San Francisco Chronicle - (Sunday)
Foundation donations rise despite crypto chaos
The Silicon Valley Community Foundation saw the market value of its cryptocurrency holdings, which propelled it into one of the nation’s largest foundations in 2017, fall by $3.6 billion, or 82%, last year as prices collapsed, according to its newly released 2018 financial statements.
They also show that the foundation’s enviable fundraising prowess survived a workplace bullying scandal that led to the resignation last year of its top fundraiser, Mari Ellen Loijens, and its longtime president and chief executive, Emmett Carson.
The foundation managed to attract $1.9 billion in contributions in 2018, up from $1.4 billion the previous year.
Facebook CEO Mark Zuckerberg, a big-time supporter, donated an additional 1.4 million Facebook shares worth $214 million on Nov. 8, according to a public filing. That was the same day the foundation named Nicole Taylor as its new president and CEO.
Taylor said the foundation “probably lost a couple” of major donors last year, but she was
happy to see contributions rise despite the turmoil. The foundation’s interim CEO, Greg Avis, and its board “did a lot to reach out to donors,” and the staff kept things “moving and stabilized,” Taylor said. The Mountain View foundation was formed in 2006 by the merger of community foundations serving the Peninsula and Silicon Valley. It grew into a behemoth, mainly by opening donor-advised funds for wealthy tech executives. A donor-advised fund is a separate account held at a public charity, such as the foundation, or nonprofits set up by investment firms like Fidelity, Charles Schwab and Vanguard.
Donors get a tax deduction when they contribute cash or appreciated assets such as stock, real estate or cryptocurrency to their account. The gift is irrevocable, but the donor can usually decide how the money is invested, which charities get grants and when. The donor doesn’t have to disburse any minimum amount each year, the way private foundations do. Nor do they have to disclose their investments; private foundations must disclose them in great detail.
The foundation has been criticized for having such a large portion of its assets, 86%, in donor-advised funds. Community foundations are generally established to serve local needs, but about 65% of the grants coming from the Silicon Valley foundation in 2017 went to national and international charities.
Taylor, a former top administrator with Arizona State University, Stanford University and the East Bay Community Foundation, wants to encourage more local
giving. “My goal is to put the community back in the community foundation,” she said. Some donors see their Bay Area employees struggling and are redirecting their grants closer to home, she added.
The foundation handed out $1.9 billion in grants last year, up from $1.8 billion in 2017. In both years, about a third of those amounts went not to operating charities but to donor-advised funds at other providers.
Taylor said another goal is for the foundation to become more transparent about everything, including its investments. Until now, it had disclosed virtually nothing about its cryptocurrency.
For example, in February 2018 it said in a news release that its assets had reached about $13.5 billion by the end of 2017, an astonishing 65% increase of $5.3 billion from the previous year. That made it the nation’s second largest foundation, ranked by assets, behind the Bill & Melinda Gates Foundation.
Almost all of that growth came from its investment portfolio. But no asset class, other than cryptocurrency, had those kinds of gains in 2017. The press release gave no explanation for that meteoric growth; when I asked former CEO Carson about it for a column, he declined to comment. When the foundation released its audited financial statements for 2017 last summer, it disclosed, in the most cryptic way possible, that it held $4.5 billion — nearly one-third of its assets — in one category of “real assets” that accounting experts said must have been digital assets.
“They were not even up-front about the fact that it was a cryptocurrency, much less a single cryptocurrency that was sales-restricted,” said Brian Mittendorf, an Ohio State University accounting professor. “It is baffling to me that such a huge risk to the organization’s holdings would not be more transparently disclosed.”
This year’s statement provides far more information. It said that the majority of its digital assets are in one cryptocurrency and “subject to sales restrictions related to timing and volume.” Those restrictions have prevented the foundation from selling more than a small portion of its crypto assets each year.
The foundation didn’t name the currency but it’s believed to be XRP. Ripple Labs of San Francisco owns a significant stake in XRP and uses it in its payment system.
Chris Larsen, who co-founded Ripple, has been contributing XRP to a donor-advised fund at the Silicon Valley foundation since 2013. Jed McCaleb, another co-founder who is no longer with Ripple, settled a lawsuit in 2016 by agreeing not to sell more than a certain amount of XRP each year and to donate 2 billion XRP to “a charitable donoradvised fund of his choice.”
“The same limits are placed on the ability of the charity to sell the XRP as are placed on Jed’s ability to sell his remaining XRP,” Ripple said in a forum post.
Larsen, Ripple’s executive chairman, said that charity was the Silicon Valley foundation. McCaleb didn’t return a request for comment.
Other charities also accept cryptocurrency contributions, “but most convert them into fiat (i.e. dollars) as soon as possible,” said Sean Stein Smith, an accounting professor at the City University of New York.
The vast majority of the foundation’s nearly 2.6 billion in cryptocurrency units were donated before 2017, most likely at the end of 2016. The price of XRP and other cryptocurrency soared in 2017, reaching a peak around December, then plummeted in 2018 before recovering somewhat this year.
As a result, the market value of the foundation’s cryptocurrency swelled from about $11 million at the beginning of 2017 to $4.46 billion at the end of that year, then fell to $815 million at the end of 2018 — even though the number of units it held did not change much.
Had the foundation been able and prescient enough to unload its crypto at the peak of the market, it could be more than $3 billion richer right now. “A lot of people wish they had sold their holdings at the end of 2017,” quipped Smith.
The foundation also changed the way it accounts for digital assets last year. This sounds geeky, but it’s a big issue in accounting circles and will only grow larger as companies such as Facebook, JPMorgan Chase and Fidelity are “diving into the cryptocurrency pool,” Smith said.
Before 2018, the foundation treated crypto assets as an investment and recorded them at market value. Starting last year, it treats them as “indefinite-lived intangible assets” and records them “at cost,” or the estimated market value on the day they were donated.
Taylor said some of the nation’s top accounting firms recommended that entities other than investment firms account for digital currency this way.
Larsen, who once worked as an auditor for Chevron, called this method “overly conservative” and “ridiculous.” He said crypto markets have become so “deep and liquid” that digital currencies should be treated like other investments and recorded at their market value.
The foundation restated its 2017 financial statement to reflect the accounting change. So instead of ending 2017 with $13.58 billion in total assets (as touted in that press release) it now shows it ending the year with $9.15 billion. Its assets at the end of 2018 were $8.9 billion.
The truth is that nobody knows how to account for cryptocurrency, which is unlike any other currency or asset. The Financial Accounting Standards Board, which establishes accounting rules for U.S. companies and nonprofits, has issued no rules on the practice.
The foundation’s startling disclosures about its crypto holdings “highlight the need for increased guidance and clarity as to how these assets are treated and disclosed to investors, donors and any other parties,” Smith said.