The charity-cryptocurrency complex

It may appear that charities and proponents of cryptocurrencies benefit from working together. However, charities should consider the risks posed to their legitimacy by partnering with actors in the cryptocurrency space.

As someone who researches the use of data and technology by nonprofit organisations, I’ve been intrigued by the deepening relationship between proponents of blockchain technologies and individual nonprofit organisations (or the concept of charity more widely). There are potential future benefits of blockchain technologies for charities (such as increased transparency and verifiability). In reality, we haven’t seen many of those benefits yet. However, we have seen a rapid increase in charity-cryptocurrency partnerships and the widespread adoption of ‘charitable aims’ by cryptocurrency proponents. As cryptocurrency projects receive increasing criticism, I’m interested to see what nonproft organisations and cryptocurrency projects have to offer each other and what the implications are for nonprofit organisations of this increasing interconnectedness.

In the interest of complete transparency, it’s worth saying that I don’t hold any assets underpinned by a blockchain. I am generally highly critical of most current blockchain use cases, although I recognise the potential for uses that produce positive externalities. There are plenty of critical assessments of Web3, blockchain, cryptocurrencies, NFTs, DAOs, etc. (some of which I’ve put at the end of the blog) which don’t need to be reproduced here but are worth reading if you have the time. This blog focuses on cryptocurrencies, which whilst using blockchain technology, are worth thinking about separately from the broader potential of the underpinning mechanisms.

1) Why charities need cryptocurrency proponents

New income sources: Many nonprofit organisations in the UK and in the US have seen their incomes fall during the pandemic, whilst demand for services has often increased. They are used to having to attract income from a diverse range of sources and be responsive to changes in the wider funding environment. It is therefore not surprising that nonprofits see cryptocurrency donations (and sale of NFTs) as potential income streams. As speculative assets, many people (so called ‘bulls’) have made huge financial gain from betting early on legitimate cryptocurrency projects. The value of cryptocurrency increases can be released in a ‘tax-efficient’ way by using one of several platforms that aim to partner charities with crypto donors. In its annual report, The Giving Block platform claims to have processed nearly 70m USD worth of cryptocurrency donations to nonprofits in 2021, and processed 12.3m USD raised from NFT projects.

Income can also come from cryptocurrencies that have a charitable donation built into their operating model. There are 1000s of ‘charity’ tokens, most of which operate on the Binance Smart Chain and claim to give 1-10% of the transaction total to charity. For example, every purchase of Elongate ($EG) comes with a 10% fee, a portion of which is distributed to charitable causes. It is claimed that Elongate has generated over 3.5m USD for charitable causes. Pawthereum ($PAWTH) is a “decentralized, community-run charity cryptocurrency project that gives back to animal shelters and advocates for the well-being of animals in need”. It claims to have donated almost 500k USD to animal shelters.

Appear innovative: A far less important, but visible, reason for charities to accept crypto donations and partner with crypto proponents is to appear innovative and attract a type of donor which may not typically engage with formal charitable organisations. Whilst problematic (explored later), a large UK charity justifies their partnership with a crypto donation platform by saying:

Cryptocurrency is an innovative new kind of currency and we believe that accepting cryptocurrency will result in donations we may not otherwise receive, as well as connecting us with new types of supporters.

Also, looking into future trends, it looks likely that digital currency as a donation and/or as part of a legacy at some point will become a popular way to support charities and we want to be prepared for that eventuality.

2) Why cryptocurrency proponents need charities

To build community: It’s fair to say that crypto proponents need charities at the moment more than charities need them. As with any speculative asset, for the value of cryptocurrencies to rise against fiat currency (GBP, USD etc), demand needs to increase. The ‘developers’ behind new crypto projects create a sense of community and unity towards a common charitable cause by interacting with coin holders in Telegram groups or on subreddits and Discord servers and encourage them to proselytize for that coin. Users are made to feel like they’re part of something far bigger than buying a speculative asset, instead, they’re part of a revolution. Elongate aims to “redefine philanthropy” and eventually build a platform which allows donors to follow their donation to the point of expenditure. Elongate holders can earn $EG by promoting the token online and engaging with social impact organisations.

Except, investors often find themselves being left in the dark regarding the ‘next bag drop’, or whether the ‘devs’ will follow through on their proposed roadmap for adding new features and generating new use cases with the token. Unsurprisingly, it turns out that many crypto projects are highly opaque, centralised, and offer no recourse for investors who fall victim to a ‘rug pull’ scam or a failed coin.

The BBC recently pulled a feature on a crypto investor after it transpired that he was behind the failed charity crypto token, Orfano. Orfano’s ‘tokenomics’ included a donation of 2% of all transactions to children’s charities, and used a supposed 10K USD donation to Save the Children as a way of demonstrating its commitment to philanthropy. The Save the Children donation featured in promotional podcasts, videos and posts across multiple platforms. The ‘Orfano inner circle’ was promoting (otherwise known as ‘shilling’) this charity coin hard.

Orfano’s white paper listed a broad range of objectives, of which building the ‘Orfano foundation’ was one. In the end, the Orfano coin had to relaunch as Orfano X, shortly before being ‘pulled’ by the ‘developers’ for a variety of reasons. It’s impossible to tell if this was a malicious scam or the product of incompetence, but either way, support for Save the Children was routinely used to encourage people to invest money which they would soon lose.

Legitimise cryptocurrency: I have no doubt that many charity crypto investors genuinely wish to support worthy causes whilst at the same time increasing the value of their holdings, and of course, some cryptocurrency projects are more credible than others. However, even projects which are ostensibly set up to support a particular cause are seeking to legitimise cryptocurrency by creating demonstrable use cases to show the ‘value’ of blockchain and cryptocurrencies. The Giving Block has a fund for US nonprofits which are pro-crypto, Pawthereum aims to educate on the “benefit of digital assets”, and Binance’s charity arm partners with organisations such as Unicef and encourages investors to ‘ride out the dip’ by remembering all the “tangible impact blockchain and cryptocurrencies are making to communities in need”. Of course, the question is who really benefits from the use of digital assets?

By partnering with established nonprofit brands and claiming to support broad but undeniably worthy causes (such as animal shelters and environmental projects), crypto proponents are riding off the symbolic power of giving to charity. They are gaining a ‘good glow’ by appealing to positive externalities produced through cryptocurrency exchanges. The good glow achieved from charity-washing is used to distract from the fact that there is still a significant profit incentive at play and that, as with many Ponzi schemes, new support needs to continually be gained to prop up and increase the value of the cryptocurrency as existing holders cash out.

3) The problem for charities: a trade-off between output legitimacy and normative legitimacy

Charities rely on legitimacy because it determines whether people will engage with and trust and support an organisation. However, legitimacy comprises both output and normative legitimacy. Output legitimacy is conferred when organisations are seen to successfully deliver their end mission, whereas normative legitimacy arises from the sharing of values with a particular community. An organisation that enjoys output legitimacy, but not normative legitimacy, may successfully deliver a mission but not have the support of their wider community and stakeholders.

Whilst nonprofit organisations may gain a new income stream to help deliver their end-goal, they are risking their normative legitimacy by associating with cryptocurrency proponents. Cryptocurrencies are currently associated with environmental damage, unregulated speculative investing, and criminal activity. Of course, there will be cases where these claims are untrue, but there’s little room for nuance when it comes to reputation. Damage to normative legitimacy arising from crypto – nonprofit value clash has been seen in the cases of Mozilla and UEFA, with Mozilla swiftly reversing its acceptance of crypto donations.

Whilst there are ways of mitigating against loss of legitimacy, it’s very hard for people to accurately assess whether an organisation lives out its value-set or compare value congruency between organisations, therefore any future ethical cryptocurrency-nonprofit partnerships might be a hard sell. For cryptocurrency proponents, the difficulty in assessing value-congruence is a benefit, as by associating with nonprofit organisations they gain a ‘good glow’ and acquire normative legitimacy, albeit at the expense of the nonprofit organisation’s normative legitimacy.

Nonprofit organisations may be lured into partnerships through the promise of transparency, however, it is practically impossible for charities to ascertain whether a crypto donation is the product of money laundering or not. Of course, the same could be said for fiat currency, but there are due diligence systems in place to safeguard against suspect donations. Transparency is so poor that many charity crypto platforms choose to have photos and livestreams with donors to provide evidence to coin holders that the donations really are being received!!

As crypto actors seek to legitimise themselves by appearing as conventional social sector organisations, there is a risk that trust in the sector more broadly is compromised. Cryptocurrency projects that themselves masquerade as charities are harmful and difficult to distinguish from legitimate nonprofit organisations, especially given at least one-third of registered charities don’t display their charity number clearly on their website.

Alongside the loss of legitimacy, nonprofit organisations are being dragged into and supporting tech-utopia projects that promise a lot and deliver little. The ‘radical transparency’ of donations proposed by crypto-advocates is underpinned by the perpetuation of the nonprofit overhead myth. Donor pressure to operate with low overhead costs produces the perfect conditions for scandals to take place and real-world harm to be caused. It should be said that it’s not just nonprofit organisations that are falling victim to the mythologies of crypto proponents; there is a strong tech-utopia push in academia, an example of which is this peer-reviewed article on a nonprofit crypto payment platform which is co-authored by the founder of the platform and is dangerously close to a promotional piece.

It’s clear the charity-cryptocurrency complex is in operation, but that the net benefit is heavily weighted in favour of actors who are seeking to legitimise activities that are receiving a heavy dose of just criticism. Lots of charities will be able to do some important and brilliant work as a result of cryptocurrency donations, but I think it would be worthwhile to pause and consider the long-term risks to their own normative legitimacy and that of the sector more widely.

Further reading on blockchain, crypto, Web3, NFTs etc:
The Crypto Syllabus
Jemima Kelly’s FT Alphaville reporting
The Web3 Fraud
The Third Web
Rosenthal on negative externalities

On legitimacy, trust and charities:
Jon Dean’s The Good Glow
CAF’s work on blockchain and charities
Peter Howson on surveillance philanthropy
The commodification of trust
Forsters on charity crypto donations
Susan Phillips on reputation and charity crises
Trust and blockchain in the public sector
Ann Nevile on nonprofit legitimacy

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