Technology is advancing at a rapid pace—most recently in the form of a quickly growing blockchain movement, which has resulted in the proliferation of cryptocurrency. There are currently more than 1,000 types of cryptocurrency—Bitcoin is a popular example—and as a result of its growing popularity, not-for-profit organizations are more likely to accept cryptocurrency contributions.
To understand how a not-for-profit organization can benefit from these technological advancements, it’s important to first understand how blockchain technology works.
How Blockchain Technology Works
Blockchain is an encrypted database similar to a general ledger that’s promoted as being transparent, tamperproof, and secure and also has sets of consensus rules. If a transaction violates those rules, the transaction is rejected; and once a transaction is completed, it can’t be modified.
In more detail, blockchain technology is a distributed database where the data is stored on nodes or digital ledgers. These nodes are basically computers connected to the blockchain, which create a peer-to-peer network. When a new transaction or information is added to the blockchain, each node simultaneously downloads the information and then validates and verifies it before it’s added to the shared ledger. The benefit is data that’s continuously reconciled and verified.
Once a new block is added to the blockchain structure, the previous block is locked and can’t be altered or changed. Because the data is held in an interlinked network of computers, the information is owned by the users—although only the intended recipient is able to view and process the data.
- It’s a decentralized technology, which means a clearinghouse or manager isn’t needed to process, clear, or complete transactions.
- Transactions are processed in a secure manner.
- It’s more efficient to process information, enter contracts, and analyze or follow data.
For a not-for-profit organization, blockchain technology can be used to integrate operating and accounting functions. It also means organizations will no longer be bound by geographic regions or traditional intermediaries, such as banks or investment managers, to conduct business.
Cryptocurrency is a digital asset, also known as digital currency. It acts similarly to traditional currencies in that it allows an individual to purchase goods or services. But unlike traditional currencies, such as the US dollar or Euro, cryptocurrency doesn’t need a bank, investment house, or central banking system to transmit funds or complete transactions.
Cryptocurrency is instead dependent on blockchain technology to transmit the currency between individuals or organizations.
- Transaction are processed in real time, directly with the intended recipient.
- There’s no longer a reliance on a clearinghouse or an investment manager to complete or process a transaction.
- Fundraising efforts can be geared toward cryptocurrency holders, allowing them to donate to a not-for-profit organization.
How to Hold Cryptocurrency
To receive, transfer, and hold cryptocurrency, an organization needs to set up a digital wallet. To access the wallet, an organization needs a private key, which is a secured digital code. It’s important to note the only identifier needed to access cryptocurrency is that digital code, which means anyone with the code potentially has access to the wallet. As such, if the wallet is ever comprised and the cryptocurrency stolen, the organization would be unable to recover its digital currency.
There are two primary types of wallets:
- Cold. This is an offline wallet stored on a platform that isn’t connected to the internet, protecting it from cyber hacks and other risks associated with online wallets.
- Hot. This is a wallet that’s stored online. The benefit of a hot wallet is that transactions can be completed more efficiently than with a cold wallet.
An organization that decides to accept cryptocurrency will first want to take the following actions:
- Understand the risks of accepting or transacting in cryptocurrency
- Review the organization’s gift and investment policy to address receiving, valuing, and holding cryptocurrency
- Provide training opportunities to management and staff regarding cryptocurrency
- Understand the financial reporting framework and how to handle accounting for cryptocurrency in accordance with that respective framework
The next step is to revisit any internal control policies and procedures that address valuation and monitoring as well as processing cryptocurrency. Items to consider include the following:
- Type of wallet in which to hold cryptocurrency
- Who has access to the digital key, keeping segregation of duties in mind
- Whether there’s a two-step verification process
- The valuation technique used to value the cryptocurrency at each reporting period
Financial Statement Disclosures
An organization needs to consider how the asset should be reflected in the statement of financial position and in the footnotes. Because of this, an organization should revisit and update any significant accounting policies and valuation-technique disclosures.
While accepting cryptocurrency can present many opportunities for not-for-profit organizations, it also surfaces complex challenges that require an evaluation of the following:
- Internal controls
- Valuation process
- Financial statement disclosures
We’re Here to Help
For donors looking to donate cryptocurrency, the Moss Adams valuation team has extensive experience assisting donors with the valuation process for personal income tax purposes.
For organizations desiring more information on the challenges of using cryptocurrency and how accepting such assets can impact your organization—as well as determining the internal controls needed to hold such assets—contact your Moss Adams professional.