Cryptocurrency-funded DAOs running charities isn’t as bad as it sounds
We just need to keep an eye on a few key issues
New terrain
Based on myresearch regarding crypto-assets, I believe that there areseveral considerationsthat 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-basedlimited 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, mostcryptocurrency donations to charitiessimplyprovided capital to eligible organizationsthat operate like any other standard nonprofit.
For tax purposes,donating cryptocurrencyis like giving away stocks, bonds or other property, rather than donating money. This means, typically, that cryptocurrency donations actually provide donors with alarger tax benefitversus cash donations. If a donor were to instead liquidate their cryptocurrency prior to making a gift, they would first have to paycapital gains taxes, and they would have less money to give away.
However,it’s unclearwhether funds can legallyflow 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 theInternal Revenue Serviceorstate 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, instances of for-profit DAOs – or even DAOs organized for a specific one-time purpose, such asattempting to purchase an original copy of the U.S. Constitution– cash or appreciated property that is contributed to the organization is exchanged forgovernance tokens. The tokens essentially represent a fractional form of collective ownership.
This could be problematic. When donors make charitable contributions, they relinquish the money or asset they just gave to the charity. Abasic conditionfor having a donation be eligible for favorable tax treatment by the authorities is that thedonor gets nothing of value in return.
The authorities may eventually determine that the distribution of virtual tokens to donors, even if those tokens aren’t used for anything outside the scope of the nonprofit, violates this precondition.
Wild rides
The clearest risk with those gifts is probably their volatility.
Overall, the cryptocurrency’s total market value sank to$1.6 trillion on Feb. 3, 2022, down from $2.85 trillion three months earlier.
Charities either need to convert these donations into U.S. dollars right away,as they do with donated stocks, or gamble regarding their future value.
Despite all the operational, financial and legal obstacles nonprofit DAOs face, I’m excited about the opportunities with these crowd-managed charities funded by cryptocurrency donations because of their potential for a high degree of transparency paired with low overhead.
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This article bySean Stein Smith, Assistant Professor of Economics and Business,Lehman College, CUNY, is republished fromThe Conversationunder a Creative Commons license. Read theoriginal article.
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