Cryptocurrency appears to be behind big foundation growth
The Silicon Valley Community Foundation, one of the first U.S. charities to accept donations of cryptocurrency, may have held billions of dollars worth of them at the end of last year, when their values were near their peak.
The foundation held $4.5 billion — nearly one-third of its investment portfolio — in one category of assets that appears to be “digital assets,” according to accounting experts who have reviewed the charity’s recently released audited financial statement for 2017.
That would help explain the foundation’s meteoric and mysterious explosion of assets last year. In February, before it was rocked by a workplace misconduct scandal that resulted in the departure of its CEO and top fundraising executive, the foundation disclosed in a press release that its assets last year had swelled to about $13.5 billion. That was up $5.3 billion from the end of 2016, a gain of roughly 65 percent.
It gave no explanation for the increase, which far exceeded any returns it could have reaped from a diversified stock and bond portfolio. The foundation took in about $1.4 billion in contributions and dis-
tributed about $1.3 billion in grants last year, so the growth had to come almost entirely from investments.
In a column at the time, I speculated that cryptocurrencies — which soared in December before coming back to earth — might have played a role in that huge growth. And now it appears that was right, based on the foundation’s financial statement dated June 14.
Under “concentrations of risk,” the statement said that one-third of the foundation’s $13.4 billion investment portfolio was in “one class of real assets” on Dec. 31. The report showed $4.46 billion in a category labeled Level 2 real assets. Based on its footnotes, this could only be what the report called “digital assets,” valued using pricing obtained from licensed online exchanges, said Brian Mittendorf, chair of the accounting department at Ohio State University.
The report does not define digital assets, but “I interpret that to be cryptocurrencies,” Mittendorf said. At the end of 2016, the foundation had only $77 million in real assets, none in Level 2. Real estate is a separate category under alternative assets.
Daniel Figueredo, the partner who heads up the nonprofit practice for the accounting firm BPM, said the term digital asset “generally refers to cryptocurrencies.”
Moss Adams, the accounting firm that audited the report, declined to comment.
“I’m surprised an organization that large would hold a position that volatile at the end of the year,” Mittendorf said.
Most charities that have begun accepting cryptocurrencies sell them as soon as possible.
The foundation declined to comment except through email. It said it “does not disclose the specific mix of assets” in any asset class.
It said the foundation “has been gifted cryptocurrency assets going back several years, and they are held in a few individual donor advised funds. We have never purchased any and do not have any of these assets in our investment pools, consistent with our overall investment philosophy of maintaining a diversified mix of assets in our longer term investment pools. Consistent with the way we have prudently managed large gifted assets in the past, we have a liquidation plan in place to gradually sell the crypto assets over time and reinvest the proceeds in a diversified investment portfolio.”
Wade Loo, chairman of the foundation’s audit committee, said in an email that the board “considers this a prudent practice for creating charitable funds from the wide variety of assets” from donors.
The foundation is no stranger to concentrated positions. At the end of 2015, it had 29 percent of assets in one publicly traded stock, presumably Facebook. Its CEO, Mark Zuckerberg, put 18 million Facebook shares into his donor-advised fund at the foundation in 2012 and another 18 million shares in 2013. In 2014, WhatsApp co-founders Jan Koum and Brian Acton donated large amounts of Facebook stock after it bought their company.
The foundation’s singlestock holding had been reduced to 17 percent of assets at the end of 2016 and just 7 percent at the end of last year.
The foundation has grown to be the nation’s largest community foundation and the ninth-largest public charity overall, in part by letting Silicon Valley philanthropists donate alternative assets, such as private company shares and cryptocurrencies, usually to donor-advised funds they set up at the foundation. These funds make up the vast majority of the foundation’s assets.
Donor-advised funds are individual accounts held at a public charity, usually a community foundation or nonprofit set up by a brokerage firm. Fidelity, Charles Schwab, Goldman Sachs and Vanguard sponsor donor-advised funds and now rank among the nation’s 10 largest public charities.
Donors get a tax deduction when they put an irrevocable gift of cash or appreciated assets into the account. Donors can recommend how the money should be invested and which charities should get grants from their fund. These recommendations are usually followed if they meet the sponsoring organization’s guidelines.
These funds are controversial because donors get an immediate tax deduction for their donation but are not required to distribute the money to charities according to any schedule. Meanwhile, the assets sit in the funds, earning advisory and other fees for financial firms.
Chris Larsen, who founded the San Francisco payments company Ripple, has donated cash and XRP — a virtual currency that Ripple holds a large stake in — to the foundation starting in 2013. “They were one of the first organizations to accept donations in digital assets,” he said in an email. “These donations have worked out well for both the Foundation and recipients” of the money, he said, adding that he will continue making donations through them.
Like most cryptocurrencies, XRP had a wild ride last year, rising from six-tenths of a cent on Jan. 1 to $2.32 on Dec. 31. It’s now trading around 44 cents.
In a 2014 article in the Chronicle of Philanthropy on Larsen’s cryptocurrency donation, Mari Ellen Reynolds Loijens, the foundation’s former chief development officer, said, “You have to be fearless to work with someone like that and say, ‘OK, we’ve never done that before. I don’t even know if that’s legal.’ ”
Loijens resigned from the foundation in April following allegations that in the pursuit of growth at all costs, she bullied the staff. CEO Emmett Carson was put on leave shortly thereafter and resigned in June after an investigation harshly criticized his leadership.
Other charities have begun taking cryptocurrencies, but generally sell the asset immediately and reinvest the proceeds in something less risky. Schwab Charitable said in an email that it has received about $2 million worth of bitcoin since it started accepting it last year, and “generally aims to complete the conversion on the day the contribution is received.”
The San Francisco Community Foundation started accepting bitcoin this year. “Our policy is to liquidate them as quickly as possible,” whether they come into the foundation itself or a donor-advised fund, its Chief Financial Officer Sonja Velez said.
Ray Madoff, a Boston College Law School professor, said it’s “inappropriate” for the foundation to allow donor advised funds to hold cryptocurrencies when it wouldn’t buy them itself. “The reason donors get tax benefits for a contribution to donor-advised fund is because the sponsoring organization has full legal ownership and control over those donated assets. Therefore their fiduciary duties should extend to those funds.”
But University of Oregon Law School professor Susan Gary said, “It doesn’t strike me necessarily as imprudent. It could be they need more time to liquidate” the asset.