CAI0059             

Written evidence submitted by the Charity Commission for England and Wales

1. The Charity Commission for England and Wales welcomes the Treasury Committee’s inquiry on the cryptoasset industry, given the complexity of the industry and the possible risks that cryptoassets may pose to charities.

2. The Charity Commission is the registrar and regulator of charities in England and Wales. It is an independent, non-ministerial government department, accountable to Parliament. Our purpose is to ensure charity can thrive and inspire trust, so that people can improve lives and strengthen society. We seek to achieve this purpose by providing the best possible regulation of these charities to increase charities’ efficiency and effectiveness and public confidence and trust in them[1].

3. The Commission’s statutory objectives include increasing public trust and confidence in charities and promoting the effective use of charitable resource. One of our strategic objectives is also to give charities the tools and understanding they need to succeed. Therefore, we are in the process of investigating how charities are using cryptoassets and may do in the future. Following this, we will provide further guidance to charities if we think that is appropriate.

4. Whilst the commission is considering cryptoassets in the round, including how charities might use or apply the underlying blockchain technology in different ways and for innovative purposes in the future, we have predominantly focused this response more directly upon risks associated with cryptocurrencies.

5. In the interim, we have published a blog[2] that encourages charities to think carefully before investing in cryptocurrency and evaluate the benefits and risks as they would do with any important decision about their charity. This should include taking appropriate professional advice and trustees are advised to consult the Charity Commission’s guidance on the core trustee duties[3], making effective decisions[4] and investments[5].

The charity sector

6. The charity sector is exceptionally diverse, with a long history of making an important and unique contribution to community life and civil society. Charities vary in their size, type, breadth, and scope, and they advance a wide range of issues such as the relief of poverty and the promotion of health, heritage, and the environment. By law all charities must further exclusively charitable purposes, and must operate for the public benefit.

7. At 31 March 2022, there were more than 169,000 charities on the Register[6]. During the financial year 2021-22, we regulated £83.8bn of charity income (2020-21: £84.1bn) and £80.1bn of charity spend (2020-21: £82.3bn).

8. As of September 2021, the Register shows that there are 928,688 trustee positions in England and Wales[7].

Charities’ use of cryptoassets

9.             It is difficult to fully assess the scale of charities using cryptoassets in England and Wales given that they are not currently required to report on this in annual returns or accounts. The Commission is considering revisions to the questions included in charities’ annual returns between 2023-2025. This has included a public consultation until 1st September 2022[8]. The set of proposed questions includes asking charities whether they have used cryptocurrency to send or receive funds from overseas[9].

10. Our work so far has identified a number of ways that charities could currently be utilising cryptoassets, each of which poses different potential risks and issues:

• Fundraising. We know that some charities are accepting donations through cryptocurrencies. Donors can donate cryptocurrencies directly to the charity’s wallet or via a third-party crypto giving platform. The highest reported single donation is less than £100k[10]. Charities have also been known to work with NFT creators or accept the proceeds of their work as a donation.

• Moving funds internationally. Some humanitarian organisations have reported utilising cryptoassets to move funds overseas to increase speed of transfer and reduce fees associated with exchanging money.

• Investments. All charities can make financial investments, although a charity’s specific powers of investment may depend on its constitutional form (for example, whether a charity is unincorporated or a company)[11]. Whilst we are not aware of any charities investing in cryptoassets as part of their investment portfolio, this may happen.

11. Generally, the Commission wants to help promote innovation in charities. Indeed, we encourage trustees to consider how they might change what they do, or improve the way they do it, to better deliver on their charitable purpose. However, there is much that we don’t yet know about how the world of cryptoassets is likely to develop in the future, and there are risks for charities that are engaging with cryptoassets that should be considered.

Potential risks of charities engaging with cryptoassets

12. The regulation of cryptoassets is still developing. The Commission (and charities) will need to be cognisant of the developing nature of regulation on cryptoassets, and trustees will need to act to ensure they are compliant with any changes that emerge. Any regulatory instability of cryptoassets may make it more challenging for the Commission to fulfil its regulatory functions, such as registration or compliance issues, related to use or promotion of cryptoassets.

13. The cryptoasset market is extremely volatile with values fluctuating greatly. This has been demonstrated by a recent significant and sudden reduction in the value of Bitcoin[12]. It is considered extremely risky for charities to speculatively invest in cryptoassets or hold funds in cryptocurrency given this fluctation in an asset/’currency’ that is not regulated. If a future crash were to happen, charitable funds could be at risk. Therefore, there is a risk to charities in holding money in cryptoassets for significant periods of time, without converting into FIAT currency[13].

14. Cryptoasset donations are usually made anonymously. The Commission’s ‘’Know your donor[14]’’ guidance outlines that charities can accept anonymous donations. However, charities are advised to look out for suspicious circumstances, including where significant funds are being donated, and put adequate safeguards in place. Charities would not easily be able to identify donors who use cryptocurrency without them providing information at the point of making a donation. This poses a risk that charities may receive funding from donors with whom they do not wish to be associated.

15. Most cryptoassets have environmental impacts. Whilst there are examples of cryptocurrencies that have taken steps to limit their carbon footprint, the digital mining production process for most cryptocurrencies is energy intensive and considered to be unfriendly to the environment. This may pose a potential reputational risk to charities using cryptoassets, particularly those with environmental purposes.

16. There is a risk of theft of cryptoassets. There have been numerous reports of large scale thefts and cyberattacks which may pose a risk to charities’ assets without adequate security measures in place. A report by blockchain data firm Chainalysis said that, in 2021, illicit addresses received $14 billion worth of cryptocurrency compared to $7.8 billion in 2020[15].

17. Cryptoassets are banned in some countries[16]. There is a risk of charities sending money to countries where it is illegal. This could result in the charities committing criminal offences because of these nations’ anti-money laundering (AML) rules.

18. Trustees may lack expertise to safely handle and mitigate risks associated with cryptoassets. Research conducted by the FCA suggested that 78% of UK adults have heard of cryptoassets in 2021 but this does not necessarily translate to understanding, with 71% of these being able to correctly identify its definition from a list of statements[17]. In the 2022 Charity Digital Skills report[18], it was reported that 64% of boards’ general digital skills are either low or have room for improvement. Given the complexity of the cryptoassets market and that using cryptoassets may be new for many charities, there may be risks for how equipped charity trustees are to make informed decisions about handling of cryptoassets.

Conclusion

19. There are multiple ways that charities could engage with cryptoassets and each pose different risks and potential opportunities. The Commission will contine to investigate charities’ engagement with cryptoassets and provide further guidance if that is appropriate. We will await with interest the evidence submitted to the Committee and its considerations, and where these may apply to the charity sector and charity beneficiaries.

September 2022