Cryptocurrency is becoming a more familiar way to pay for things.
One option is as part of a crowd, through a decentralized autonomous organization. In this relatively new kind of group, also called a DAO, decisions and choices are governed by holders of one kind of cryptocurrency token, such as ethereum or bitcoin. DAOs also use “smart contracts” that make decisions through online votes by all participants who wish to weigh in and other forms of automation.
DAOs are essentially clubs that harness both crowdfunding and cryptocurrency to operate in arenas from art to sports. They are also cropping up in philanthropy.
One good example is the Big Green DAO. Launched in late 2021, it’s tied to a decade-old food justice charity that had revenue in excess of US$9 million in 2019.
Big Green’s founder is Kimbal Musk, who is Elon Musk’s brother and a member of Tesla’s board. The DAO version of his nonprofit promises to “disrupt philanthropic hierarchies” by reducing overhead spending and shaving other expenses.
New terrain
Based on my research regarding crypto-assets, I believe that there are several considerations that donors and charities should keep in mind as these arrangements emerge.
First, DAOs have little if any formal infrastructure. Some states simply require one individual to be designated as the agent of record. Wyoming passed a law in 2021 – the first of its kind in the United States – that legally recognizes DAOs as legal entities. It still requires the DAO to be organized as a Wyoming-based limited liability company, with an individual identified as the registered agent.
In theory, at least, when combined with the quick nature of how DAO decisions are made, this means that nonprofits can achieve more and respond more quickly to changing circumstances, while spending less on administrative staff and other kinds of overhead.
Legal questions
Until now, most cryptocurrency donations to charities simply provided capital to eligible organizations that operate like any other standard nonprofit.
For tax purposes, donating cryptocurrency is like giving away stocks, bonds or other property, rather than donating money. This means, typically, that cryptocurrency donations actually provide donors with a larger tax benefit versus cash donations. If a donor were to instead liquidate their cryptocurrency prior to making a gift, they would first have to pay capital gains taxes, and they would have less money to give away.
However, it’s unclear whether funds can legally flow to, through and out of a charitable decentralized autonomous organization.
Nonprofits are subject to regulatory enforcement and need to be chartered in a particular state. So far, it’s unclear how regulators, such as the Internal Revenue Service or state charity offices, will be able to monitor or audit these groups.
It’s also unclear whether the very nature of DAOs is compatible with charitable donations.
In most, if not all,…
