Being cautious about cryptoassets
On 19 December 2022, the Charity Commission opened a statutory inquiry into the charity Effective Ventures Foundation (EVF UK, formerly known as the Centre for Effective Altruism). The inquiry was launched after EVF UK reported the bankruptcy of FTX to the Commission as a serious incident, on the basis that the charity received substantial funding from FTX-linked entities (including the FTX Foundation) and individuals.
FTX, a US cryptocurrency exchange, which in early 2022 was valued at $32 billion, filed for bankruptcy protection in the US on 11 November 2022 and is now being investigated on the lines of being a Ponzi scheme. Its co-founder, Sam Bankman-Fried, whilst being a high-profile figure in the cryptocurrency world, was also a proponent of “effective altruism”, an intellectual movement in philanthropy aiming to identify the most effective ways of helping others through impartial research.
Associated with this movement is the idea of making as much money as possible in order to maximise charitable donations, known as an “earn to give” strategy.
Criminal charges
Bankman-Fried promised that he would eventually donate most of his net worth, and had already donated large sums of money to charities, including the FTX Foundation and FTX Future Fund in the US, as well as various well publicised political donations, before FTX collapsed. He now faces criminal charges relating to fraud, and the full ramifications of the crypto giant’s collapse are as yet unknown.
In line with the Commission’s guidance on filing serious incident reports, charity trustees are required to file reports in certain circumstances and – unsurprisingly - a decision was made by EVF UK to file one in this case. Serious incidents includes incidents where there is an adverse event, whether actual or alleged, which results in or risks significant loss to charity assets or harm to a charity’s work or reputation.
The Commission’s announcement in January of the inquiry into EVF UK stated that the initial scope of the inquiry was two-fold, examining:
- “The extent of any risk to the charity’s assets and the extent to which the trustees are complying with their legal duties with regard to the protection of the charity’s property.
- The governance and administration of the charity by the trustees, including relationships between the charity’s trustees and its funders and the identification and management of conflicts of interest and / or loyalty.”
Statutory power
From a charity law perspective, it is important to note that an inquiry in itself is not a determination of wrongdoing, rather the exercise by the Commission of a statutory power to institute inquiries where certain criteria have been met. Following the announcement, EVF UK issued a statement saying that the charity was not reliant on FTX-related funds for its future operations and that the trustees would continue to cooperate with the Commission.
Whilst the content of EVF UK’s initial report to the Commission is unknown, on the face of it, the collapse of FTX carries, at the very least, the risk of adverse reputational impact on EVF UK as a result of funding ties. Following reports that FTX will be seeking to recover funds donated by its founder and associated individuals to US politicians, there could also be a question as to whether FTX might somehow seek to claw back funds donated to charities.
In any event, however, as the Commission itself has said, the trustees “fulfilled their duties and responsibilities in submitting a serious incident report” and “..there is no indication of wrongdoing by the trustees at this time..”.
On the second limb of the inquiry, relating to conflicts of interest (including those of loyalty), a blogpost issued by the charity’s interim CEO acknowledged that there are several links between EVF UK board members and the philanthropy flowing from FTX, including one board member on the board of both EVF UK and the FTX Foundation in the UK, as well as a UK board member in an advisory role to the US foundation. Both board members are now “…recused from all board decisions that concern FTX”.
Proper recognition
Clearly, the Commission will want to scrutinise the management of conflicts of interests and/ or loyalties arising in the circumstances. However, this is not to say that those conflicts are inappropriate, simply that the trustees need to be able to evidence that they have been properly recognised and dealt with so as to ensure the integrity of decision making within the charity.
As to the reputational point, there has already been a degree of media interest, prompting EVF UK to confirm that it did not, for example, use any funds from FTX or affiliated individuals or organisations, to purchase Wytham Abbey, near Oxford, which was on the market in 2021 for £15 million, with a view to turning the abbey into a convening centre for the charity.
Being on the backfoot is difficult for any organisation, and the dramatic manner of the FTX collapse means it is inevitable that the Charity should now be under scrutiny from both the Regulator and the public.
More generally, other charities in the FTX orbit, as well as those which may have been on the receiving end of crypto-philanthropy, may now be asking themselves similar questions to reassure themselves that their assets are not at risk and that their decision making processes are robust, should they face challenge further down the line.
Whilst the context is new (cryptoassets and associated currencies were understood by few until relatively recently) the principles to be applied by charity trustees are familiar. Charities should approach cryptocurrency and potential uses for the associated technology with the same due diligence as for any other activity, with the board taking reasonable decisions in line with their trustee duties. This includes understanding core duties, such as those to act only in the best interests of the charity, to safeguard the assets of their charity (including its reputation) and to act independently.
Standard guidance
As the Commission noted in its cautious first blog on “Cryptocurrencies: what are they, and should charities use them?” (published 12 July 2022), trustees should follow its guidance, as standard, on core trustee duties, on making effective decisions and on investment when taking decisions in this area. It goes without saying that trustees should ensure they have carried out appropriate due diligence on donors and associated organisations, whatever the form of donation.
Specific guidance from charity regulators such as the Charity Commission and the Fundraising Regulator is, at this time, confined to preliminary blogs only which, whilst recognising there may be opportunities, highlight that this remains an emerging area where policy (and law) is yet to be defined.
Undoubtedly, whilst there may be many positive uses and potential uses of cryptocurrency (and other cryptoassets) for good, there are also significant opportunities for criminal activity, on a global scale, hence the associated money laundering risks and reputational risk of association for charities (and other organisations) when things go wrong. In the UK, whilst the government set out plans in April 2022 to make the UK a global cryptoasset technology hub, it remains the case that cryptoassets are largely unregulated.
For individuals, the Financial Conduct Authority (FCA) considers cryptoassets to be “very high risk, speculative investments” with the clear warning that “…if you invest in cryptoassets, you should be prepared to lose all your money”.
Unsurprisingly, in the aftermath of the FTX exchange, banks have been keen to reiterate this warning to their customers, in many cases introducing restrictions on purchasing cryptocurrency (such as limits on card payments made to crypto exchanges from current accounts, and prohibiting payments from credit cards and to certain cryptocurrency firms) to the extent such activity was not already restricted.
Joint consultation
Meanwhile, HM Treasury and the Bank of England published a joint consultation in February of this year looking at the potential case for a blockchain based UK central bank digital currency – a “digital pound”, akin to pound sterling – which would be a new form of digital money for households and businesses. Any such digital pound, also referred to as “Britcoin”, would not be a cryptocurrency or cryptoasset.
Rather than being issued in the private sector, it would be issued by the Bank of England and government backed. Crucially, this would give the digital pound a stable value (the same as cash), in contrast to the high volatility associated with cryptocurrencies such as Bitcoin.
Interest in blockchain technology and associated use cases runs high, and charity trustees need to remain alert to developments if they want to be involved in this area (either directly, through operational use cases, or as recipients of associated assets or funds).
Overall, charities and their trustees should remain cautious in relation to how they might interact with cryptocurrencies and associated technologies, as well as organisations connected with those technologies. As the collapse of FTX has shown, this area remains largely unregulated and – as with any industry with the potential for high gains – is susceptible to bad players, no matter how good their intentions may appear to have been. The usual principles of good governance apply and, if trustees follow those principles, they will protect themselves from challenge should things go wrong.
