How will Blockchain technology affect my charity?
Cryptocurrency, Blockchain and Bitcoin are all current buzz words in the business news but what do they actually mean and does this have any relevance to the charity sector? Read on to find out how this new technology could be both an opportunity and a threat for charities.
What is blockchain?
A Blockchain is essentially a ledger that can record all sorts of information such as financial transactions and legal agreements along with a timestamp. Each new “block” of information is linked to the others using complex algorithms with the data owned by all users of the system, stored across a peer-to-peer network instead of a traditional database which is stored centrally and managed by a single third party.
This set up makes the network harder to hack than a centralised system. Records cannot be easily changed once they have been created without the consent of everyone in the Blockchain. In fact the data is not actually changed rather a new version is added but the older version is still in the Blockchain. Furthermore the Blockchain database is transparent and can be viewed by anyone who knows how to access them.
Bitcoin is an example of a cryptocurrency currency which uses this Blockchain technology.
So, is it an opportunity or a threat to the charity sector?
One advantage from a charity donor’s perspective is that by using a cryptocurrency they would be able to see exactly where their donation ended up being used. If the donor gave a Bitcoin they would be able to track precisely how the charity spent their specific donation. By giving donors greater confidence it should encourage them to give more thus benefitting the charity. However this could lead donors to make unreasonable demands about how their donation was used which could make it difficult for charities to operate. Most donors do not particularly like the idea of funding the charity’s core operating cost, so this might have unwanted side effects for the charity. Once a cryptocurrency has been converted to a traditional currency all transparency is lost. However the cryptocurrency coin still exists and will travel onwards through all further transactions.
There is significant regulatory risk around the issue of Cryptocurrencies, called Initial Coin Offerings (ICO). A number of countries have banned currency trading platforms due to the use of ICOs for fraudulent fundraising or the use of currencies for money laundering via unregulated platforms.
Cryptocurrencies are non-geographic, this means that there are no foreign exchange fees. This should mean that charities using such currencies would be able to transfer money internationally more effectively and avoid the estimated 10% of aid which is lost because of banking fees. Charities operating in conflict zones often struggle to fund operations because of banking restrictions, which cryptocurrencies would be able to avoid. The transparency noted above would also give the ability to evidence that money spent on international development was going to the right causes and not being diverted by corruption or poor governance. However if cryptocurrencies are diverted then the reputation risk to the donor or charity could be significant. It is expected that in the longer term money transfer fees will reduce significantly as major financial institutions invest in Blockchain. For example Santander have developed a cryptocurrency, the SanCoin, which is currently used within the bank as an internal currency for staff rewards.
Cryptocurrencies can be highly volatile and illiquid. Their value can fluctuate significantly and this would probably out weigh any transfer fees on traditional funds. This means that charities should be clear about their risk profile towards such investments and be clear about their objectives for using them, for example in situations where traditional currencies can encounter barriers such as international payments.
The due diligence in terms of the identity of a donor of the cryptocurrency could be difficult. Even though every Blockchain is completely traceable by law enforcement agencies, charities may not have the technological capability or the legal power to identify the donor if they have not been disclosed. This may give rise to either money laundering issues or moral challenges for the receiving charity.
Smart contracts and governing documents
Funding agreements could be prepared using Blockchain technology. This would be a smart contract between the relevant parties, whereby payments could be automated once certain conditions are met. As a result of the transparency of Blockchain, funders would be able to follow exactly how their money had been spent. Longer term, Blockchain could also be used to carry out many of the functions of a traditional regulator, with the possibility of transparent, real time, financial information for charities available to the public.
In the Spring Statement the Chancellor announced that, working in conjunction with Payment Service Providers, they will use split payments to extract tax on internet transactions in real time. It is not hard to envisage that HMRC could use the Blockchain to radically overhaul Gift Aid. A donor could digitally sign a Gift Aid Declaration and HMRC could also sign to confirm that the donor is a tax payer. This could then remove the need to file Gift Aid Claim and HMRC could pay the Gift Aid to the charity more frequently.
In summary, the charity sector is unlikely to be radically changed in the short term by this new technology. Cryptocurrencies are only likely to be a welcome addition to a Risk Register if they are properly regulated and issued by reputable financial institutions. However charities should be aware of the latest developments which may in future disrupt the sector and perhaps consider how they might influence their development for social good. Hopefully this brief summary provides some food for thought.
Please speak to your usual Kreston Reeves contact if you wish to discuss this subject further. Alternatively, contact me here or by phone on +44 (0)330 124 1399.
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