Cryptocurrency’s popularity has increased dramatically within the last decade. In addition, to some raising millions, many have used it to donate to charities. For example, The American Red Cross started accepting bitcoin in 2014. That outlet became even more popular when in-person fundraising methods declined during the pandemic; cryptocurrency was a creative outlet to entice worldwide donations without the restrictions of completing transactions internationally. However, recently, the Non Fungible Tokens, or NFTs, have been on the rise and disrupted the fundraising field. They are suspected to be a significant player in the field in the years to come. Alex Wilson, the co-founder of The Giving Block, a nonprofit crypto fundraising platform, said that the rise of NFT philanthropy has mirrored general growth across the NFT sector and that over 30% of its donation volume comes from NFT-giving initiatives. Hope for Haiti a Virtual Reality Experience to raise $50k for earthquake relief in Haiti and Save the Chimps, who made NFTs out of handprints of their chimps.
How do NFTs work?
According to Investopedia, Non Fungible Tokens (NFTs) are cryptographic representations of assets with unique identification codes that distinguish them from each other, kind of like digital passports. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. NFTs are assets on a blockchain, a distributed database shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. The innovation of a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party. When someone buys an NFT, for example, on the trading platform Open Sea, they engage in a smart contract on the Blockchain. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They are typically used to automate an agreement’s execution so that all participants can be immediately sure of the outcome without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the following action when conditions are met. According to The Economist, the inventors of NFTs Anil Dash, an entrepreneur, and Kevin McCoy, a digital artist say that the value comes from providing proof that the holder owns that specific token, even if it does not give them copyright or exclusive use of that work.
“Putting artworks on the blockchain is like listing them in an auction catalogue. It adds a measure of certainty about the work being considered.”
Anil Dash
In addition to the advantages of the blockchain transaction, NFTs are more than just a pretty digital picture, because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time. NFTs can function like membership cards that provide access to exclusivity, be that yacht parties merchandise, and special discounts — as well as serving as digital keys to online spaces where holders can engage with each other. Moreover, because the blockchain is public, it’s even possible to send additional products directly to anyone who owns a given token.
Fundraising through NFTs
A. Organizations can make NFTs
For organizations taking their first steps in minting an NFT here are some guidelines from CoinDesk.
1. Decide the concept – What is the purpose of the NFT? What do you want it to represent?
2. Decide the platform – Do you want to use Open Sea, Rarible, Objkt or something else?
3. Connect and build community – It is important to market your NFT to create a community around the concept, e.g. join a Discord channel or market on Twitter.
4. Create your art – Should the organization out-source new artists? Do they have access to artists who are familiar with the platform?
5. Mint and share – Polygon is a platform that has no fees, after you have minted your NFT (essentially like uploading a document) you and everyone will be able to see it on your profile since the blockchain is open-source.
6. Sell your NFT – On the platform OpeanSea the cryptocurrency used is Ethereum (ETH), you will have to decide on a price and list it for it to be ready to auction.
Organizations might also consider minting NFTs as gifts for donors. While their current value might be zero, studies have shown that reciprocity matters to cultivate the donor -benefice relationship.
B. Organizations can accept cryptocurrency profits of NFTs from others
According to TechSoup there are a few ways organizations can access funds from a digital donation but must keep in mind best accounting practices, and how NFTs are taxed.
1. Intermediary 501(c)(3) – This is the best way to simplify the legal, accounting, and administrative implications of accepting the asset. By accepting the donation through another 501(c)(3), the organization does not need to take custody of the cryptocurrency.
2. Specialized Nonprofit Crypto Processors – Payment processors such as The Giving Block and Engiven help nonprofits accept donations to their own digital wallets, allowing them to hold onto crypto as an investment if they wish. In this case, the organization takes custody of the cryptocurrency and must comply with the appropriate IRS regulations and accounting best practices.
3. Checkout Through Crypto Exchange – Exchanges like BitPay and Coinbase offer embeddable checkout experiences with automatic conversion to cash for minimal fees. Since these platforms are made for individual checkouts, the organization must handle donor support, and tax receipts, and collect donor information appropriately for tax purposes.
Looking forward
Before your organization jumps into cryptocurrency and NFTs, there are some things to consider. First, with its rise, several scammers, e.g., Open Sea, had to freeze assets of over $2.2 million. In addition, the computing process of maintaining the records of crypto transactions consumes an unsustainable amount of energy, which has led some organizations to reconsider if it’s appropriate to accept digital currencies. For example, Greenpeace announced it would stop taking Bitcoin donations earlier this year. Finally, the OECD published a research paper on what needs to be done to meet the future financial shift of cryptocurrency and digital assets. The consequences can be severe such as money laundering and tax avoidance. Therefore, for the future of fundraising through NFT to be sustainable, the government must come to a consensus and adapt current policies to ensure the proper taxation to keep up with the disruption of digital transactions because that format is here to stay.
Resources
“How Are Non-Fungible Tokens (NFTs) Taxed?” Accessed April 24, 2022. https://news.bloombergtax.com/daily-tax-report/how-are-non-fungible-tokens-nfts-taxed.
“Nonfungible Tokens the New Fad for Campaign Fundraising – Roll Call.” Accessed April 20, 2022. https://rollcall.com/2022/01/04/non-fungible-tokens-the-new-fad-for-campaign-fundraising/.
“The Tokenisation of Assets and Potential Implications for Financial Markets – OECD.” Accessed April 20, 2022. https://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.htm.
“What Are Smart Contracts on Blockchain? | IBM.” Accessed April 27, 2022. https://www.ibm.com/topics/smart-contracts.
AMT Lab @ CMU. “NFTs and Arts Management.” Accessed May 5, 2022. https://amt-lab.org/blog/2021/7/nfts-and-arts-management.
AMT Lab @ CMU. “NFTs Legal Considerations and Implications.” Accessed May 5, 2022. https://amt-lab.org/blog/2021/9/nft-considerations-and-implications.
AMT Lab @ CMU. “OpenSea: Diving into the World of NFTs.” Accessed May 5, 2022. https://amt-lab.org/reviews/2022/1/opensea-diving-into-the-world-of-nfts.
Classy. “NFT Fundraising Explained: What Is a Non-Fungible Token Donation?,” February 25, 2022. https://www.classy.org/blog/nft-fundraising/.
Coin Telegraph. “NFT Philanthropy Demonstrates New Ways of Giving Back.” Accessed April 20, 2022. https://cointelegraph.com/news/nft-philanthropy-demonstrates-new-ways-of-giving-back.
Fortune. “Greenpeace Stops Accepting Donations via Bitcoin.” Accessed May 7, 2022. https://fortune.com/2021/05/21/greenpeace-bitcoin-carbon-footprint/.
Investopedia. “Non-Fungible Token (NFT).” Accessed April 20, 2022. https://www.investopedia.com/non-fungible-tokens-nft-5115211.
National Council of Nonprofits. “Fundraisers Turn Their Sights to Non-Fungible Tokens,” August 17, 2021. https://www.councilofnonprofits.org/thought-leadership/fundraisers-turn-their-sights-non-fungible-tokens.
Network, Janelle Levesque, Director of Digital Growth, Tapp. “How to Utilize NFTs for Fundraising.” Accessed April 19, 2022. https://blog.techsoup.org/posts/how-to-utilize-nfts-for-fundraising.
News, A. B. C. “Charities Wade into NFT Craze with Mixed Financial Results.” ABC News. Accessed April 20, 2022. https://abcnews.go.com/US/wireStory/charities-wade-nft-craze-mixed-financial-results-81986769.
Roh, Tina. “How to Accept Cryptocurrency Donations at Your Nonprofit.” Accessed May 7, 2022. https://blog.techsoup.org/posts/how-to-accept-cryptocurrency-donations-at-your-nonprofit.
Sandner, Philipp. “Digital Assets: The Future Of Capital Markets.” Forbes. Accessed April 20, 2022. https://www.forbes.com/sites/philippsandner/2021/08/24/digital-assets-the-future-of-capital-markets/.
The Economist. “The Market for Non-Fungible Tokens Is Evolving.” Accessed April 20, 2022. https://www.economist.com/finance-and-economics/the-market-for-non-fungible-tokens-is-evolving/21805856.
The Giving Block. “Nonprofits & NFTs Explained: A New Vision for Charitable Fundraising.” Accessed April 20, 2022. https://thegivingblock.com/resources/nonprofits-nfts-explained-a-new-vision-for-charitable-fundraising/.