August 4, 2022

Crypto and Campaign Finance Rules: Everything you need to know this election season

As the U.S. mid-term election season heats up, last week California ended its ban on the use of cryptocurrency for campaign contributions. While crypto’s impact on the environment, consumer protection, financial stability and national security have been extensively discussed and debated by policy makers across the globe, the issue of crypto and campaign finance has been left up in the air. So, what is the current situation regarding crypto at the ballot box and campaign finance laws?

Federal campaign finance law

According to a 2014 advisory opinion from the Federal Election Commission (FEC), “a non-connected political committee may accept contributions in the form of bitcoin digital currency.”

A nonconnected political committee is a committee that conducts activities in connection with an election, but not affiliated with a specific political party or candidate. While this 2014 advisory opinion was written during a time in which bitcoin was synonymous with cryptocurrency, it is likely that the advisory is applicable to other crypto assets as well.

In the 2014 advisory opinion, the FEC provided this helpful example:

Make Your Laws PAC, Inc. (“MYL”), a nonconnected PAC registered with the FEC, wants to accept bitcoin contributions of up to $100 per contributor per election. Under its proposal, MYL would use an online form to request the contributor’s name, address, occupation and employer, and to affirm that the donor is not a foreign national and owns the bitcoins to be contributed. Only after a contributor provides this information will MYL provide that contributor with a one-time “linked address” by which to contribute bitcoins. MYL also wants to purchase bitcoins itself on open exchanges. For bitcoins received via contributions and by purchase, MYL proposes to either sell them for U.S. dollars, hold them for later sale, or disburse them in bitcoin form to pay for various administrative expenses associated with running the committee.

The FEC ultimately found that cryptocurrency falls under the “anything of value” catch all of the Federal Election Campaign Act (the Act) which defines a contribution as “any gift, subscription, loan, advance, or deposit of money or anything of value made by any person for the purpose of influencing any election for Federal office.”

The opinion, rather than categorize bitcoin as money, likens it to “stocks, bonds, art objects and other similar items that cannot be deposited upon receipt, but will be liquidated at a later date.”

States’ rights?

While the 2014 FEC guidance permits donations in crypto in federal campaigns, elections are still mostly a state game and their laws matter. According to law firm Wiley, “contributions made via cryptocurrency are currently expressly permitted by law or official guidance in at least six states (Arizona, Colorado, Iowa, Ohio, Tennessee, and Washington),” with California now following suit.

California dives in

Just last week, California ended a four-year ban on crypto contributions when the California Fair Political Practices Commission voted unanimously to repeal the state’s ban on cryptocurrency donations and adopt new rules for how to accept the funds. The new regulation will take effect within the next 60 days and requires that donations go through a U.S.-based third-party payments processor registered with Treasury’s Financial Crimes Enforcement Network (FinCEN).

As reported by the Block, “This is a new and ever-changing area,” said legal division general counsel David Bainbridge during the commission’s July meeting. “We may need to adjust this as the industry develops, this is a fairly new industry," Bainbridge added. "But I feel pretty confident this regulation at this point does a good job of allowing contributions to be made in crypto but then ensuring it’s not going to become an easy avenue to violate the law.”

The commission prohibited crypto donations during the 2018 election cycle, citing concerns that crypto could be used to circumvent contribution limits and rules against accepting cash from foreign donors, according to a commission memo. California was one of nine states that banned crypto donations, while a dozen states expressly allow some form of crypto donations.

Which other states are in?

Colorado, Iowa, Ohio, and Tennessee have followed the FEC’s guidance — that is, crypto donations are in the assets’ fair market value at the time of the contribution and increases or decreases are handled later as either “other income” or as an expenditure.

States such as Washington and Arizona have gone further, treating cryptocurrencies more like traditional forms of currency. Of the two states, however, Washington has taken a more restrictive approach, treating crypto donations as the equivalent of cash contributions, capping them at $100, requiring that crypto payments be turned immediately into traditional currency, and prohibiting the use of crypto for the purchase of goods and services.

Arizona, on the other hand, has taken a more forward leaning approach stating that “committee[s] may accept an in-kind contribution in the form of cryptocurrency...and such contributions are generally subject to the same rules applicable to traditional contributions in U.S. currency...” As explained by Wiley, “In keeping with this treatment of cryptocurrency as analogous to ‘traditional’ U.S. currency rather than a commodity, Arizona has neither expressly approved nor expressly foreclosed the use of cryptocurrency by political committees to purchase goods or services.”

Which states are out?

Not all states are ready to hit the campaign trail with crypto.

Contributions made via cryptocurrency are currently expressly prohibited by law or official guidance in Michigan, North Carolina, and Oregon. In Michigan and North Carolina, the decision to ban contributions via cryptocurrency was driven by concerns about volatility of crypto markets and the inability of campaign regulators to ascertain the value of a contribution.

So what does all this mean?

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. Some states, like Georgia, have provided informal guidance consistent with the FEC and as long as the crypto is immediately converted to traditional currency. For a full list of states and their respective stances, check out this resource from Multistate.

Like every other issue in crypto, there are global implications. In April, Ireland announced plans to ban crypto donations made as part of an effort to prevent election interference, particularly in the form of Russian influence, on Irish elections.

As more and more candidates seek to fill campaign coffers with donations from younger, and potentially more tech savvy constituents, regulators — both state-by-state and country-by-country — will be forced to consider the benefits and challenges of allowing crypto contributions. Concerns around pseudonymity of wallet addresses, price volatility and election interference will clash with candidate’s desire to connect with ever-evolving constituencies.

One thing is certain, just like crypto has touched almost every political and social issue - from environmental to consumer protection, market stability to national security, questions of crypto in campaign finance are likely to continue well beyond election eve 2022.

About TRM Labs

TRM provides blockchain intelligence to help financial institutions, cryptocurrency businesses, and public agencies detect, investigate, and manage crypto-related fraud and financial crime. TRM's risk management platform includes solutions for transaction monitoring and wallet screening, entity risk scoring - including VASP due diligence - and source and destination of funds tracing. These tools enable a rapidly growing cohort of organizations around the world to safely embrace cryptocurrency-related transactions, products, and partnerships.

TRM’s Global Investigations team conducts and supports crypto investigations to combat illicit activity and build trust and confidence in the crypto economy. Our investigators use TRM Forensics to trace the flow of stolen assets and coordinate with relevant law enforcement partners.

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