It’s not in vogue yet.
But states are hustling to get ready.
Little by little nationally, digital currency — otherwise known as cryptocurrency — is becoming a more popular form of campaign contribution even as its value has plunged and one of the leading exchanges for trading crypto has crashed amid criminal charges of fraud.
The emergence of cryptocurrency as a campaign contribution is forcing Kansas and other states to scramble to find ways to regulate something outside the traditional sphere of cash that could influence our elections – even from foreign interests.
The Federal Elections Commission already allows political committees to accept cryptocurrency contributions, although they can’t be used to pay for expenses.
Federal rules require campaigns to sell cryptocurrency and deposit the proceeds before using the money to buy goods and services.
However, the issue is still fluid in the states where there is a mishmash of laws regulating cryptocurrency, and in many cases it’s not regulated at all, raising the specter of political influences that aren’t subject to any kind of restriction or disclosure requirements.
A vast majority of the states, including Kansas, don’t address cryptocurrency contributions to political campaigns, opening the door to an entirely new world of political dark money.
Twelve states, as well as the District of Columbia, expressly allow cryptocurrency contributions in some form, according to research compiled by the California Fair Political Practices Commission.
They include Arizona, Colorado, Georgia, Iowa, Massachusetts, Montana, New Hampshire, Ohio, Tennessee, Vermont, Washington plus California.
California had banned cryptocurrency contributions until last summer, when the state’s Fair Political Practices Commission approved new rules allowing the donations for digital currencies such as bitcoin.
The commission adopted new rules that allow candidates to accept cryptocurrency donations if they immediately convert the digital currency into U.S. dollars.
Candidates must use a registered cryptocurrency processor to handle the transaction that will collect the name, address, occupation and employer of each contributor.
At least five states — Arkansas, Michigan, North Carolina, Oregon and South Carolina – ban cryptocurrency contributions, according to the National Conference of State Legislatures.
While the Kansas Governmental Ethics Commission informally advised against taking cryptocurrency contributions in 2017, there’s nothing in state law that expressly outlaws their donation.
The Kansas ethics commission, however, revisited the issue recently and is recommending that the Legislature take up cryptocurrency contributions before they take hold in Kansas.
Mark Skoglund, the commission’s executive director, said he was unaware of any state campaign that was set up to accept virtual contributions.
“My concern is that if someone does decide to approach cryptocurrency right now, it’s a little bit the Wild West,” Skoglund recently told the commission.
“There’s not anything in statute that handles it in any meaningful way,” he said.
“This is an issue that would be good to get in front of rather than be dealing with it retroactively or on the fly,” he said.
Everyone understands hard cash.
The federal government defines currency as “the coin and paper money of the United States or of any other country that is designated as legal tender.”
Digital currency, meanwhile, functions like cash but doesn’t share the same traits.
Specifically, digital currency does not have legal tender status in any jurisdiction and isn’t backed by any government or bank.
The Internal Revenue Service has ruled that virtual currencies that can be converted into traditional currency are property and can be taxed based on whether there is a gain or loss when it’s eventually sold.
It has been reported that there are roughly 22,023 different types of cryptocurrencies — bitcoin being the most well known — that represent a market believed to be worth $900 billion, although its value can fluctuate wildly.
It is believed that just four years ago, there were about 2,000 forms of cryptocurrency, which is subject to great volatility in its value.
A Pew Research Center survey last year revealed that 16% of U.S. adults have personally invested in, traded or otherwise used one form of cryptocurrency or another.
In recent weeks, the future of cryptocurrency took a hit with the collapse of FTX, the world’s third-largest cryptocurrency exchange where investors could trade bitcoin and other types of cryptocurrency.
Sam Bankman-Fried, the founder of FTX, was arrested and charged this week with wire fraud, securities fraud, money laundering and campaign finance violations.
Despite the fallout from FTX, consumers aren’t giving up on crypto.
Morning Consult reported last month that 21% of U.S. adults said they were likely to buy cryptocurrency in the next month, compared with 25% in October before the fall of FTX and 26% in January.
“Crypto owners have been similarly steady in their intentions to purchase cryptocurrency,” Morning Consult reported. “They weren’t scared off at the beginning of the ‘crypto winter,’ and they aren’t scared now.”
Nevertheless, crypto has been part of the political ecosystem in recent years, forcing states to figure out how to address this arcane form of unregulated currency.
An analysis by Government Technology magazine revealed that $1.5 million had been contributed to political committees via cryptocurrency from Jan. 1, 2021, to June 24 of this year. About $1.2 milllon of that came from venture capital firms.
Data compiled by the FEC shows Democratic U.S. Sen. Ron Wyden of Oregon among those who received cryptocurrency contributions along with Republican U.S. Senate candidate Blake Masters in Arizona and Democrat Shrina Kurani, who ran for Congress in California.
“It’s definitely still a minority of contributions,” said Chris White, a campaign finance specialist with the Washington, D.C.-based law firm Wiley Rein.
He said oftentimes donors and campaigns still prefer cash donations because of lower processing costs and it’s easier to use than cash.
“That said, contributions made via cryptocurrency are becoming more popular and rapidly more popular,” White said.
Yet, White said that while the FEC has led on the issue, there are some “big gaps” in regulation at the state level that potentially put candidates at risk.
“There are a lot of states that just haven’t chimed in on this,” he said.
“The lack of regulatory clarity can put candidates and would-be contributors in a really awkward situation,” he said.
“Any time there is uncertainty about whether a certain contribution is permitted or not, that’s going to put campaigns and their fundraising staff in a really awful position,” he said.
“They have to choose between potentially incurring the wrath of regulators and potential criminal liability, and leaving money for the campaign on the table.”
The fact that the value of cryptocurrency can shift so quickly could potentially lead to a campaign unintentionally violating contribution limits, which is not an issue with cash.
“Accurately valuing a cryptocurrency contribution at the time of the contribution can be very difficult,” White said.
“It is a double-edged sword,” he said. “It can go up, or it can go down.”
Take Republican Austin Petersen, a failed U.S. Senate candidate from Missouri, as an example.
He reported receiving a $130,000 bitcoin donation, the largest single contribution of its type in federal election history.
He was later forced to return the contribution because it exceeded federal contribution limits.
The prospect of unregulated cryptocurrency creeping into political campaigns has already been drawing scrutiny for several years.
In 2018, Scott Dueweke, an expert in cyber analytics and alternative payment systems, warned Congress about that dangers posed by virtual campaign contributions.
“For cryptocurrencies, the greatest emerging threat of foreign funds reaching the
coffers of political candidates, or to be used to fund other influence operations, are
the increasing number and liquidity of ‘privacy coins,'” Dueweke told a Senate subcommittee.
“These are cryptocurrencies that seek to evade efforts to identify their users,” Dueweke told lawmakers in his testimony.
But even as cryptocurrency gains popularity, observers say its nature presents challenges to protecting the integrity of election campaigns, including a lack of transparency, traceability and regulations.
The Campaign Legal Center raised some of those concerns in Texas, where state ethics officials are considering a proposal to treat virtual contributions as in-kind contributions.
The rule would require candidates to report the fair market value of the cryptocurrency at the time that the candidate receives the donation.
But in a letter to the Texas Ethics Commission, the Campaign Legal Center noted that the proposal presents similar enforcement challenges to both cash contributions and in-kind
contributions of assets like stocks.
“Like cash, cryptocurrency offers a ‘facile medium for unethical and illegal activities’ because many modes of use emphasize ‘untraceability and easy transferability,’” the organization wrote to the commission.
Unlike contributions made by check or credit card, a bitcoin contribution requires only a bitcoin address, which does not contain any personal identifying information, the group said in its letter to ethics officials.
“The inability to uncover the actual source of a cryptocurrency contribution with standard
audit mechanisms could facilitate a range of unlawful conduct,” the legal center wrote.
“Thus, under many modes of transfer, the inability to uncover the actual source of a cryptocurrency contribution with standard audit mechanisms could facilitate a range of unlawful conduct,” the group said.
The Campaign Legal Center said the cryptocurrency system allows users to create an unlimited number of addresses for transactions, which creates a climate for “unscrupulous
donors” to funnel excess contributions through straw donor transactions.
“Moreover, cryptocurrency could provide a relatively simple method for foreign entities and other prohibited sources to direct money into Texas elections surreptitiously.”
Saurav Ghosh, director of federal campaign finance reform for the Campaign Legal Center, said any regulations of cryptocurrency contributions should require the donor to be identified to ensure their identity is not concealed.
“Everyone who participates in elections has the right to know who is spending on those elections and who is actually trying to influence the outcome and who’s backing the candidates that are vying for people’s votes,” Ghosh said in an interview.
“The technology’s capability of concealing who is actually behind the financial transaction is obviously problematic,” he said.
The staff of the California Fair Political Practices Commission flagged similar concerns before a new regulation was adopted earlier this year.
“The nature of cryptocurrency presents challenges for ensuring full and truthful disclosure
of campaign contributions made using cryptocurrency,” the commission’s lawyers wrote in a memo to the commission.
“Anyone can conduct rudimentary tracing of bitcoin and most other cryptocurrency using standard blockchain explorers.
“However, these tools are not suitable for tracing suspicious transactions. Criminals tend to go to great lengths to obfuscate their trail by using multiple wallet addresses.”
Meanwhile, other states have been taking similar actions.
States have generally take several approaches to dealing with cryptocurrency donations.
They’ve either kept existing bans in place, limit the contributions to $100 per donor or treat the contributions as an in-kind contribution.
Earlier this year, the Iowa Ethics and Campaign Disclosure Board issued an advisory opinion that campaigns could accept cryptocurrency as an in-kind contribution.
The campaign must report the fair market value of the contribution as of the date of the contribution.
The campaign must report the specific amount and type of cryptocurrency that was received and whether or not it was liquidated.
If the committee pays processing fees, that should be reported as a separate expenditure and not deducted from the value of the contribution.
The Ohio Elections Commission issued an advisory opinion in December 2021 allowing
cryptocurrency as an in-kind contribution.
Because cryptocurrency contributions are more fungible than cash donations and the value is highly volatile, the Elections Commission required the attributed value to be properly reflected on the date that the cryptocurrency is accepted.
When that exchange is completed, any cost involved in the exchange must be shown as an expenditure for the campaign committee.
Similar to other states, Kansas ethics officials are concerned about the fact cryptocurrency contributions, by their very nature, are not auditable.
The transfer of funds can be confirmed, but the source can’t always be verified as it would with a wire transfer or check, they said.
The Kansas ethics commission is recommending some changes to state law, including:
- Limiting cryptocurrency contributions to $100 in each primary or general election from any one donor to any one candidate.
- The value of the contribution is based upon the market value of the cryptocurrency at the time it is received by the campaign.
- Campaigns are responsible for providing accurate market valuation of cryptocurrency
received by a campaign. - Campaigns must sell the virtual currency and deposit the proceeds into the campaign
account before using the funds to make disbursements for goods and services, - Campaigns must detail on campaign finance reports the amount and type of virtual
currency received (e.g., 0.005 bitcoins) as an in-kind contribution. - Anonymous virtual currency contributions would be prohibited.
- The following information must be obtained before accepting the contribution: the contributor’s name, address, an affirmation that the contributor is the owner of the
virtual currency, and an affirmation that the contributor is not a foreign national.
Skoglund says an argument can be made that cryptocurrency campaign contributions encourages participation in the political process, especially among young voters.
“It creates more awareness around political campaigns, generally,” he said.
But he added that the nature of cryptocurrency makes it hard, if not impossible, to track the donor.
“We cannot audit those contributions in any way,” Skoglund said.
“This means that we end up in a situation where if someone reports a cryptocurrency contribution in some way, we have to take them at their word,” he said.
He said that makes it similar to cash, which is now limited to $100 per donor.
“This occupies a space that isn’t directly addressed by the Campaign Finance Act,” Skoglund said.
“Cash limits wouldn’t be applied, there wouldn’t be any limitation at $100,” he said.
“It would just be received by campaign with no requirements on what records they keep, what affirmations they accept, any limits on this in any context,” he said.
“These are all things the Legislature needs to handle before we start running into these problems with no regulatory oversight.”
