You don’t have to look far these days to see NFTs in the headlines. These digital assets are becoming an increasingly common part of our culture, as collectors, businesses and consumers embrace a new way to invest and generate revenue.
But what about nonprofits? What role, if any, will NFTs play in fundraising and awareness campaigns?
Before diving into this question, it is first important to understand what an NFT is. Short for “non-fungible token,” an NFT is best described by the definitions of those two words:
- Non-fungible. Fungible means able to replace or be replaced by another identical item. If I loan you a dollar, you can repay me with a different dollar, as the two are identical and have the same value. Therefore, a non-fungible item is one that is unique. If I loan you a work of art from Picasso, I would need the exact item to be returned to me, making it non-fungible.
- Token. A token is something that represents the item to be conveyed. If you go to an arcade, you use money to purchase tokens, which represent a currency that can be used to play the arcade games. If you do something nice for me, I might take you to lunch as a “token” of appreciation.
If an NFT is a unique irreplaceable item, what exactly are you receiving when you purchase one? That depends on the agreement made between the seller and buyer. Most often, a consumer receives the rights to use the item digitally, not physically.
For a museum or other organization with a collection of art or other collectibles, creating an NFT based off their collection is an obvious example of an NFT. But this strategy is not limited to organizations with a collection. Other nonprofits have digital property, such as their logo or a popular campaign or cause that they fund, which they can look to use strategically, in a fundraising capacity, through the issuance of NFTs.
For example, an organization can create an NFT with unique characteristics that can only be unlocked through specific donation thresholds. Under this concept, a unique background or a digital avatar acquired through an NFT can prove one’s support of a specific nonprofit or cause, while raising awareness and driving further donations through their social circles.
Can anything be uploaded to the internet and sold as an NFT? No! In order for an item to be tradeable, or available for sale, a digital certificate of ownership must be created, which then must be “minted” onto a blockchain. In this context, the blockchain is a digital ledger that tracks the conveyance of a digital good or service from buyer to seller and creates a digital trail of ownership.
Careful consideration should be put into the minted certificate, since once it is minted, it is available for sale. A few things to consider include:
- How limited will the distribution be? (i.e. will there only be one copy sold? 10 copies? Unlimited distribution?)
- What is the duration of the conveyed NFT? Does the donor or buyer have rights in perpetuity? 5 years? Or do they have to renew their NFT on an annual basis to continue using it?
- Is there a price floor below which the token cannot be sold or resold?
- As the creator of the token, do you retain any rights such as the right to refuse to sell to specific individuals (or groups of individuals) or the right to receive a royalty every time the token is resold?
- As the holder of the NFT, what rights are conveyed to the holder? Do they have the right to use as they see fit, or only for specific purposes? Can they use the NFT for commercial gain?
Going back to our original question, should a museum or other nonprofit organization monetize their collection, digital assets, or even their good name to help subsidize their operations, or raise awareness for a cause, through the issuance of NFTs? The answer is complicated.
On the upside, creating an NFT does not require the conveyance of any ownership in the original item that is being “tokened.” As such, the nonprofit could receive monetary benefit without relinquishing any of its own rights to the item. But NFTs also carry risks that could easily undermine the value of the NFT transactions if not properly considered and mitigated, such as:
Compliance Risk
While there are currently no “know your customer” (KYC) rules for NFT transactions, that does not mean that there won’t be in the future, and the compliance-related costs of maintaining or issuing NFTs in the future may outweigh the benefit.
Anti-Money Laundering (AML) rules need to be considered. While most nonprofits have regular interactions with their donors, NFTs exchanged for cryptocurrency open the door for bad actors to potentially launder money. Having a strong KYC policy can protect your organization from being an unwitting victim.
Are proceeds from the issuance of the NFTs (and any future royalties) subject to regulations that are unfamiliar to the nonprofit organization? One example is the accession rules promulgated by the American Alliance of Museums (AAM). Another could be the generation of unrelated business income tax and the requirement to file a 990-T and other applicable state tax forms.
Reputational Risk
Will your donor base look at NFTs as a get-rich-quick scheme and therefore decide not to continue to support your organization through traditional contributions?
It is well-known that NFTs require the use of technology that is not very “green.” This is due to the fact that NFTs must be purchased with cryptocurrency, and a considerable amount of energy is expended to transact items on the blockchain. If this is not in line with the environmental values of your organization, board and/or donors, the reputational fallout might outweigh the monetary gain.
Privacy Risk
The premise behind the use of blockchain is that it is intended to a be a database open to the public, thus ensuring the integrity of the blockchain as all transactions are open for anyone to audit them. As a result, the identity of the NFT holder, or at least the digital address of the NFT holder, is available to everyone on the blockchain.
Operational Risk
Knowing that NFTs can only be purchased with cryptocurrency, make sure you understand the accounting considerations of accepting crypto assets and their impact on your financial statement. Other considerations include whether to use a third-party processor to accept crypto payments. There may also be the need to inform your donors of taxable consequences (if any) on the conversion of cryptocurrency to fiat currency.
Accepting cryptocurrency may require upgrades in technology, and additional costs and training need to be considered.
In today’s economy, thinking outside the box to discover additional revenue streams is essential to a nonprofit’s financial health and sustainability. NFTs may be able to assist your organization as it seeks to address raising brand awareness, decline in donations, program funding shortfalls or increased demand for services. But like any new fundraising approach, it is one that should be carefully considered to ensure your nonprofit’s best interests are being met, now and in the future.
For more information on considering NFTs for your organization, please contact your Grassi Nonprofit advisor or Jaime Rapps at jrapps@grassiadvisors.com.
