We look at some of the main concerns with charities using cryptocurrency, such as the environmental impact, cyber security issues, price volatility, and more
The price of Bitcoin, the world’s most popular cryptocurrency, has rocketed from little over $6,000 a year ago to more than $60,000 today. It’s made some people very rich indeed. It’s also attracted the interest the likes of Tesla founder Elon Musk and donations can be made in the cryptocurrency to a range of charities including Save the Children and RNLI.
But if your charity is thinking about accepting donations in cryptocurrencies, it is very important to ensure that you are aware of the considerable downsides of this type of fundraising initiative, as well as the benefits.
The first thing to consider is that cryptocurrencies, particularly Bitcoin, have an enormous negative effect on the environment. That’s because behind every Bitcoin is a huge infrastructure of computers involved in Bitcoin “mining”.
These computers, working all over the world around the clock, consume a vast amount of energy. According to the University of Cambridge’s Bitcoin Electricity Consumption Index, Bitcoin is now responsible for more energy consumption than entire countries such as The Netherlands or Argentina.
The overwhelming majority of this energy is not generated from renewable sources like wind, so the amount of carbon dioxide that is released in to the atmosphere because of Bitcoin mining, and therefore Bitcoin’s effect on climate change, is significant.
That alone may give pause for thought. But for charities that are directly involved with environmental issues, it may be difficult to reconcile the harm that Bitcoin mining does to the environment, and the implicit endorsement of that harm by accepting funds in Bitcoin, with the aims of the charity.
On a more practical level, cryptocurrencies such as Bitcoin can be a considerable cyber security risk for charities when it comes to storing them. That’s because cyber criminals are particularly attracted to cryptocurrencies because of their high value and the fact that they can be used anonymously.
For that reason, many types of malware are designed to search infected computers for cryptocurrencies, and to send any that they find to the malware authors. Any charity storing donated cryptocurrency on a computer that gets infected with this type of malware could lose all of these donations with almost no chance of getting them back.
Some cryptocurrency exchanges store Bitcoins and other currencies on behalf of their clients, but there have been a number of examples of clients losing large amounts of money after these exchanges have fallen victim to cyber attacks, fraud, or other criminal activity.
Perhaps the best-known example of this is the Mt. Gox exchange, which went out of business after 850,000 of customers’ Bitcoins, now worth about $51 billion, went missing presumed stolen.
Aside from the security risks posed by cyber criminals, managing cryptocurrencies can be difficult for charities. If they are stored on a hard drive of a computer and the hard drive fails or the hard drive is disposed of, then all of the charity’s cryptocurrency donations will be lost unless they are backed up elsewhere – with all the security problems that these backups entail.
This is a very real problem: in 2013 a man from Newport accidentally threw away a hard drive containing 7,500 Bitcoins that today are worth £325 million.
Some people and organisations choose to store their cryptocurrency in “hardware wallets” which are not connected to the internet and which cannot be infected by malware. The problem for charities with this approach is that this means someone in the charity has to be responsible for looking after the hardware wallet and remembering the password needed to access it.
Earlier in 2021, it was reported that a San Francisco computer programmer is unable to access a Bitcoin hardware wallet containing more than £300 million in Bitcoin because he has forgotten the password.
Cryptocurrencies have no intrinsic value and that makes their prices extremely volatile. The price of a Bitcoin, for example, has gone from a dollar or so when it was launched to $60,000 today, but in between it has gone through several booms and busts. Six months from now the price of a Bitcoin could be $100,000 or $1000, or even back to $1: nobody knows for sure.
This volatility makes Bitcoin a risky asset for a charity to hold. Since a donation made in Bitcoin could easily half in value in a matter of weeks or even days, just as easily as it could double, it also makes any financial planning based on the value of cryptocurrencies almost impossible. For that reason, cryptocurrencies donated to a charity should probably be liquidated soon after they are received.
One final thing worth considering is that since cryptocurrencies are linked to cryptocurrency wallets rather than people, it is not possible to discover the provenance of any cryptocurrency donated to a charity anonymously.
These leaves charities with a moral dilemma: do they accept anonymous donations of cryptocurrency when it may be the proceeds of some activity which is in direct conflict with the aims of the charity, or perhaps the proceeds of a crime? Of course cash can also be the proceeds of illegal activity, but it is usually possible to find out something about the source of a cash donation.