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The Building Block(chain)s of Philanthropy: Exempt Organizations and Blockchain’s Potential

In recent months, news of Blockchain technology has filled headlines.  The ability of Blockchain—which provides a decentralized means of recording and verifying transactions—to shape the financial sector has been widely reported, as have transactions involving Bitcoin and other cryptocurrencies using Blockchain technology.  Programmers and businesses are quickly turning to various Blockchain platforms to develop new applications of this technology, even as regulatory bodies are beginning to pay increased attention to high-stakes cryptocurrency transactions.

The impact of Blockchain technology is already being seen in the non-profit sector, most prominently through a number of reported charitable donations made using cryptocurrencies.  In March, DonorsChoose.org, a crowdfunding website which provides support for school and classroom projects, received a $29 million donation from Ripple, a cryptocurrency platform, to fund over 35,000 projects.  In December 2017, an anonymous Bitcoin user announced the establishment of The Pineapple Fund, which intends to donate over $80 million to charitable causes.  In light of the new wealth being generated on Blockchain platforms, charitable organizations are rapidly exploring how to accept, and the risks involved with, volatile cryptocurrency.

However, Blockchain’s underlying technology may have a far larger impact on tax-exempt organizations than the sizeable donations that have already been reported.  Blockchain offers the ability to rapidly and accurately verify financial transactions without the transaction costs involved with third-party financial monitors.  In an era when individual donors and philanthropic organizations demand increasing amounts of data regarding the use and impact of their contributions, Blockchain may provide more transparency in the charitable sector. Moreover, Blockchain may make it easier to fulfill certain requirements under the Internal Revenue Code which require grantor organizations to monitor the use of their grant funds easier to fulfill.  That said, as with new technologies generally (and particularly those touted as cure-alls for many problems), members of the philanthropic sector may wish to move cautiously in embracing Blockchain’s many uses.

What is Blockchain?

In general, financial transactions are managed on one or more individual ledgers.  A ledger can be a land deed, a checkbook, or a digitally maintained list of accounts managed by a bank or credit card company.  When two parties engage in a financial transaction (for example, an individual makes a tax-deductible contribution to a charity), the donor’s bank records the transaction as a debit, and the charitable bank records the transaction as a credit.  This system is familiar, but subject to numerous risks. Paper documents can be misplaced or destroyed.  Digital files can be hacked. In addition, transactions often require the intervention of third-parties to confirm that accurate transactions are recorded.  For example, in order to execute a real estate transaction, an escrow agent is usually employed to monitor and confirm the transfer of the deed and purchase price.

The Blockchain protocol establishes a decentralized method of recording and verifying transactions. Instead of relying on a central organization—such as a bank—to maintain a single list of all transactions, chains of recorded transactions (each a “block”) are maintained on computers around the world.  Through a complex series of algorithms, computers add blocks to the chain which, once added, cannot easily be changed.  In other words, the Blockchain creates an essentially permanent record of transactions which is maintained around the world.  Because the ledger is decentralized, it is harder to hack.  Because the transactions on the ledger are efficiently verified, the need for third-party transactions costs becomes less necessary.

The use of Blockchain technology in many forms of transactions is rapidly increasing.  Such uses include, but are not limited to, the following:

  • Real estate transactions generally require numerous parties, including title companies, escrow companies, county recorders and appraisers to confirm various steps in the transaction.  Blockchain provides opportunities to create more efficient means of managing propertyrelated information, such that fewer parties need to be involved in a particular transaction.
  • “Smart contracts” are contracts which are executed automatically when certain terms are met. Blockchain technology allows contract terms to be triggered upon verification of particular events (including the transfer of assets).
  • Blockchain has the potential to make it easier to track tangible assets, such as art, and providing a quickly verifiable means of monitoring title and use rights with respect to such assets.

The use of Blockchain in the non-profit sector has not been fully explored.  However, the ability to quickly and accurately verify financial transactions may provide opportunities for individual donors and grant makers to track the use of charitable assets.  Specific uses of Blockchain in the philanthropic could include the following, among others:

  • Providing more efficient means of tracking the use of charitable assets for reporting purposes, for example in the case of expenditure responsibility grants from private foundations to organizations which are not public charities.
  • Collecting and analyzing data in order to measure charitable impact in the context of programrelated investments or charitable grants.
  • Monitoring the use of foundation grants to avoid triggering the selfdealing excise taxes under Section 4941 of the Internal Revenue Code.

The potential benefits and risks of Blockchain technology are being revealed on a daily basis.  Check in here for periodic reviews and updates on these developments and their implications for philanthropy.