As published on step.org/industry-news, Thursday 19 May, 2022.
Cryptocurrency donations to charities reached their highest recorded levels in 2021, but they carry significant risks for charity trustees who accept them, according to specialist law firms.
Although it is not known exactly how many UK individuals hold crypto-assets, the Financial Conduct Authority has estimated the number at 2.3 million adults, although the NatWest Chief Executive recently stated that 20 per cent of the bank's 19 million customers alone held cryptocurrency. Moreover, crypto-philanthropists give more frequently and in larger donation sizes than traditional donors, according to law firm Mishcon de Reya. In 2021, crypto-giving platform Giving Block recorded an average of USD11,000 per crypto donation, some ten times larger than the average amount received by charities in traditional currencies. In another case reported last year, a Scottish animal charity received a single cryptocurrency donation of GBP90,000.
Experts are now warning that although charities may be increasingly tempted to accept such donations, they need to be aware of the dangers. The recent sharp fall in the value of crypto-assets is one such risk. 'Owners of these cryptocurrencies (such as charity recipients) are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme if something goes wrong', comments Mishcon de Reya. 'If a charity is holding funds in the form of cryptocurrencies, they should be aware that their extremely volatile value classifies them as high-risk. Crucially, the charity will need to explore whether it has appropriate board expertise and governance policies in place.'
Governance questions relating to the source of funds is another issue. There is no explicit due-diligence guidance for crypto-donors, but the Charity Commission of England and Wales’ (the Charity Commission’s) general guidance directs charities to ensure they have procedures in place to identify and verify the source of any substantial donations, and should agree a policy on whether or not to accept anonymous donations. 'Where a crypto-giving platform is used, a charity should find out what donor due diligence that platform carries out, and what information the charity itself will receive', says Laura Moss, Partner at Wrigleys Solicitors. They should also ensure their financial controls are adequate to cope with crypto-donations, she adds.
Moreover, using cryptocurrencies affords donors the option to give large amounts of money without having to engage in the legal and regulatory requirements demanded by traditional financial institutions, says Mishcon. 'This means donors are not obliged to fulfil “know your customer” checks and can donate to causes completely anonymously', the firm notes. 'The introduction of cryptocurrencies into a charity's financial strategy may exacerbate the risk of money laundering or leave the charity unable to demonstrate an acceptable level of due diligence, on the basis that the identity of the donor and their funds may be unknown or unclear.'
Experts note that charities that accept crypto-donations may also encounter problems with their banks, some of whom try to restrict their customers' payments to cryptocurrency exchanges due to AML regulations. Trustees should carry out sufficient due-diligence on crypto-donations, say the law firms, as well as being aware of cyber-security threats and reporting any serious incidents such as money laundering to the Charity Commission.