Is a non-profit the best legal form for cryptocurrencies?

There can be good reasons to use a non-profit organization to bring a new (blockchain) technology to the masses.

There can be good reasons to use a non-profit to bring a new (blockchain) technology to the masses. Depending on the founders' interests, a non-profit entity may also be totally unsuitable.

Among the pioneers of new blockchain tech, the assumption is widespread that establishing a non-profit foundation (a gGmbH) or an entrepreneurial company (gUG) is the right legal form to carry out a crypto project. In fact, there are many examples of projects that chose this route.

The Ethereum Foundation, founded in 2014, can be cited as one of the most successful examples in this context. The organization is based in Zug and is subject to Swiss law. In the German legal space, the Berlin-based IOTA Foundation is probably the most prominent example, which is also recognized as a non-profit organization.

Here are the reasons for and against using a non-profit organization; this legal form can also have negative outcomes.

How can a company be recognized as a non-profit?

When a German company can be recognized as a non-profit, it is clearly laid out in the tax code. This is possible if the entity pursues charitable goals. Under the tax code, pursuing charitable purposes exists if the entity’s activities aim to promote the public interest selflessly in material, intellectual, or moral areas.

There is no broad public support if the group to be supported is clear from the start, as with family foundations. The law also lists an exhaustive catalog of eligible areas. Beyond religion, art, culture, sport, and many other fields, science and research, as well as consumer protection, are among the areas most relevant for a new blockchain technology.

Non-profit status can only be recognized if the company acts selflessly. This means, in particular, that it uses its funds only for its statutory purposes and that members or shareholders do not receive profit distributions or other benefits.

Non-profit as a workaround for BaFin licensing requirements?

A common misconception is that a non-profit company can’t be subject to BaFin licensing requirements. Granted, the permission prerequisites in the German Banking Act and the German Securities Institutions Act only matter if a provider conducts a regulated activity and does so commercially at home. With many non-profit organizations, this is not the case.