Charity Law & Blockchain Technology: Using Old Wineskins for New Wine?

• In Event: Nonprofits Harnessing Digital Transformation and New Technology

Abstract

This paper considers how charity law applies to new assets facilitated by blockchain technology. These assets include cryptocurrencies, non-fungible tokens (NFTs), and ownership interests in decentralized autonomous organizations (DAOs). These assets have become significant in numerous countries in terms of public attention and, at least with respect to cryptocurrencies, aggregate value. Charity regulators are therefore having to consider how charity law applies to them, particularly when donors contributes them to charities and claim related tax benefits. While several commentators have identified areas of uncertainty when it comes to this application (Coffey 2017; Moran 2019; Schlesinger & Auchincloss 2022), no commentators appear to have systematically considered how regulators should resolve those uncertainties, including possibly by modifying existing law.
This paper begins by describing these new assets and the initial attempts by regulators to apply existing laws to them, including reviewing the relevant literature. (Boss 2023; Britto & Castillo 2016; Brunson 2023; Frye 2023; Haynes & Yeoh 2020; Heminway 2023; Houben & Snyers 2018; Murray 2023; OECD 2021; Oh, Rosen & Zhang 2023) It then reviews the theoretical literature regarding interactions between law and new matters. (Brownsword 2008; Moses 2007; Moses 2013) It adapts that literature’s insights to identify the key questions in this context: (1) what are the goals of charity law with respect to assets dedicated to charitable purposes; (2) should those same goals apply to the new assets; (3) does existing charity law apply to the new assets in a manner that achieves those goals with sufficient certainty and comprehensiveness; and (4) if the answer to the third question is negative, how should existing law be modified to better achieve those goals with respect to the new assets.
This paper then answers these questions by examining the stated goals of charity law, including encouraging charitable activities, and particularly contributions to charities, while also preventing abuses. (Aprill 2013; CRS 2020; JCT 2005; JCT 2022) In addition, it considers whether any aspect of these new assets requires modifying those policy goals, concluding it does not. It then reviews actions already taken by regulators to apply existing tax laws to these new assets, including in a few instances tax laws relating to charities and charitable contributions. (Avi-Yonah & Salaimi 2022; Beale et al. 2023; Chason 2023; Chodorow 2016; Ooi 2021)
This analysis leads to the conclusion that the novelty of these assets does not require modifying existing charity law because as applied to them that law still adequately furthers charity law’s stated goals. But this analysis also identifies two areas where regulators may need to modify existing law or provide further guidance in the foreseeable future. First, if sufficiently reliable cryptocurrency exchanges emerge such that overvaluation abuses become unlikely, regulators
should relax the relatively onerous valuation requirements that apply under existing law to cryptocurrency donations. Second, if charities increasingly use blockchain technology, and particularly DAO structures, to further their charitable purposes, regulators should consider providing specific guidance for when doing so is (and is not) consistent with qualifying as a charity legally.

References

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Author

• Lloyd Mayer, University of Notre Dame