In our last blog post, we discussed the major businesses and charitable giving campaigns that are adopting Bitcoin (BTC) as a means of payment. With organizations like the BitGive Foundation cropping up and even more accepting Bitcoin donations like Dignitas, it’s easy to see why the digital currency is gaining traction in the nonprofit sector. Some key benefits inherent to Bitcoin make this possible, while very real risks must still be addressed before we can expect mainstream Bitcoin donations.
Benefits to Nonprofit Sector
- Low-to-No Transaction Fees
Since Bitcoin isn’t backed by physical commodities, such as silver or a central regulatory force, it operates in a low-to-no transaction fee system. In other words, Bitcoin makes it possible to skip the “middle-men” that are financial institutions and their associated fees. Applied to charitable giving, this means 100% of a donation gets to the charity. This also makes it possible to avoid currency exchange implications with global donations. - No Float Time and Real-Time Tracking
Further, without a financial institute managing transactions, transferring Bitcoin funds is near instantaneous taking only 10 minutes to confirm through the Block Chain (public ledger that verifies every Bitcoin transaction ensuring it hasn’t already been spent). Not only do donations get to charities faster, but they can easily be tracked in real-time through the Block Chain. - Security
Hundreds of developers manage the Block Chain by updating and checking the open-source code. Their efforts power the transaction process, secure the network, and keep the system up-to-date, essential to the Bitcoin economy and its security. These high-level security protocols (based on open standards) result in secure transactions and donations.
Risks to Nonprofit Sector
- Value Fluctuations
In 2011, the value of Bitcoin in US dollars averaged $5.44. Two short years later, its value reached a high of $1,147 and ended 2013 at $757, largely because Bitcoin’s value fluctuates based on supply and demand. As the digital currency gained notability in 2013, its value skyrocketed. These fluctuations introduce a very real risk or substantial gain to charities considering Bitcoin.For example, the Dogecoin Foundation’s Dogesled initiative raised 26 million in Doge to send the Jamaican bobsled team to the 2013 Sochi Olympics. The influx of donations (and demand for Dogecoin) doubled the price of the currency, which inflated the US dollar value to $30,000. Inversely, if demand for the digital currency is low, any donations still in that form suffer a blow. If we take the same 26 million Doge donated and convert it at the current exchange (1,000 Doge = USD $0.22), we would be left with $5,720. Risky, risky.Similarly, Bitcoin 100 received an anonymous donation of about 180 BTC worth $2,600 last year but with appreciation, its worth is about $110,000 today. - Uncertain Perspectives
Since Bitcoin and digital currencies at large are still unexplored, stakeholders (society, governments, and financial institutions) have evolving perspectives. In 2013, the U.S. Department of Justice deemed Bitcoin as “a legal means of exchange.” However, Canada and the Bank of France stated Bitcoin isn’t legal tender. In a recent survey for their annual Consumer Intelligence report, PricewaterhouseCooper asked 1,000 geographically-diverse people about their perceptions of Bitcoin. 49% stated they would be “more likely to trust the currency if it were distributed by a well-known third party.”In order for stakeholders to better understand crypto-currencies, they must emerge from the underground world of developers and techies. While there have been serious steps in this direction via business adoption and media coverage, many of us are still in the dark. - Transaction Reversals
Possibly one of the most predominant risks associated with Bitcoin is the inability to reverse transactions. Once funds have started the transfer process, there is no turning back – until now. In traditional credit card transactions, the intermediary processing company can reverse a transaction after a cursory investigation. After all, aren’t we paying transaction fees for this very service?The same logic applies to Bitcoin, as it’s built right into its protocol. Essentially, if I want to buy goods from on online counterpart, I can transfer funds to a Bitcoin address that’s jointly controlled by the merchant, a third-party arbitrator, and me. If two out of three sign off that the transaction is legitimate, (i.e. I receive my goods and they’re acceptable, I sign the money to the seller. The seller also signs and receives the money.) then the transaction is complete. If I’m not happy with the goods, I can sign the funds back to me and appeal to the arbitrator, who in turn conducts an investigation. This middle-man must decide whether funds get transferred to me or to the merchant, resulting in a two-of-three agreement to complete the transfer.A key warning in this process is the need for a trusted middle-man, such as traditional processing firms or arbitration marketplaces like Bitrated. - Complexity
The level of Bitcoin adoption is closely tied to its usability but as it stands, it’s still pretty complex for the average Joe to buy and cash Bitcoin. This roadblock is easily addressed as we begin seeing Bitcoin ATMs, easy-to-use digital wallets, and online profiles like OneName facilitating easy payments. As with most things, user-friendliness is the quickest way to mass adoption.
Before we can expect mainstream acceptance of digital currencies, a number of improvements become necessary. While increasing user-friendliness is a major concern, a more immediate one is to educate the public about these tools and their proper use. Moreover, transaction regulation in the form of intermediary processing firms enables transaction reversals and instills trust among users. However, this would leave a harmful effect on key benefits such as low float time and transaction fees.
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