What next for political donations of cryptocurrencies

On January 25, the Election Commission introduced a bill in the Kansas House of Representatives to limit political donations via cryptocurrencies to $100. Regardless of the success of this legislative initiative, Kanzas will not be the first jurisdiction to target anonymous donations. From authoritarian countries like Russia or China to electoral democracies like Ireland or Canada, you can find recent attempts to ban crypto donations to politicians around the world.

Opponents of cryptocurrencies can have a strong point – it is hard to imagine a healthy democracy in which large sums of untraceable money flow between candidates. But the problem of “dark money” and the tools for its distribution in the political system existed long before the emergence of pseudonymous crypto assets. The industry is not at its best right now, but the topic of donations to campaigns in cryptocurrencies remains a relatively safe space for innovation. Can this change by the next term?

2014 rule and $6,600 limit

The United States Federal Elections Commission (FEC), the independent body responsible for electoral law enforcement, first approached the topic of cryptocurrency donations in 2014. Back then, digital assets weren’t such a big deal, and the price of one Bitcoin (BTC) was around $300. Perhaps that is why the FEC treated the new problem carelessly. It recognized the possibility of donating in Bitcoin (and only in Bitcoin), but categorized it as “contributions in kind” along with such non-monetary campaign activities as providing a free consultation or concert performance.

Despite the apparent inclusion, Bitcoin donations have been deemed non-anonymous and restricted to the same sign as direct monetary donations. There is a basic limit on such donations, which increases with inflation from one election cycle to another – by 2024 it will be $3,300 in the primary and the same in the general election. The “contribution-in-kind” status also prevented activists from directly spending the received Bitcoins — they have to “liquid” them and then deposit the money into their accounts.

But there is a caveat to the American political system. While the amount of personal donations may be limited, you can always support Political Action Committees (PACs) by donating up to $41,300 per year. There are also Super PACs that have no restrictions. Technically, Super PACS cannot make any direct donations, but can spend unlimited amounts marketing support for its candidates regardless of their campaigns.

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There is at least one successful instance – BitPAC – specifically dedicated to promoting cryptocurrency and blockchain technology. It has accepted donations of Bitcoin, Ether (ETH) and Litecoin (LTC) and has used these donations to support US presidential candidates, congressional candidates, Super PACs and grassroots organizations.

The FEC has not made any significant statements on cryptocurrency donations since 2014, although Bitcoin’s total capitalization has skyrocketed since then, not to mention the issuance and adoption of hundreds of other digital currencies.

An example of a cryptocurrency donation listing schedule. source: FEC

There is also a major exception for non-fungible tokens (NFTs). In 2022, the FEC deemed it “acceptable” to send NFTs to political campaigners without violating corporate contributions. Earlier in 2019, the FEC approved the ERC-20 token issued by Omar Reyes for use in an incentive program for his congressional campaign. The agency decided the tokens would be souvenirs with no cash value.

Kansas or California?

Over the past decade, individual states have largely agreed with the FEC’s vague recommendations on cryptocurrency donations. Only in South Carolina, North Carolina, and Kansas did lawmakers strongly oppose any crypto donations. In the beginning, cryptocurrency donations slowly began to spread with the help of enthusiastic politicians such as Rand Paul, Austin Petersen and Jared Polis.

However, in the 2020s, when every fifth American dealt with crypto to some extent, and the industry itself became something of a problem for global regulators, the mood changed direction. In April 2022, Ireland became the first European country to officially ban political donations in crypto. As Darragh O’Brien, the Irish Minister for Housing, Local Government and Heritage, explained to journalists at the time, the law was intended to protect Ireland’s democratic system, “given the growing threat of cyber warfare against free countries.”

This year, Kansas began discussing political donations in the state legislature. Local household account no. 2167 sets a limit of $100 for each political candidate in a state primary or general election. Furthermore, even for donations below $100, the recipient would have to “convert” the cryptocurrency to US dollars immediately, not use the cryptocurrency for spending, and not keep the funds.

However, there is reason for optimism. After a four-year ban, candidates for California state and local office are allowed to accept cryptocurrency donations again. The ban was lifted by the state’s Fair Political Practices Commission (FPPC) last year after considering three main strategies for cryptocurrency donations.

An option with a $100 limit like in Kansas was also on the table, but the FPPC opted for the original FEC prescription and treated crypto donations as in-kind contributions. Golden State has joined 12 other states where political donations of digital assets are explicitly allowed.

Cryptocurrency donations in 2024

Why has FEC not provided any significant updates in all these years when the landscape of the crypto industry has been constantly changing? First, the 2014 ruling was only finalized in 2019, so with all caveats, it’s not as old as Martin Dobelle, co-founder and CEO of Engage Labs, told Cointelegraph. He said it “was a good principle and allowed political donations to be made successfully.”

Anthony Georgiades, co-founder of the Pastel Network, believes that the pace of FEC is completely in line with general cryptocurrency regulations in the United States. Since cryptocurrency is still a very new industry compared to traditional finance, the FEC is most likely not sure how to monitor cryptocurrency donations, making it difficult to enforce any regulations. He then stated that it was time for an update on cryptocurrency donations, telling Cointelegraph:

“Given all the recent crypto turmoil, regulators now want to bring more clarity and transparency to the industry, and by the time the next election cycle starts, we will see more regulation in place.”

Terrence Yang, managing director of Swan Bitcoin, is not so optimistic about the chances of getting an update from the FEC until the next election cycle. In an interview with Cointelegraph, he points out the polarized nature of the current political setup.

“Because of a divided Congress, it may be more difficult to pass a bill than you think. It is unlikely that any crypto electoral provisions will be added to the bill, which is expected to pass both houses of Congress and be signed by the president,” he said.

Given the turmoil in the markets caused by the crypto winter of 2022, there is always a chance that the new cryptocurrency donation laws will not be market-friendly. But on the other hand, the area of ​​campaign donations still remains completely free of any public cryptocurrency scandals.

Of course there was the case of Sam Bankman-Fried and the $40 million he gave to both political parties in the US and tried to come back later. But, as with the lobbying efforts of the crypto industry in general, it technically has nothing to do with the topic of campaign donations in crypto. “In fact, there is very compelling evidence that political finance offers a real use case for blockchain technology that can be used to greatly increase transparency and traceability,” stated Dobelle.

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“There are many reasons to be optimistic about future cryptocurrency donation regulations,” Georgiades believes. It takes time for knowledge to develop and reach regulators; the example of Internet regulation, virtually absent in the 1990s, is still fresh.

Flawless implementation is hard to imagine, but understanding of the technology will grow over time; regulators will become more adept and recognize where cryptocurrencies have the potential to impact campaign fundraising and where risk needs to be mitigated.

“It just takes patience and a lot of education to get there,” Georgiades concluded.