We’ve talked a bit in recent months about both cryptocurrency and DAFs here on The Intelligent Edge, and this week my colleague, Kenny Tavares, pulls the two together in a thought-provoking piece. What do these two vehicles have in common, and how do they impact fundraising and prospect research? Read on…
Let me start with a disclosure: I’m a skeptic. When the media starts to buzz about new investment approaches and how it might benefit nonprofits, I see red flags. So, you can imagine how I must feel these days with a drumbeat of favorable stories about cryptocurrency (crypto) and donor-advised funds (DAFs). It’s not that I don’t support new ideas. However, I do worry about the consequences of not being more thoughtful about these changes.
In July 2021, Paul Sullivan of The New York Times, in a story about nonprofits handling gifts of cryptocurrency, noted that Fidelity Charitable Gift Fund, the largest donor-advised fund (DAF) in the United States, had already received $150 million in crypto this year, an increase of more than 435% so far. A number of other donor-advised funds, including those run at colleges and international institutions, have announced that they also accept crypto.
Blockchain technology, which cryptocurrencies run on, have made some transactions easier to track and more cost effective, providing more money for the nonprofit organization. But the skeptic in me wants to know why crypto gifts to donor-advised funds are surging. How will the growth of these two vehicles affect fundraisers and researchers? First, I think we should look at why each of these might be attractive to investors.
A common myth regarding cryptocurrency, according to Eswar Prasad, a professor at Cornell University and a senior fellow at the Brookings Institute, is that it is actually currency. Although cryptocurrencies such as bitcoin were designed as an electronic payment system, the transaction costs and high volatility make it unreliable for that purpose.
Cryptocurrency is an asset similar to publicly-traded securities. It is subject to a capital gains tax, so donating it to charity is an attractive way to alleviate that cost. Still, their volatility creates risks for organizations receiving them. Notably, the Pineapple Fund, a project that gave 5,570 bitcoins to 60 charities, initially was credited for its plans to give away the equivalent of $86 million. By the time of the disbursement, the total was closer to $56 million.
Cryptocurrency is anonymous, but trackable. If your username is ever linked to your identity, all your transactions in this space will be linked to you. Satoshi Nakamoto, the pseudonymous inventor of bitcoin, suggested in his original whitepaper that users use a different address for each transaction. Nevertheless, tracking down the holders of cryptocurrency may be more effort than most organizations are willing to make.
Right now, the role of cryptocurrency in philanthropy is small, but growing. Still, the need for tax relief may drive more crypto holders into the light and into the researcher’s view, but another wealth vehicle may stand in the way of transparency: donor-advised funds. The surge in giving to DAF’s, which is related to crypto’s appreciation in value, may serve as a warning to those seeking to overcome anonymity in philanthropy.
The donor-advised fund is a charitable giving vehicle in which the individual or organization surrenders ownership of funds deposited into the account but retains advisory privileges over where those funds might be given. The donor receives an immediate tax benefit, despite offering no immediate benefit to charitable organizations. The donor also has no time requirement to disburse funds.
Ray Madoff, a professor at Boston College Law School and the co-founder and director of the Boston College Law School Forum on Philanthropy and the Public Good, and James Andreoni, an economist at the University of California, released a report earlier this year suggesting that between 2014 and 2018, charities lost $300 billion due largely to the growth of donor-advised funds and the lack of distribution of those funds.
Billionaire philanthropist John Arnold has described the DAF as a “wealth-warehousing vehicle.” Madoff and Arnold have been lobbying Congress to pass legislation and Sens. Angus King (I-Maine) and Chuck Grassley (R-Iowa) are co-sponsors of the Accelerating Charitable Efforts Act, which would attach up-front tax deductions to the distribution of funds within 15 years.
What it means for us
Cryptocurrency and donor advised funds have one major thing in common that should get the attention of fundraising offices everywhere: anonymity. Through either vehicle, a donor can hide their identity from your organization, making stewardship, cultivation, and future solicitation nearly impossible. For researchers, the tasks of wealth capacity research and prospect identification could be stunted. Our inability to encourage donors to make larger donations could inhibit our growth – or worse – decrease our fundraising.
How big a problem is this? At the moment, a number of people who bet on the collapse of mortgage-backed securities are very skeptical of cryptocurrency in the long term. If the volatile crypto market crashes again, some investors, devoid of capital gains on this asset, may not seek philanthropy as a means of tax relief in the short term. Fidelity’s promotional materials suggest that 90% of donors identify themselves to recipient organization. Whether that means the name of the donor or the name of the fund in unclear.
Regardless, these trends forecast potentially challenging times ahead for nonprofit fundraising. We can’t necessarily change this arc, but as skeptics, we can move forward with our eyes opened and hopefully mitigate the anonymity these vehicles provide.