We are now seeing the growth in the use of cryptocurrencies in the real economy, as they become a more mainstream route to investing, trading and moving assets.
This has presented a challenge to the charity world. Regulation has not really kept up with this exponential growth in cryptoassets; given that they are in their relative infancy, there are real risks inherent in engaging with them.
So what should a charity do if a donor wants to support them in this way? And with stories of investors making big gains, should charities be investing in cryptocurrencies?
If a donor wants to make a donation in cryptocurrency, the charity needs to consider how they can receive the funds as these cannot be paid directly in to a normal bank account - a crypto investment platform is typically needed.
Knowing the donor and source of funds becomes more challenging with the lack of transparency that cryptocurrencies can present and this remains a key consideration for charity donations.
Such a donation leaves the charity with a straight choice: immediately convert the donation into a traditional currency (i.e. pounds sterling) or hold the donation in the original cryptocurrency in the hope that it will increase in value.
For almost all charities, the safest route is to realise the donation into pounds sterling. Cryptocurrencies are very volatile, and while big gains can be made, so can big losses – and trustees have a legal duty to protect the assets of their charity.
That is also the reason why charities should be cautious about investing in cryptocurrencies. Whilst trustees with financial experience and financial managers will probably know their way around traditional investment vehicles, few will have experience in this brave new world; investment advice should be taken.
There are a number of risks inherent in engaging in the world of cryptocurrency:
They are notoriously volatile, with values fluctuating wildly. It is very easy to lose a lot of value very quickly (although equally it is possible to make big gains).
Regulation in this area is still developing – cryptocurrency is not covered in the SORP, for example. So trustees may find it difficult to remain within the rules, such as they are.
By their nature, there is a lack of transparency in the crypto world (this is one of its major attractions for investors). Knowing your donor may be tricky, and avoiding fraud and the danger of money-laundering is much more difficult.
Security: digital wallets are nowhere near as safe as traditional assets and are not covered by the usual FCS protection which assets held in regulated institutions enjoy. Hardware failure, hacking and theft are all big risks.
Cryptocurrencies are banned in some countries, so if your charity operates in these countries or has beneficiaries in them, you may run the risk of falling foul of their laws.
The Charity Commission advises that trustees should think very carefully before investing in cryptocurrency, and suggests erring on the side of caution until more is known about how the market works, and until there is more and better regulation in the UK.
At the moment this seems sensible advice, given trustees’ duties and responsibilities in terms of protecting their charity’s assets (and reputation).
But that should not deter charities from accepting donations in cryptocurrency, provided there is transparency about where the donation came from; but in most cases, it is sensible to convert such donations into a traditional, regulated currency at the earliest opportunity.