While the charity sector is increasingly considering crpto-assets, one can’t ignore the pitfalls of the currency’s lack of transparency, writes Jerry Jamieson
With Brexit attracting the majority of the government’s attention, and domestic public spending being stretched increasingly thin, the responsibility placed on the charitable sector to plug the gaps has never been greater. Funding these increased responsibilities is a perennial challenge – and one to which charities are increasingly forced to find an innovative solution.
The rise of cryptocurrency has given many charitable institutions just cause for excitement; at a total value of $118bn, it represents a hitherto untapped vein of potential donations. There are practical benefits for crypto donors too: anonymity, coupled with swift, low-cost transactions represents significant advantages over traditional currency, and blockchain technology (the mutually-distributed ledger which underlies the majority of crypto currencies) brings with it the potential for unprecedented transparency as to how each donation is used.
The Royal National Lifeboat Institution (RNLI) became the first UK charity to accept cryptocurrency (in the form of Bitcoin) in July 2014, citing hopes that ‘accepting Bitcoin will result in donations we may not otherwise receive, as well as connecting us with new types of supporters’. In the four and a half years since July 2014 however, further uptake within the charitable sector has been thin on the ground. Why the hubris? Gift aid – or rather, the current lack of it.
Gift aid allows for all charities to claim an extra 25p for every £1 donated by way of reclaiming the income tax already paid on the donation by the donor, and amounted to a staggering £1,260bn reclaimed by charities in 2017/18. At a time when many charitable organisations country-wide are facing difficulties, gift aid repayments can often make the difference between staying afloat, and the spectre of insolvency.
Gift aid is, however, only available for donations of money, such as cash, cheques, or credit card payments. HMRC does not currently recognise any form of cryptocurrency as money, instead defining them as ‘assets’ akin to stocks or shares. The final report of HMRC’s ‘Cryptoassets taskforce’, published in October 2018 argues that cryptocurrencies such as Bitcoin should not be considered money as they are too volatile to be a good store of value, they are not widely-accepted as means of exchange and they are not used as a unit of account (i.e. as a unit of measurement to value something). The position in the October 2018 report has recently been confirmed in a policy paper published by HMRC on 19 December 2019, entitled ‘Cryptoassets for individuals’.
This reasoning given by HMRC is not one borne out of principle, and as cryptocurrencies such as Bitcoin mature further, they will almost certainly become less volatile, more widely accepted, and increasingly used as a metric by which various things are valued – one only needs to look at the progress that cryptocurrencies have made in the last 5 years to see how far cryptocurrencies have progressed towards this definition.
The UK government and HMRC therefore face a conundrum: an entire swathe of potential charitable donations in the form of cryptocurrency is currently being discouraged due to donations of this kind representing an inherent 20 per cent reduction in comparison with gift-aided cash gifts. Additionally, the unavailability of gift aid is based on a definition which certain crypto-assets will likely fulfil in the near future (and which some would argue they fulfil now).
This is a live issue, and one which is not likely to find a quick resolution although we are aware that at least one charitable organisation has approached HMRC to understand how crypto can be used in philanthropy in similar ways to fiat currencies. Whilst the clinical, technical, and legal aspects of cryptocurrencies give rise to many valid arguments, the public policy perspective including the inherent lack of transparency of blockchain, particularly in light of current toughened economic climate for charities, cannot be ignored.
Jerry Jamieson works at boutique private wealth law firm Maurice Turnor Gardner LLP