Political donation is most complex crypto payment

It’s hard to think of any form 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 another 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 details have the added benefit of being unclear or simply unwritten when crypto is added to the equation.

And the transactions are even more complex for the recipient. Cryptocurrencies aren’t considered money, but they fall under the category of “anything of value,” according to the Federal Election Commission (FEC) — like art, jewelry, stocks, bonds, or anything that can’t be deposited directly into a bank. Add to that the fun of valuing them correctly and the need to collect customer data (KYC) of the kind banks and other financial institutions (FIs) usually handle.

Then there’s the reality that even though bitcoin’s image as nothing more than a tool for drug traffickers and tax evaders has been heavily rehabilitated, cryptopolitical donations are still seen as a “donation” in a gym bag in many circles. It remains a global concern, with Ireland in April banning all crypto-political donations over concerns about Russian interference in its elections.

The law

The biggest stumbling block this type of transaction faces is the opacity of what the rules actually are when crypto is involved.

At the federal level, it’s basic: 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 seems irrelevant.

But campaigns are responsible for collecting KYC data that allows them to properly identify each donor in their FEC filings — something that’s taken care of by banks and credit card issuers for dollar-based donations (aside from actual paper cash, of course.)

In July, political software firm Engage Labs launched a partisan fundraising platform, Engage Raise, aimed solely at facilitating these transactions by offering 2022 midterm candidates a way to accept cryptocurrency donations, as well as a channel to “connect with the crypto and blockchain community via fundraising, events and messages,” Engage Labs CEO Martin Dobelle told CNBC.

Engage Raise collects the required KYC information – which for donations includes the name of the donor’s employer – and then instantly exchanges bitcoin or other tokens for dollar-pegged USD Coin (USDC) stablecoins. This is “necessary to capture the exact donation amount, as well as send the donation to the candidate in USD,” the platform said.

Which means it works much like a Visa or Mastercard crypto card, or the crypto-accepting payment processors that enable most retail sites that accept cryptocurrencies. The buyer spends crypto, but the recipient receives cash, and the intermediary sells the crypto at the point of sale (POS) or in the 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 actually have no crypto campaign finance laws, which is a problem as the industry increasingly focuses on state and local campaigns.

In May, attorneys Christopher White and Caleb Burns of the Washington, DC 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 creating their own laws and regulations governing the use of cryptocurrencies in campaign finance.”

These laws, they noted, “fall on a spectrum from a total ban on contributions or use of cryptocurrencies to explicit approval of contributions made via cryptocurrency.”

While half a dozen states expressly allowed crypto contributions at the time—California joined the 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, nevertheless take very different paths, with Washington limiting such donations to $100 and requiring them to be converted into dollars within five days. Arizona’s secretary of state, they added, suggested that crypto be treated as U.S. currency, but took the less 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 difficult to fairly value when it comes to meeting donation limits.

The long and short of it, White and Burns concluded, is that political donations in crypto are complex enough transactions 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 DC have not considered or enacted laws or regulations to allow cryptocurrency which creates a large gray area.”

Indirect effect

Lobbying in the crypto industry is becoming a bigger and bigger problem as the crypto and blockchain industries began 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 election. Although he recently backtracked on that last part, Politico reported on Oct. 14, Bankman-Fried called the billion-dollar quote “silly.” The Capitol Hill publication said he has “turned off the tap” this year after a still-huge $40 million.

While the ins and outs of who is lobbying for what isn’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 major issues throughout 2022, with several committees sprinting to try and get at least one bipartisan stablecoin through before the election, and at least one interested congressman says he thinks it could still happen after the election.

That is, all the crypto money flowing into the election cycle this year and through 2024 is likely to have a very large effect on how both traditional cryptocurrencies and stablecoins are regulated. Which will have a big impact on how they can be used for mainstream C2C, B2C and B2B payments in the years to come.

Note that a July 1 analysis of FEC filings by state and local government technology company GovTech.com found that as of early 2021, the USDC stablecoin was the second largest cryptocurrency in terms of political donations, behind only bitcoin and well ahead of Ethereum’s ethereum token . So how stablecoin payments are regulated is important to politicians seeking these donations.

And remember that the biggest issue the crypto industry is pushing in the fight for crypto regulation is stopping the Securities and Exchange Commission (SEC) from continuing to label nearly every digital asset except bitcoin as a value. And although there are many reasons for that, making cryptocurrencies a payment currency is very important. Like securities, any purchase made with a cryptocurrency – even as small as a cup of coffee – is a capital gain event that must be filed with the IRS.

In the long term, the level of difficulty that will add to crypto payments could be a big, big barrier to widespread adoption. And it’s far less of a problem at this point than donating bitcoin to a candidate.

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