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Challenges to Crypto Funding: From Winning Trust to Gas Fees

Crypto donations can require special consideration.

Frozen cryptoFrozen crypto
 

In 2021, the cryptocurrency market was estimated as having a market capitalization of around $3 trillion, almost equal to the UK’s nominal GDP of $3.2 trillion. Since then, the estimated value of this market has dropped to $1 trillion, which, if it were a country, would still place it within the top 20 in terms of GDP, which places it close to the Netherlands.

Longevity Literacy VitaDAOVisit the VitaDAO website to learn how you can get involved.

Crypto is a significant, yet highly volatile, asset. It also continues to be touted by some reports as one of the ‘best-performing’ assets of the last decade, identifying its market potential while highlighting its underlying risks.

By the end of 2021, 295 million people worldwide had interacted with cryptocurrency, which is approximately 3.7% of the world’s total population or just less than the entire population of the United States.

However, cryptocurrency isn’t just about trading digital coins for profit. A study by Fidelity Charitable suggests that cryptocurrency owners are potentially more charitable than other investors; 45% of such investors donated compared to 33% of the wider investment community, highlighting the crypto community’s interest in doing good. This is supported by The Giving Block, which reported that their users donated ~$69 million via the platform in 2021 alone.

How can crypto technology be used for non-profits?

Non-profits can accept various types of monetary and non-monetary contributions, including crypto funding via donations. Crypto technology can be utilized to support nonprofit organizations or even form new ones. The UK’s fundraising regulator now has a dedicated section for this purpose, showing its growing popularity among nonprofits. Here are some of the crypto options available for nonprofits:

  • Direct donations are donations made using cryptocurrency directly into a nonprofit’s digital wallet. This will usually require some technical staff on the back end to manage the process and track the transactions.
  • A donation platform, such as The Giving Block, is an alternative to direct donations. For example, organizations such as Lifespan.io can accept cryptocurrency donations via Coinbase and The Giving Block. Normally, these platforms accept the donations and manage the payments, simplifying the process. However, they may charge a fee for their services.
  • Crypto exchanges, such as Coinbase and BitPay, also allow nonprofits to receive funds and manage the donation process. This does require some paperwork to account for taxes, donor information, and other information as needed by certain jurisdictions.
  • DAOs, decentralized autonomous organizations, bring together like-minded individuals to support specific aims and objectives in a decentralized way. For example, VitaDAO is a DAO focused on supporting longevity research via fundraising, IP-NFTs, hackathons, and more. While these are not specifically a fundraising tool, they can be used to support the work of an organization.

The opportunities of cryptocurrency funding

With many options available, organizations thinking of onboarding crypto funding or forming a DAO may be drawn in by some of the benefits of crypto platforms.

Taxes

In some regions, crypto is a non-taxable asset, so donors may feel freer to donate profits towards nonprofits. Similarly, in others, donating cryptocurrency is a way to offset gains in tax law, which the IRS considers a tax event. This means that donors may be encouraged to make donations, providing a potential opportunity for a nonprofit. Interestingly, The Giving Block noted that 50% of all donations were made in November and December, the end of the tax year.

Worldwide donations

Cryptocurrency is not tied to any singular location and is legal (or, at least, not illegal) to use in most parts of the world, meaning that organizations can widen their audience and deal with issues at a global scale. As 31% of donors already donate outside their countries, this provides a wider net for potential donations, which could be used to boost the effectiveness of the recipient organizations.

Technology opportunities

Across all industries, global spending on digital transformation is set to hit $3.4 trillion by 2026, with the majority of businesses attempting to increase operational efficiency. Nonprofits are no exception. Although nonprofits may not have the same resources as corporations, modern donors expect platforms that are easy to use and easy to donate. Upgrading an organization’s donations platform as part of a digital transformation strategy could provide increased organizational efficiency. At the same time, for organizations seeking a more decentralized approach, a DAO structure could provide opportunities for growth and increased collaboration.

Established platforms already exist

Luckily for many nonprofits, there is no need to reinvent the wheel. Platforms such as The Giving Block and Coinbase have already done all the technological heavy lifting and created tailored platforms for crypto giving. Nonprofits, in this case, need to establish a strategy for integrating them into their own platforms and ensuring their visitors are directed there.

Overcoming the challenges of crypto funding

Although there are significant benefits to employing crypto technology for non-profits, it does not come without its challenges.

Usability

Fidelity Charitable reported that 46% of would-be crypto investors experienced difficulties in finding charities that were open to crypto donations, while others reported that the process for doing so was ‘cumbersome’. This not only highlights the need for nonprofits to explore alternative financing methods but to make them user-friendly, which may present extra budgetary challenges.

Trust

As a new industry, it’s understandable that there is mistrust regarding cryptocurrencies, their value, and how precisely they can be utilized for non-profits. Industry scandals do little to improve their image, while functional use cases or industry support get little coverage. Improving trust will take time and goes together with industry calls for more coherent regulation, which could improve trust in the digital asset.

Gas fees

Sending cryptocurrency isn’t always free. Usually, it incurs something known as a ‘gas fee’, which refers to the cost it takes for the crypto ecosystem to perform a transaction. These can be quite significant. A recent example of this saw ConstitutionDAO, which raised over $40 million to buy a copy of the US Constitution, having to refund donations minus the gas fee. As it turned out, the total cost of gas fees to its members totaled approximately $1 million, making it quite a substantial loss. Although crypto industry entrepreneurs, such as the founder of Ethereum Vitalik Buterin, have spoken out about gas fees and taken steps to alleviate them, there is currently no perfect formula in existence yet.

Environmental impact

Especially for environmental non-profits, the underlying issue of cryptocurrency’s energy use could be a crucial factor in deciding whether or not to make use of the asset. Cryptocurrency is known to be demanding in terms of energy usage; however, there is little research to suggest how this compares to more traditional assets, such as the maintenance of fiat banking systems.

Transparency

Due to crypto’s digital nature, it is not always possible to know who a specific transaction is coming from. Many fundraising regulators require a certain level of accountability for donations, including, at times, a person’s identity to prevent corruption or other criminal activity. For nonprofits, this presents unique challenges when constructing the platforms used to collect donations and ensuring they are compliant.

Volatility

Cryptocurrency is a highly volatile asset, as shown by its market capitalization. This presents additional challenges for people seeking to utilize the funds effectively. Nonprofits engaging with cryptocurrency need to be aware of the risks and act with care.

Should nonprofits consider accepting donations in cryptocurrency?

The challenges of the nonprofit sector in fundraising and gaining support mean it constantly needs to look for new avenues of support and funding. Crypto provides a potential pathway for organizations to seek funds and gather together like-minded communities. However, there are challenges involved in creating the systems needed to capitalize from crypto donations or create a DAO platform.

Non-profits considering crypto donations, as with any new strategy, should explore how they fit into the overall aims of the organization and whether the investment in onboarding a crypto platform is the right choice for their needs.

Summary

As interest grows in cryptocurrencies and their related technologies, it’s no surprise that nonprofits are exploring this option for supporting their initiatives and even forming new ones. Challenges, such as trust, usability and gas fees, will require work to build a more functional ecosystem. However, initial prospects, highlighted in reports like those by The Giving Block, indicate that crypto could prove productive for nonprofits seeking out alternatives.

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About the author
Maria Isabella

Maria Isabella

Maria is a writer and editor with a passion for technology, health, and lifelong learning. With over 6 years of experience in content creation for the fintech and wellness industries, and 10 years in the non-profit sector, as well as a Masters of Science in Development Management, she is passionate about combining tech and healthcare to make the world a better place.
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