It’s hard to think of any type of payment more fraught with legal restrictions and privacy issues than political donations. And that’s doubly true when those donations are in bitcoin or some other cryptocurrency.
The laws change state-by-state as well as federally, the penalties for getting it wrong can be harsh, and campaign finance laws that are already complex with minutiae have the added benefit of being unclear or just flat-out unwritten when crypto is added to the equation.
And the transactions are even more complex for the recipient. Cryptocurrencies are not considered money, but they fall under the “anything of value” category, according to the Federal Election Commission (FEC) — like art, jewelry, stocks, bonds or anything that cannot be directly deposited in a bank. Add to that the fun of valuing them correctly and the need to gather know your customer (KYC) data of the type that banks and other financial institutions (FIs) generally handle.
Then there’s the reality that while bitcoin’s image as nothing more than a tool of drug smugglers and tax evaders has been heavily rehabilitated, crypto political donations are still seen as very much like a gym-bag-in-the-alley “donation” in many circles. That remains a global concern, with Ireland in April banning all crypto political donations over concerns of Russian interference in their elections.
The Law
The biggest stumbling block this particular type of transaction runs into is the opacity around what the rules actually are when crypto is involved.
On the federal level, the basics are this: Any donation made in cryptocurrency must be valued in campaign finance filings at the exchange rate when it was accepted into the campaign’s digital wallet. Whether the value of the highly price-volatile digital assets goes up or down after that appears to be irrelevant.
But campaigns are responsible for collecting the KYC data that allows them to correctly identify each donor on its FEC filings — something that is taken care of by banks and credit card issuers for dollar-based donations made (excluding actual paper cash, of course.)
In July, political software firm Engage Labs launched a nonpartisan fundraising platform, Engage Raise, aimed solely at facilitating these transactions by offering 2022 midterms candidates a way to accept cryptocurrency donations, as well as a channel to “connect with the crypto and blockchain community via fundraising, events and messaging,” Engage Labs CEO Martin Dobelle told CNBC.
Engage Raise gathers the required KYC information — which for donations includes the name of the donor’s employer — and then immediately exchanges the bitcoin or other tokens for dollar-pegged USD Coin (USDC) stablecoins. This is “needed to capture exact amount of donation as well as sending the donation to the candidate in USD,” the platform said.
Which means it works much like a Visa or Mastercard crypto spend card, or the merchant crypto acceptance payments processors who enable most retail sites that accept cryptocurrencies. The buyer spends crypto, but the recipient receives cash, with the middleman selling the crypto at the point of sale (POS) or shopping cart.
State Your Case
At the state level, sending crypto to a candidate can be even more complex as there are 50 different sets of rules.
However, many states don’t actually have any crypto campaign finance laws on the books, which is a problem as the industry is increasingly focusing on state and local campaigns.
In May, attorneys Christopher White and Caleb Burns of the Washington, D.C. law firm Wiley Rein noted in a blog post that as “interest in the use of cryptocurrencies for political contributions has increased, states have begun to fashion their own sets of laws and regulations governing the use of cryptocurrencies in campaign finance.”
These laws, they noted “fall on a spectrum from a total ban on the contribution or use of cryptocurrencies to the explicit approval of contributions made via cryptocurrency.”
While a half dozen states expressly permitted crypto contributions at the time — California joined that club in July — Colorado, Iowa, Ohio and Tennessee more or less follow the FEC’s rules, while Washington and Arizona treat them more like cash.
The latter two, White and Burns noted, nonetheless take very different paths, with Washington capping such donations at $100 and requiring that they be turned into dollars within five days. Arizona’s secretary of state, they added, suggested crypto be treated like U.S. currency but took the less than helpful position that it “takes no position on the legality of a committee purchasing goods and services or making expenditures using cryptocurrency.”
Michigan and North Carolina, on the other hand, say their volatility makes crypto donations too hard to value fairly in terms of meeting donation limits.
The long and short of it, White and Burns concluded, is that political donations in crypto are complex enough transaction that they “can also serve as a kind of ideological or aesthetic signaling to like-minded voters — the campaign finance equivalent of a cool set of shades.”
TRM Labs, a digital asset compliance and risk management firm, concluded in an August blog post that the “bottom line is that the overwhelming majority of states have not addressed the issue of crypto campaign contributions. Thirty-four states and D.C. have not considered or enacted legislation or regulations to permit cryptocurrency creating a vast gray area.”
Indirect Effect
Crypto industry lobbying is becoming a bigger and bigger issue as the crypto and blockchain industry started lobbying aggressively this year — led by Sam Bankman-Fried, the multi-billionaire CEO of the FTX exchange who said he planned to spend $100 million in the 2022 election cycle and up to $1 billion in the 2024 presidential elections. Although he recently pulled back on that last part, Politico reported Oct. 14, with Bankman-Fried calling his billion-dollar quote “dumb.” The Capitol Hill publication said he’s “turned off the spigot” this year after a still-huge $40 million.
While the ins and outs of who’s lobbying for what aren’t really the focus of this article, it’s worth noting that both the regulation of dollar-pegged stablecoins and the broader crypto industry have been huge issues throughout 2022, with several committees sprinting to try and get at least a bipartisan stablecoin through before the election, and at least one interested congressmember saying he thinks it could still happen after the election.
That is to say, all of the crypto money pouring into the election cycle this year and until 2024 will likely have a very big effect on how both traditional cryptocurrencies and payments stablecoins are regulated. Which will have a big impact on how they can be used for mainstream C2C, B2C and B2B payments for years to come.
Take note that a July 1 analysis of FEC filings by state and local government technology firm GovTech.com found that since the beginning of 2021, the USDC stablecoin was far and away the second-largest cryptocurrency in terms of political donations, behind only bitcoin and well ahead of Ethereum’s ether token. So how stablecoin payments are regulated matters to politicians seeking those donations.
And keep in mind that the biggest issue the crypto industry is pushing in the crypto regulation battle is to stop the Securities and Exchange Commission (SEC) from continuing to label nearly every digital asset except bitcoin a security. And while there are a lot of reasons for that, it is vitally important to making cryptocurrencies a payment currency. As securities, any purchase made with a cryptocurrency — even as small as a cup of coffee — is a capital gains event that must be filed with the IRS.
Long term, the level of difficulty that would add to crypto payments could be a big, big hurdle to widespread use. And that’s far less of a hassle, at this point, than donating bitcoin to a candidate.
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