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When it comes to the rules for cryptocurrencies and non-fungible tokens (NFTs) in campaign finance, it’s a bit like the Wild West: Anything goes, and there is no sheriff in town. As a result, “crypto,” an underregulated and easily manipulated financial technology, threatens the core principles of campaign finance regulations, experts say, allowing bad actors to take advantage of lax rules.
“It’s just such an unregulated sphere that I think it poses challenges to all three pillars of our campaign finance law,” said Stephen Spaulding, a campaign finance expert at Common Cause.
For one, crypto’s unstable market poses problems for individual contribution limits. That is the first pillar.
“We know that its value is what it is on the day it’s received by the campaign, but then its value can fluctuate wildly and be manipulated in a way that redounds to the benefit of the campaign,” Spaulding said.
The value of a contribution manipulated in this way could exceed limits on individual contributions without anyone knowing.
“We have contribution limits in place for a reason, to guard against corruption and the appearance of corruption,” Spaulding said.
Valuation is the key issue with cryptocurrency. Items with stable values can easily be measured against the individual contribution limit imposed by campaign finance laws. Volatile items without reliable standards of value may allow donors to exceed these limits, skirting the law.
“If you give cash or even say you donate something in kind, like a car, you have a relatively stable and clear way to value that item,” said Daniel Weiner, director of the Brennan Center’s Elections and Government Program. Weiner previously worked with Commissioner Ellen Weintraub at the Federal Election Commission (FEC).
“What you need is some objective measure of value that is reasonably reliable and not just basically whatever someone decides randomly,” he added. “Crypto obviously is sometimes like a whole different ball game. Certainly the Sam Bankman-Fried fiasco, the scandals that we’ve seen, it just leads to a real sense that crypto is volatile and not really something that’s easy to figure out what you’re dealing with.”
The valuation issue is part and parcel of what Spaulding calls crypto’s “Wild West.”
Volatility, unstable valuation, and uncertain regulatory environment are cause for concern.
“It’s the combination of volatility and lack of reliable, objective measures of valuation,” Weiner said. “That doesn’t make it impossible. The art market also doesn’t always have reliable, objective measures of valuation but there isn’t that same volatility. The two things combined naturally make regulators — not just in the campaign finance space but generally — very nervous.”
“At the time all we knew about Bitcoin was that it was used for all kinds of illegal activities, so there was a lot of concern about this request,” Ravel said. “Except for the fact that it’s so limited in terms of the amount.”
If cryptocurrency contributions are treated as items of value that may be liquidated — the category which covers stocks, bonds, artwork, and other securities — the contributions are valued at the market rate when they are received. According to Myles Martin, a public affairs specialist at the FEC, the assumption is that neither the donor nor campaign has control over what the stock does.
In addition to the possible circumvention of contribution limits, experts worry that cryptocurrency could allow for foreign influence in American elections.
“Because of the difficulty of tracing it — although in some cases they do have a certain kind of tracing, but not enough to identify who’s really behind the money — that was a big issue because of the foreign interference in the elections,” said former FEC Commissioner Ann Ravel.
This worry is especially pronounced after the 2016 election.
Foreign influence is not the only avenue through which cryptocurrency threatens the disclosure principle — the second pillar of campaign finance law.
Campaign finance law prohibits contributions on someone else’s behalf. The opacity of cryptocurrency creates opportunities to do just that, Spaulding said.
Cryptocurrency and NFTs have so far outpaced the FEC’s rulings on their use by campaigns and political donors making enforcement — the third pillar — difficult.
“The FEC is just not set up to respond nimbly to emerging trends in political finance,” Weiner said. “The Democratic and Republican appointees have increasingly divergent ideological perspectives on the basic appropriateness of government efforts to regulate money in politics. When presented with a novel issue that they frankly don’t fully understand, the commissioners are likely to retreat to some degree into their ideological corners.”
The FEC last made a significant ruling on cryptocurrency in 2014, when Bitcoin was first moving from the black market to the mainstream, traded at an average of $526.92, and was just starting to face small-scale competitors called altcoins. In 2014, the largest exchange at the time, Mt. Gox, collapsed, and the first NFT had just been minted on Namecoin.
Make Your Laws PAC (MYL) intended to allow Bitcoin contributions to their committee in amounts equivalent to $100. In explaining their decision to allow these donations, three commissioners compared the contributions to cash donations.
“Given their potentially anonymous nature, contributions of bitcoins are most like cash contributions, on which the Act imposes strict limits,” wrote the commissioners, which included Weintraub, Ravel, who was then the vice chair, and one independent commissioner. “For this reason, the $100 limitation on MYL’s acceptance of bitcoins was a material aspect of the proposed transaction upon which we relied when joining our colleagues in approving MYL’s request.”
Despite misgivings, Ravel and her colleagues voted to approve the opinion.
“At the time all we knew about Bitcoin was that it was used for all kinds of illegal activities, so there was a lot of concern about this request,” Ravel said. “Except for the fact that it’s so limited in terms of the amount.”
Martin said that in the current amounts, exceeding $100, blockchain technologies would not be considered comparable to cash contributions. In the absence of further rulings by the FEC, or acts of Congress, campaigns must rely on the 2014 advisory opinion for legal guidance.
Candidates such as Blake Masters (R) in Arizona have been quick to use cryptocurrency and related technologies like NFTs to fundraise. Masters, a conservative Senate candidate, was a top recipient of cryptocurrency contributions. The campaign reported a total of $171,626.91 in contributions liquidated via Coinbase, a cryptocurrency exchange. WhoWhatWhy has not been able to corroborate claims made by the campaign about its crypto-related FEC filings.
Ravel does not think new guidance is likely.
“It was a compromise in the decision about Bitcoin,” Ravel said. “It really occurred because there was a willingness among the Republicans to go to the low limit.”
Guidance from the FEC may not be forthcoming any time soon given partisan differences of opinion on campaign finance matters.
Weiner has advocated for resolving the deadlock in the FEC through legislation which would provide for an odd number of commissioners, including a required independent.
In the absence of federal action, Michigan, North Carolina, and Oregon have outlawed cryptocurrency contributions. California overturned their ban, according to reporting from Reuters, joining Arizona, Colorado, Iowa, Ohio, Tennessee, and Washington in giving the green light.
In the meantime, campaigns are free to accept and to sell NFTs, invest in cryptocurrency, and accept donations in crypto. These items are considered securities by the Securities Exchange Commission (SEC). Coinbase, a cryptocurrency exchange, disputes this classification.
“The law is very clear that you can give a campaign a thing of value,” Weiner said. “It’s really just this practical question of what’s the value.”
