Crowdfunding sources have become popular for collecting money to source funds or good causes. The Internet has given rise to these platforms because they don’t require any physical venue and greater audience with a global reach. The funding platform uses a type of crowdsourcing, in which social media is used to spread the news across various Internet platforms like Twitter and Facebook. There are different types of crowdfunding platforms available now that provide access to fundraising ranging from social justice causes to technology projects.
There are actually two types of crowdfunding. One is for-profit and the other type is non-profit. A well known for-profit crowdfunding platform is GoFundMe. This type of fundraising can be used to collect funds from anyone on the Internet via a payment processor. On GoFundMe, they provide a target goal of money for fundraising. Once the target is reached, the account that created the fundraiser will collect the money for a beneficiary or cause. Users on the platform raise money usually for good causes, like to help a person with financial problems. Likewise for-profit can be used to fund a person or organization starting a project. This is the purpose of KickStarter. Projects are funded with the good will of the fundraiser to provide the finished product to those who made contributions to the fund. Both GoFundMe and Kickstarter take a cut from the funding.
Non-profit organizations who collect funds can go through various agencies and even grants (both private and government). These are large organizations that run charities and social services that also require donations to continue their operations. Non-profits include research agencies, social justice advocacy and interest groups. There are various challenges to handling the processing of these funds. It can be more chaotic than for-profit companies because the sources of funding can be hard to trace. Sometimes collections are not via the Internet but rather through postal mail or direct contribution. Accurate budgeting has been one of those problems, since accounting issues can arise when the numbers don’t add up.
Blockchains can be a perfect match for fundraising, using cryptocurrency. This is because the blockchain provides transparency, accountability and immutability of transactions. Such features give non-profit organizations an audit trail for fund sources that are not subject to manipulation and control by a single entity. It is decentralized and peer-to-peer, allowing a donor to send funds directly to a non-profit organization’s digital wallet. The transaction is created on the blockchain, and cannot be reversed once it is committed. It records a timestamp of the donation, along with the donors public address and the amount donated. The identity of the source is pseudonymous on the blockchain, but the non-profit organization does not need to know the name since anonymity is permitted for donations. Most donors who release their identity information to the non-profit, will do so for tax related purposes. The blockchain will also hold the charity or non-profit who collected the money, accountable for the donations since the transaction can be seen by everyone.
According to the IRS, cryptocurrency donations are tax-deductible. If the recipient is a public charity, the deduction is capped at 30% of your adjusted gross income (assuming that selling the property would result in a capital gain). If it is a private foundation, the cap is 20%. The advantage to paying in cryptocurrency are the potential deductions in taxes. For donations above $500 in the US, a form 8283 is required. Tax laws are subject to their own jurisdictions, so it will be different from one country to another.
Cryptocurrency also provides a frictionless way for making cross-border donations possible. If a donor from the EU or North America wanted to make a donation to a charity in the Philippines, it would require a wire transfer through a money remittance service. That requires a third party to facilitate the transaction, so that means the transfer provider gets a cut of the amount sent by the donor to the charity. The blockchain can resolve that without any hidden costs, other than a small transaction fee and can efficiently settle the transfer of value. Besides taking a cut of the funds, some wire transfer services can take between 1-5 days to complete. A typical transaction using ETH (Ethers) can settle in less than 5 minutes or on the same day. With cryptocurrency, there are no third party and the transaction is conducted directly between the two parties.
Funding with cryptocurrency is expected to increase in 2020. An article on the Asia Times explains how the blockchain is the future of philanthropy across the world. Recent studies about Bitcoin within the charity sector also reflect that cryptocurrency donations represent 1%–5% of the payment methods used for charitable donations, with over 100% growth in some countries, according to Funraise and Nonprofit Tech for Good’s 2019 “Global NGO Technology Report.” A real world use case in cryptocurrency fundraising is for COVID-19. The Stellar Development Foundation launched a program to match donations given in Stellar Lumens (XLM), which was powered by Stellar-based Lumenthropy, a fundraiser that supports charitable organizations. Additionally, The Giving Block announced the start of the #CryptoCOVID19 alliance, and Paxful launched the “Africa Fund”to ensure PPE, supplies, water and other necessities were provided to communities throughout Africa. Unicef has also started using cryptocurrency for funding COVID-19 relief efforts.
The acceptance of cryptocurrency for funding purposes is gaining further adoption. One such organization called TheGivingBlock is providing funding to donations from cryptocurrency. At this point the main concern is the volatility of cryptocurrency, which is why developers need to create smart contracts that can provide solutions to these issues. If a donor sent a donation worth $100 in fiat, the problem is if the value of the cryptocurrency were to plunge to $30, it would lose 70% of its original value. Some would argue that cryptocurrency valuation should not relate to fiat valuation, but it will matter most to the donor who sent the cryptocurrency. It would mean a loss of value for what they sent and that can affect other things like taxes. This is where stablecoins can provide value by providing stability to the funds. Otherwise, the charity who receives the donation must liquidate the digital asset to fiat as soon as they can when they need the funds.
Another big problem that remains is accountability. Crowdfunding and fundraising can be subject to fraud. What is needed is more transparency. If the blockchain can provide this layer with verification and trust, it can be used as a funding solution. Large non-profit organizations that are prone to manipulation at the top can start using this to gain more transparency about how funds are allocated and whether they are being properly used. This is something that is a problem with certain crowd-funded projects that have turned out to be fraudulent to donors. Addressing fraud with more transparency and accountability is what the blockchain can provide.