in the network.

Immutability:  Transactions in a blockchain ledger are final and cannot be altered. These ledgers work like append-only databases with new transactions added to the ledger at select intervals. For example, every 10 minutes a block of new transactions is added to the bitcoin ledger. This block, and all the previous ones before it, will never change and will always be available for anyone to verify.

Cryptography:  This is the magic behind blockchain. Cryptography allows a user on a blockchain network to authenticate their transactions using their private key and the nodes to validate that the transactions were properly authenticated by that user without ever needing to know or reveal that private key.

About digital money

Digital money is the native currency of a blockchain network. Blockchains do not require a native digital money, but digital money requires a blockchain. The types of digital assets vary greatly across the different blockchain networks. 

The Bitcoin network is simple: The entire blockchain is just a recorded history of where the bitcoins are moving to and from. The Ethereum network uses their digital money to power smart contracts on the network (often referred to as gas).  Other blockchains use their token as a utility currency to access the services the network provides. Many private, enterprise blockchains such as Hyperledger do not have a native currency.

When entrepreneurs are creating a new blockchain solution, the issue of digital money is often the most difficult question to tackle.  Also known as “tokenomics,” these decisions are what give the digital money its inherent value, incentivize network participation and drive the velocity of the currency.

Blockchain and the role of trust

Blockchain is often referred to as “trustless.” It will change how we trust others in society. Many institutions exist as trust intermediaries. From banks to lawyers to title companies to personal IDs – these models all afford some aspect of trust in a system. Blockchain allows us to transact and make agreements with others without the need for a third party to resolve a transaction or mediate a dispute.

Bitcoin and other digital currencies allow us to transfer value peer to peer with finality and without a bank needed to facilitate the transaction. Smart contracts allow us to make agreements with others based on a set of conditions that automatically execute through code and pay the proper party. So, there’s no more worry that the other party won’t pay what they owe.

Blockchain land registries give a complete and transparent history of a property that is readily available to all and no one can tamper with. Decentralized identities give each of us control to reveal to others only the information we want to without giving them ownership of that data, greatly reducing our personal exposure to cyberattacks on a third party.

The declining trust in nonprofits

Worldwide, trust in many sectors — government, banking, energy, the food industry — is in decline. According to a poll in The Chronicle of Philanthropy, nonprofits also face problems related to lack of trust:

  • 35% of Americans say they have little or no confidence in charities
  • 50% say that in deciding where to donate it is very important to know the organization has low overhead
  • 68% say it’s important to have evidence that the charity’s programs are effective
  • 13% say charities do a good job of spending money wisely

Bad actors have harmed the entire industry, and many would-be donors, unfortunately, stay on the sidelines. Independent organizations have been developed to hold charities accountable for their actions and how donation money is spent. They have found their share of serious problems that further erode public trust in charity.

What if there’s a better way for nonprofits to hold themselves accountable to their donors? Blockchain has arrived at the perfect time.

Areas blockchain will impact

Transparency and accountability: Much of the news around cryptocurrency focuses on its privacy and anonymity. While these are desired features for certain users and currencies, blockchain also allows for incredibly transparent movement of money. A donor sending money to a nonprofit in cryptocurrency could see when and how their donation moves and how much of it ends up at the desired destination.

This feature is particularly useful for charities sending money to countries or international organizations where the risk of corruption is high. Through blockchain, nonprofits that want to hold themselves to a higher standard can essentially open their books to donors and give them a full picture of how the organization is using its funds.

New donor base: Cryptocurrency is borderless and can be sent to anyone, anytime, anywhere.  For nonprofits, this reality opens an entirely new donor target market for whom their products or sponsorships were previously inaccessible. Even in these early days of crypto, nonprofits accepting the digital currency have already benefitted from a number of large donations.

The Pineapple Fund, started by an anonymous early bitcoin buyer, has donated bitcoin worth over $55 million to a wide range of charities, such as The Water Project and EFF. In April 2019, Ripple co-founder Chris Larsen donated $25 million in cryptocurrency XRP to San Francisco State University – the largest gift ever made in a digital asset to a university.

GiveDirectly, a charity that provides grants to the world’s extreme poor, received $1 million in crypto tokens from OmiseGo and Ethereum founder Vitalik Buterin. They built a website that shows donors a live feed tracking how their donations are impacting the recipients. These donations give us a glimpse into the future of a new kind of giving.

With the growing market of stablecoins (cryptocurrencies designed to maintain a steady value) such as Facebook’s Libra, donor demand to send digital assets to nonprofits will only increase. Stablecoins offer all the benefits of crypto without the volatility that has held back bitcoin and others from mass use. In the case of Libra, it will be available for all the world’s Facebook and WhatsApp users to donate in seconds with a click of a button.

Transaction costs: in the fall of 2018, someone moved 30 bitcoin worth around $194 million for a fee of $0.10, a transaction which would cost tens of thousands of dollars via banks.  The recipient of the bitcoin had the funds ready to spend within an hour. This event demonstrates the powerful potential of transferring value digitally. With traditional payment systems, settlement time is measured in days. Crypto is measured in minutes — and potentially seconds in the near future.

What the future holds

Benefits such as new donor targets, transparency, and lower transaction costs can be achieved currently by on-ramping your nonprofit into this new digital world.

As noted earlier, smart contracts are digital agreements between parties that automatically execute once certain conditions are met. The terms of the contract are contained in the code on the blockchain. They aren’t quite ready for wide use yet, but they offer a peek into this new future.

Potential uses for smart contracts range widely. Companies or individuals could initialize a smart contract with their favorite nonprofit stating that once they achieve a designated profit level, a percentage is immediately sent to that charity. Alternatively, a nonprofit could lay out specific goals in their annual plan and agree to a smart contract with a set of donors whose donations will automatically trigger as the nonprofit achieves each goal. Or a smart device could be programmed to donate certain savings such as computing power or leftover electricity to a charity.

Even more futuristic are smart contracts designed around the entire operation and governing of a charity. Known as DAOs (decentralized autonomous organizations), a few of these have popped up in the early blockchain days related to lending and crowdfunding.

A nonprofit DAO would operate entirely on code, with organizational decisions made by a majority vote of the members of the DAO. These are extremely experimental, but a successful iteration of a nonprofit DAO will arrive in the future.

How to get started

More and more foundations, nonprofits, private schools, and museums are accepting cryptocurrency for payment and donations.  Do you want to be ahead of the curve?  Future-proof your organization by getting involved in crypto and blockchain early.


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