From California to Colorado: How US Regulates the Political Donations in Crypto
California Ban of Cryptocurrency Political Donations: What Happened and What Comes Next.
On Sept. 20, the crypto community was rattled by the news that California’s political campaign regulator ruled in favor of an outright ban of any and all cryptocurrency donations. It came across as a surprise for many that the progressive state, which is home to the world’s largest technology hub as well as to a politician whom Bloomberg calls the ‘Crypto Candidate for Congress,’ has suddenly set such a hard-handed regulatory precedent in the run-up to November’s elections.
If anything, the signals that emanated from the state’s Fair Political Practices Commission (FPPC) up to this point were largely positive: Just about a month ago, the commission considered the status of cryptocurrencies in state-level political campaigns. Although no definitive decision was reached at that time, commissioners were vocal about their reluctance to ban cryptocurrency from elections outright and expressed their willingness to do further research. How come the end result wound up so fiercely anti-crypto?
Preserving fair political practices
The Fair Political Practices Commission (FPPC) is a regulatory body tasked with ensuring the integrity and fairness of state-level elections of public officials in the state of California. Its main responsibility is to administer and enforce the 1974 law called the Political Reform Act — a major piece of anti-corruption legislation enacted in the wake of the Watergate scandal. The ambition of its sponsors has been to eradicate corrupt practices in state government by limiting the amount of money spent in elections and eliminating contributions from anonymous donors. The Act endows the FPPC with the power to institute, interpret and amend particular regulations that will advance fundamental principles of this law.
The FPPC is a five-person, non-partisan commission, meaning that no more than three members can represent one of the political parties. Its current chairperson is Alice Germond, who is a Democrat; so are Commissioners Frank Cardenas and Brian Hatch. One of the remaining seats is currently vacant, which leaves the fourth Commissioner, Allison Hayward, the only Republican on board.
Thanks to the transparency of the FPPC’s records, the process leading to issuance of the commission’s opinions is usually traceable in granular detail. A closer look into the steps and decisions that the FPPC members had to take is insightful in its own right — but it is also instructive on a larger scale. Since campaign finance legislation shares a certain degree of similarity across the states — as often does the design of the regulatory bodies that oversee its enforcement — the Californian case might be indicative to some extent of the scope and character of the issues that state-level watchdogs face when grappling with regulation of crypto in elections.
Staff reports and written comments
In the run-up to the Sept. 20 meeting, the FPPC issued a notice regarding the upcoming vote on the permissibility of cryptocurrencies for campaign contributions and expenditures. There are two main points of contention visible from the document. One applies to the question of whether cryptocurrencies should be treated the same as cash — and as such subject to same regulations — and another concern is the clause in the Political Reform Act that prescribes that a committee should only have one bank account in order to facilitate oversight.
The potential solutions outlined in the document represented the whole range of regulatory approaches: a blanket ban on using crypto for campaign contributions and campaign expenditures; capping crypto contributions at the same level as cash donations (i.e., $100); requiring that cryptocurrency contributions be converted to fiat and deposited to a campaign’s single account; allowing committees to establish separate cryptocurrency accounts and make expenditures from them; classifying cryptocurrency contributions as in-kind and thus removing the cash cap. These, however, were just preliminary policy options that left the door open for any other language at the commission’s discretion.
In response to the FPPC’s earlier call for conducting further research on cryptocurrencies before the final decision can be issued, at least two documents emerged in their sights prior to the Sept. 20 meeting. One was a product of the commission’s own staff’s research — a report put together by Acting General Counsel Brian Lau and Senior Counsel Zachary Norton. The document provides a description of cryptocurrencies’ structural features relevant to campaign finance law (with a nod to the classic traceability issues), clarifies their relation to the tenets of the Political Reform Act, sketches regulatory frameworks that exist in other states and on the federal level, and weighs potential policies listed in the FPPC notice against each other.
Despite dedicating substantial space to Bitcoin traceability concerns, the FPPC staffers sound fairly positive in their evaluations of two ‘soft’ policy options. They note that regulating cryptocurrency contributions the same way as those made in cash will effectively do away with traceability concerns: Such donations will be limited to a modest $100 and required to be converted to fiat before being deposited to a campaign’s single account. Lau and Norton also suggest that if the same standard of mandatory conversion is applied, crypto contributions could also be treated as in-kind donations without the risk of jeopardizing the integrity of electoral processes.
To be fair, they also mention that an outright ban would also solve traceability problems efficiently. The only policy option that staffers explicitly recommend against instituting is treating crypto donations as in-kind while permitting campaigns to maintain separate digital cash wallets. Overall, the report gives the impression of a balanced account and does not contain any language that could be interpreted as favoring a blanket ban.
Another detailed perspective on the issue submitted to the Fair Political Practices Commission ahead of the vote came in the form of written comments from a nonprofit organization called the Campaign Legal Center. It also presents an overview of existing regulation in other jurisdictions and specifies the essential properties of digital money. The argument dwells heavily on the dangers of cryptocurrency transactions’ decentralized structure and pseudo-anonymity, which are not very compatible, the authors note, with the Political Reform Act’s spirit of maximum disclosure.
Moreover, by allowing for an unlimited number of wallets per person, cryptocurrency systems “readily furnish a means for unscrupulous donors to funnel excess contributions through straw donor transactions.” And what sounds even more disturbing is that they “could provide a relatively simple method for foreign entities and other prohibited sources to direct money into California elections surreptitiously.”
This vivid description of crypto threats to election integrity notwithstanding, the recommendation part of the Campaign Legal Center’s comments does not advance the idea of an outright ban. Rather, the nonprofit stands with the option that proposes to subject crypto contributions to the same regulations as those in cash — with a $100 cap per donor and a requirement to convert crypto to cash before depositing.
On Sept. 20, four commissioners voted on the proposed regulation options, resulting in a 3-1 tally in favor of a blanket ban of cryptocurrencies from campaign finance, effective immediately. As the FPPC’s communications director Jay Wierenga explained to Breaker magazine, the main rationale for the decision has been transparency woes. Apparently, the majority concluded that the standards of openness and traceability that inform the Political Reform Act cannot be met with crypto contributions. It’s hard to tell why the vote went down this way despite the generally positive tone of the two major supporting analytical reports. Perhaps gory depictions of potential dangers permeating those narratives dwarfed reasonable — yet cautious — suggestions in favor of a more friendly approach. Or maybe the committee led by a 75-year-old politician, who is bound to step down in January 2019, simply decided to play it safe. At any rate, against the backdrop of opaque federal regulations and the impending election season, California has set a precedent that other states facing similar regulatory pressure might want to follow.
Nine states and DC
Elsewhere in the country, regulation of political contributions made in cryptocurrencies remains scarce: only one in five states has any kind of ruling on the matter is in place. Here’s the roundup of the existing state-level regulations across the US.
In July 2018, Colorado Secretary of State approved amendments to the Campaign and Political Finance Rules that first mentioned cryptocurrency contributions. Unchanged from the first version of the draft published in May, new regulation holds donations made in digital money to the same limit as regular cash donations. The USD value of crypto received is to be determined by the market value at the time of contribution, and campaigns are obliged to report all subsequent gains and losses as well.
District of Columbia
DC has had a few official words on cryptocurrency donations since late 2014, when its Board of Elections introduced new rules to Title 3 (Elections and Ethics) of the District of Columbia Municipal Regulations. The document mentions ‘Bitcoin contributions’ and specifies the order in which they have to be liquidated and reported as in-kind. The text implies that the cap is no different for crypto donations than any other kind.
In October 2017, in response to a candidate’s request for guidance on whether they could accept bitcoin donations, Kansas Governmental Ethics Commission opined that digital currency was ‘too secretive’ to be used in campaign finance. It is unclear, however, if the scope of the ruling encompasses cryptocurrencies other than bitcoin.
In Massachusetts, the rules governing cryptocurrency donations to political committees are summarized in a January 2014 letter that the state’s Office of Campaign and Political Finance produced in response to Massachusetts Pirate Party PAC’s request of an opinion on the issue. The essence of the ruling is that ‘contributions in Bitcoins’ are permitted and subject to the same limits and disclosure requirements as fiat contributions, with a five-day period for liquidation. It is not allowed to directly use crypto for campaign expenditures, since state law holds it that any campaign purchase exceeding $50 should by paid for with a check from an official committee account.
A similar pattern is visible in an advisory opinion issued by the Office of Montana Commissioner of Political Practices, also in January 2014. Receipt of crypto contributions is permitted, but expenditures can only be made out of a ‘primary campaign depository,’ hence there can be no such thing as the candidate’s official crypto wallet. The time period allowed for converting crypto to US dollars is tighter, though: committees should liquidate the contribution within 24 hours from receipt.
In August 2018, the North Carolina State Board of Elections Campaign Finance Office responded to a crypto-related inquiry by a candidate named Emmanuel Wilder with a firm ‘no,’ citing the regulator’s inability to adequately handle such contributions, as well as the fact that it is impossible to reliably ascribe value to crypto assets.
Oregon took a more flexible stance, as Secretary of State Dennis Richardson came forward in June 2018 with a proposed set of rules designed to mirror the FEC’s approach of allowing contributions but not expenditures to be made in cryptocurrencies. Arguing that ‘cryptocurrency is here to stay,’ Richardson called the move ‘innovative way to expand participation in Oregon elections.’ In August 2018, the rule was adopted.
In South Carolina, the House Legislative Ethics Committee resorted to formal reasons when substantiating their decision to recommend against crypto campaign donations last April. According to the Committee, since the statutory definition of a contribution does not include anything like cryptocurrencies or digital assets, those cannot serve as a means of financing political campaigns.
Tennessee law treats digital currency contributions the same as cash contributions, mandating that crypto is liquidated before it can be spent for campaign needs. The monetary value of crypto donations is determined by the market value at the time of receipt.
The Wisconsin State Ethics Commission, when confronted with a request to resolve the issue of cryptocurrency’s status as a vehicle for political contributions in April this year, opted to pass it on to the state legislature. As of late September, the Wisconsin State Assembly hasn’t yet addressed the issue.
Does the most recent California ban mean that Brian Forde is not getting any more donations in support of his congressional bid from fellow crypto entrepreneurs? Not at all. The Fair Political Practices Commission’s ruling only concerns the elections of California public officials and has nothing to do with the state’s candidates for national offices. Those running for the U.S. Congress and presidency should follow guidance of the Federal Election Commission (FEC), which has been anything but definitive so far.
A 2014 FEC advisory opinion still stands as the only waymark for those seeking to comply with the law while soliciting donations made in cryptocurrency. It only mentions Bitcoin and treats it as an in-kind donation that should be deposited to the campaign’s main account before it can be spent. The document also deems contributions of up to $100 per donor permissible. However, since the advisory opinion is a response to a particular inquiry that only concerned contributions up to $100, it does not specifically address instances when the $100 cap is exceeded. Some candidates avidly exploit this legal grey zone to receive crypto donations worth up to $2,700 per donor.
In the world where the US House Judiciary Committee chair discloses his ownership of a handsome chunk of digital wealth, a more comprehensive and up-to-date set of guidelines for crypto campaign finance is long overdue. The more candidates and voters are getting comfortable with digital money, the more common crypto donations become. There is already a registered 2020 presidential candidate who announced his embrace of Bitcoin as a means of supporting the campaign, and many more will certainly follow suit. Crypto-specific political action committees (PACs) are coming to fruition.
It is very likely that serious legislative work in this area is already underway, and there is hope that national policymakers will adopt a more open-minded approach than did their Californian peers. Granted, anti-crypto fear-mongering is still widespread, as are some legitimate concerns and calls for watchful approach to sensitive legislation. However, there are also signs of countervailing narratives gradually gaining traction among policymakers, which suggests that blanket bans will eventually give way to more nuanced and sensible regulatory architectures.
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