This article was updated February 18, 2022
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 not-for-profit organizations are more likely to accept cryptocurrency contributions due to its growing popularity.
To understand how a not-for-profit organization can benefit from these technological advancements, it’s important to first understand 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; 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 can view and process the 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. 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.
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 compromised and the cryptocurrency stolen, the organization would be unable to recover its digital currency.
There are two primary types of wallets:
Read more about benefits, risks, and best practices of investing in cryptocurrency.
Cryptocurrency offers users a few benefits that traditional forms of currency can’t provide.
Some of cryptocurrency’s benefits include the following, though the currency’s uncertain future and the likelihood of changes may ultimately affect its benefits.
Cryptocurrency types include:
A few of these risks, significant for long-term investors, include the following:
Key questions to ask before utilizing cryptocurrency include:
Other considerations to keep front of mind include:
An organization needs to consider how the financial statements, including the statement of financial position and footnotes, reflect the asset.
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:
The IRS stated that virtual currency is property for tax purposes. However, because no valid charitable deduction exists without a contemporaneous written acknowledgement, the major issue is likely to be valuation, determined, for example, through an appraisal.
Under Internal Revenue Code Section 170(f)(11)(E)(ii)(I), criteria for a valid deduction require that the individual conducting the appraisal have verifiable education and experience in valuing the type of property for which the appraisal is performed.
The American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) has released a practice aid that contains nonauthoritative guidance developed by the Digital Assets Working Group
The objective of this aid is to offer guidance on how to account for an audit of digital assets under the US generally accepted accounting principles (GAAP) for nongovernmental entities and generally accepted auditing standards (GAAS), respectively.
For more information on the challenges of holding cryptocurrency and how accepting such assets can impact your organization—as well as determining the internal controls that protect such assets—contact your Moss Adams professional.
You can also learn more about our Not-for-Profit Practice and additional topics affecting investors.