Jeanne Koua, in leading law firm Blandy & Blandy’s Charities & Education team, discusses the factors charities may need to consider when receiving NFT and cryptocurrency donations.
In an increasingly digital world, charities may wish to consider whether and how they accept donations in the form of digital assets, as such donations can present unfamiliar challenges and risks which many charities don’t yet to know how to navigate.
Traditionally, if an individual wants to give £100 to a charity, that charity may check to ensure that the individual is a person of good repute and look to trace the history of the money being donated. However, tracing ‘traditional’ money is, ultimately, a very difficult task. The charity may rely on its own due diligence to ensure it knows the identity of the donor and to some extent guard themselves against receiving any illegitimate funds or the proceeds of crime.
Establishing provenance is one of the many difficulties posed by digital currencies, which are often considered to represent ‘dirty’ money, whether that be through obscure trade, criminal enterprise, or money laundering.
If an individual can donate £100 then that person should, following the same logic, be able to donate using digital currencies such as Bitcoin (BTC) or Ethereum (ETH).
The issue is that it is impossible to trace digital currencies back to the time that they were minted or acquired, therefore placing a far greater burden of identification on digital transfers when compared to traditional transfers. This is why the use of NFTs is arguably becoming more appealing.
What is an NFT?
Under English law, NFTs (non-fungible tokens) are considered to be property in the same way works of art and other valuable assets are regarded.
A NFT is a digital asset linked to the ownership of unique physical or digital items which cannot be replicated or substituted in any way. The authenticity and ownership of NFTs is verified using blockchain technology, which allows for them to be traded.
What About Other Cryptocurrencies?
Most cryptocurrencies, however, are fungible. The Cambridge dictionary describes “fungible” as something that is easy to exchange or trade for something else of the same type and value.
Bitcoin and Ethereum, for example, are fungible. A fungible token can be exchanged for any other token of the same kind. These tokens are identical to one another. Therefore, they are interchangeable and not unique. They are easily traded, meaning that their ownership can change constantly, and they are not easily traceable.
|Examples of Fungible & Non-Fungible Tokens|
These key differences make the NFT market much more appealing, but it is still evolving; and so are the legal and regulatory issues tied to digital assets.
Many owners and creators of these digital assets have considered donating large proportions of their profits to favoured charities, where donations can be made from NFT sales or auction proceeds. This makes it easier to verify the identities of the donors, as the assets are tangible and can be traced back to the donors. However, the lines become less clear when it comes to fungible cryptocurrency donations, where it is often not easy to identify the donors nor trace any trading activity.
The Charity Commission has published guidance in which trustees are urged to think carefully before investing in cryptocurrency or accepting donations.
Whilst acknowledging the real risks in engaging with crypto assets, as it isn’t yet fully clear what challenges and opportunities digital currencies may provide, the Commission pointed out that it wishes to help promote innovation in the sector by encouraging trustees to consider how they might change and improve how they operate, to better deliver on their charitable purpose.
The Commission noted that several charities already accept cryptocurrencies or assets as donations, and where they do, they generally convert them immediately into regulated assets or traditional currencies.
We would always advise trustees to carefully consider the due diligence they undertake before investing in or trading cryptocurrency, by evaluating the benefits and risks as they would do with regards to any important decisions. This should also include taking appropriate professional and legal advice.
For further information or legal advice, please visit www.blandy.co.uk.