Nonprofits Should Prepare Now to Accept Cryptocurrency

Over the past year, there has been exponential growth in both the volume of cryptocurrency (crypto) donations to nonprofits and the number of nonprofits accepting such donations, either as cryptocurrencies or as liquidation to cash at the time of donation. This growth has been driven by a number of factors, including increased mainstream acceptance and comfort with the use of cryptocurrencies, potential tax benefits to donors, and the increasingly philanthropic and tech-savvy Millennials and Gen-Zers. Fidelity Charitable reported that its crypto donor contributions increased twelve-fold in 2021, to over $330 million. In addition, The Giving Block, a leading crypto donation platform for individuals and nonprofits, reported its total 2021 donation volume of approximately $70 million, an increase of 1,558% from 2020.

What are Cryptocurrencies?

Well-known examples include Bitcoin and Ethereum, but there are nearly 10,000 cryptocurrencies as the market continues to expand in 2022. What they all share is a virtual form with no corresponding physical manifestation, and they are traded in a digital marketplace. Cryptocurrencies are stored on networks using blockchain technology, which ensures the integrity of the transactions and data on the networks. Cryptocurrencies are also decentralized and mostly unregulated, so they are global in nature and not subject to significant government regulations.

Implications for Nonprofits

Nonprofits already accepting cryptocurrencies liquidated to cash on receipt include Save the Children, Susan Komen, International Medical Corps, No Kid Hungry, and the American Cancer Society. So, what are the implications for nonprofits? There is the potential for a much larger and international donor base, and a significantly increased volume of donations. However, there are also unique accounting, auditing, and tax implications that should not be overlooked before a nonprofit decides to accept crypto donations.

Of course, it is important to look at both the pros and cons of accepting cryptocurrencies. Crypto markets are volatile, and nonprofits face challenges posed by new technology and the unregulated virtual nature of the currency. There are also concerns about the environmental impact from the significant energy used by crypto networks and the electronic waste resulting from the disposal of computers. A number of initiatives have been organized to offset the negative environmental impact of crypto. The Crypto Climate Accord, which has a goal of making blockchains run on 100 percent renewable energy by 2025, aims to achieve net-zero emissions for the entire crypto industry by 2040.

Before accepting cryptocurrencies, nonprofits should also consider updating their current gift acceptance policy, or developing a separate crypto gift acceptance policy, to include guidelines for donating crypto assets and a policy for retention or liquidation.

Receiving Cryptocurrency Donations as Cash

There are generally three main options available to nonprofits wishing to liquidate cryptocurrencies to cash upon receipt. Option one is to use an outsourced third-party payment processor. This is the preferred option for smaller nonprofits with limited staff. The third-party payment processor liquidates crypto receipts to USD and transfers the proceeds to the nonprofit’s bank account. The third-party processor also sends a contribution receipt to the donor. Fees vary but generally depend on the size of contributions and the nonprofit.

Option two is for the nonprofit to use a crypto exchange and manage the process mostly internally. The advantage is lower costs resulting from internal management. However, this option requires a larger internal staffing capacity and the training of staff on the use of crypto exchanges.

Option three is to use a Donor-Advised Fund (DAF). The DAF accepts the crypto contribution and later provides the proceeds to a nonprofit as a contribution based on the donor’s overall preferences. The fees associated with DAFs are generally higher.

The best choice for nonprofits, therefore, depends on size, staffing, and the expected frequency and size of crypto contributions.

Accounting and Auditing Considerations

The AICPA and CIMA set up a joint working group on the Accounting and Auditing of Digital Assets, and issued their initial guidance in 2020 which they update continuously. The FASB, following its agenda consultation in 2021, has asked its staff to continue to monitor the area of digital assets due to significant stakeholder interest.

Cryptocurrencies are generally deemed to be intangible assets and are accounted for under FASB ASC 350, Intangibles – Goodwill and Other. They are measured initially at cost and tested for impairment annually, or more often if necessary. For the purposes of fair value measurement, the price in the principal market should be used to measure Level 1 fair value. Given that crypto markets usually operate continuously and without a traditional market close, a nonprofit should use a point-in-time convention that is reasonable and consistently applied for the purposes of measuring value.

When selecting a firm for their annual financial statement audit, nonprofits accepting crypto donations should engage an auditor who understands the proper accounting treatment and the potential implications for the audit. Auditing implications to consider include an evaluation of any new requirements and any challenges organizations face in accepting crypto donations. There are also new compliance and independence risks, particularly if audit team members hold the same crypto assets as those being audited.

Management is responsible for the internal controls surrounding the acceptance of cryptocurrencies, and formally updating financial and accounting policies accordingly, including provisions relating to the retention of crypto or liquidation to cash upon receipt. In addition, staff will need to be trained on the proper evaluation of third-party service providers, including the analysis of SOC reports, and crypto valuation and impairment methodology.

Finally, the nonprofit’s Board of Directors should have a working understanding of the issues involved, so that they can effectively perform their fiduciary duties of effective oversight and governance.

Conclusion

The time for nonprofits to prepare for crypto donations is now. Don’t wait until you are approached by a donor who wants to make a significant crypto donation and miss out because you are not ready to accept it.

There are some simple steps you can take today to prepare your organization to accept crypto:

1.    Your finance team should have a fundamental understanding of crypto. Sources like Investopedia provide crypto basics, and other online sources offer training.

2.    Revisit your gift acceptance policy. Make sure your organization has clear guidelines for accepting crypto as donations.

        3.    Work with a CPA firm that is familiar with crypto. This area is constantly evolving so it is important to work with a firm that is closely monitoring regulatory guidance and has an understanding of the accounting                 standards