Advancements in the Web3 space are paving new ways for charities to deliver services, create operational efficiencies, engage their donor base and raise funds. While the area can seem complex, you don’t need a degree in cryptocurrency and financial technology to take advantage of these innovations.
You may have already come across ‘A Guide to Web3 in Australia’ published by our market-leading Fintech + Web3 team which provides an in-depth guide into all things Web3. This week we are launching a new article series which sits alongside this guide to help charities and not-for-profit organisations better understand how to leverage the innovations bought about by the new world of Web3.
To kick off the series, we have started with a 101 primer to get you up to speed with some key terms often used in connection with Web3 and provide an overview of the associated regulatory space in Australia.
What is Web3?
The internet as we know it has existed in three stages: Web1, Web2 and Web3. It is helpful to think of Web3 in this context.
The first version of the internet, Web1, was the internet which gave us the ‘information economy’. In Web1, users consumed internet on a read only basis. That is, users could access information but the users could not engage with the content beyond reading it on webpages, sometimes referred to as brochure websites.
The one way flow of information changed with Web2, or the ‘platform economy’, where users can access various platforms and create accounts, write content and interact with each other (including through social media platforms (think Twitter, Facebook, Youtube, ReddIt etc). While users could now create and upload/distribute their own content, the content is generally owned, and to a large degree controlled, by the platform they are using.
Web3 is said to bring in a new era, the ‘ownership’, economy with a greater focus on the individual ownership of data and digital assets. Whereas users in Web2 relied heavily on platforms to generate content and connect with other users, Web3 will be more decentralised, moving away from platform reliance and toward user participation and ownership of networks (think the Fediverse, Mastodon, PeerTube, Pleroma, Pixelfed, Friendica etc). The ‘fediverse’ is a name for the thousands of servers which connect together to form a giant ‘federated’ social network. It is open source and free.
There are already a plethora of ways charities and not-for-profits are using Web3 innovations in their work.
In this next section we break down some key terms you should be across if you are exploring where and how to implement Web3 innovations into your organisation’s work.
Crypto assets describe the digital representation of value (whether it be through cryptocurrency, non-fungible tokens or other types of crypto assets) which can be transferred, stored, or traded electronically using blockchain technology.
Cryptocurrency is a digital currency of digital tokens created from code using blockchain and is increasingly accepted as a valid form of donation for charities. Unlike the Australian dollar and other regular forms of currency, cryptocurrency does not exist physically in the form of notes or coins. Cryptocurrency is not a ‘fiat currency’ and is not treated as money under Australian law. However, the trading of cryptocurrency is permissible in Australia and most cryptocurrency can be exchanged for money on digital exchanges. Popular types of cryptocurrency include Bitcoin and Ether.
Decentralised Autonomous Organisations
Decentralised Autonomous Organisation (DAOs) are appearing more and more in the philanthropy space as a new way for charitable organisations to govern themselves or for donors to fund charitable organisations through cryptocurrency. A DAO is a collectively-owned, blockchain-governed organization which uses blockchain technology to automate aspects of voting and transaction processing. DAOs operate as a structure which has no central governing body. Instead, decisions are made by members (who are tokenholders) who share a common goal to act in the best interests of the entity. Notable charitable DAOs include The Big Green DAO, where tokenholders vote on matters pertaining to governance and the distribution of grants to participating not-for-profits.
Digital exchanges allow users to buy and sell crypto assets using money or other crypto assets. If a charity has received a donation in cryptocurrency, they may use a digital exchange to convert this donation to Australian dollars. Broadly speaking there are two types of exchanges; centralised, which is run by a third party and decentralised, which uses automated smart contracts.
As the internet evolves, the forms for giving have transformed. Now there are digital, instant and innovative platforms and mechanisms to donate to all types of causes. Digital giving encompasses an ecosystem of online fundraising or giving platforms (for both money and items), websites hosting donation or live auction portals, payment round up prompts through commercial platforms and Web3.
A digital wallet (or crypto wallet) does not hold cryptocurrency. Digital wallets hold the ‘keys’ which allow users to send and receive the cryptocurrency which is held on the blockchain network. A digital wallet consists of a public key which is available to the public and a private key which is used to both ‘sign’ transactions and provide access to the wallet. Users must have a digital wallet before sending and receiving crypto assets.
Charities which accept cryptocurrency donations should ensure their digital wallets have a mechanism for tracking transactions. Charities should ensure that any donor donating cryptocurrency is aware of the origin of the donations and the taxation implications of the donation. Charities should also ensure the cryptocurrency donation meets the Australian Taxation Office (ATO) gift and donations conditions, as well as the gift types, requirements and valuation rules.
Non-fungible tokens (NFTs) have made waves as a new fundraising tool for charities in the last couple of years. NFTs are a type of crypto asset which takes the form of a unique cryptographic token recorded on blockchain. The unique quality of NFTs sets them apart from other crypto assets, and is part of their underlying value as tokens as NFTs cannot be replicated. Typically, NFTs are used for digital pictures or artwork, but they can also be used to represent real world assets. Many charities have auctioned off NFTs as part of fundraising efforts, raising significant funds and engaging their donor bases in new and exciting ways.
What is the regulatory landscape?
Cryptocurrency and digital exchanges have been legal in Australia Since 2017. While there is some regulatory activity, currently there are no laws in Australia which have been implemented to specifically regulate crypto assets. Charities which wish to introduce Web3 digital giving as part of their fundraising regime should be aware the regulation of crypto assets in Australia is complex and will likely be subject to significant change as the products themselves develop and change.
Presently, cryptocurrency is treated as an asset, not income, by the ATO, meaning any cryptocurrency owned by a charity will appear on its balance sheet and may have tax implications. Any charity which holds onto cryptocurrency at the end of a financial year should ensure the holding is appropriately reporting in the charity’s Annual Information Statement and financial report.
The Australian Charities and Not-for-profits Commission (ACNC) is watching the space closely, given the risks connected with both accepting donations and investing charity funds in cryptocurrency. These risks include:
- the fact cryptocurrency remains a high risk investment;
- data security issues, including vulnerabilities associated with lost or stolen passwords, hacking or malware;
- crypto-asset scams;
- the risk the donation includes funds which are high risk or interact with digital wallets involved in criminal activity; and
- the reliance of charities and donors on external providers to convert the cryptocurrency assets into cash before the charity receives the donation.
As always, charities and their boards should seek legal advice before accepting crypto-assets as donations and ensure any activities undertaken in this area are made in compliance with the ACNC Governance Standards, which require the responsible management of charities’ financial affairs. Any charity which engages with Web3 and is not already across the ACNC External Conduct Standards should review these standards as they will apply in the event a charity invests in cryptocurrencies outside Australia.
How can we help?
If your organisation is currently undertaking charitable fundraising or looking to fundraise and needs assistance with compliance, or if your organisation is interested in learning more about how digital giving may assist it in furthering its purpose(s), please get in touch with our specialist Charities + Social Sector lawyers.