Bitcoin Campaign Donations Pose Potential Fraud Risks

By Michaela Ross and Lydia Beyoud

Rising bitcoin values have launched a new type of campaign donor: suddenly -wealthy cryptocurrency holders who want to support candidates that value the technology.

These virtual currency donations are raising concerns among campaign finance transparency groups who worry bitcoin’s potential for anonymity combined with a flawed reporting system could mask a wave of fraudulent campaign giving.

The Federal Election Commission last offered guidelines — but not rules — on how to report bitcoin donations in May 2014 when bitcoin was worth about $427, compared to roughly $8,000 today.

Gaps in FEC policy around crypto donations mean even if a campaign is trying to be compliant, bad actors could take advantage of cracks, Adav Noti, senior director at the Campaign Legal Center and former associate general counsel for policy at the FEC, told Bloomberg Law.

“It’s much easier to give false information in the bitcoin context,” Noti said. “As long as the amounts are small, it’s not a big deal, but if you start getting maxed-out donors through bitcoin, it becomes potentially a very big deal.”

Noti may be better placed than most to see the potential for abuse. He helped write the FEC’s 2014 advisory opinion explaining how a nonpartisan political action committee, Make Your Laws PAC, should report bitcoin donations up to $100.

One of the biggest shortcomings with the FEC’s 2014 effort is that it doesn’t have teeth to mandate that campaigns use bitcoin collection methods that are subject to traditional know-your-customer rules that banks and other entities must follow, Noti said. Campaigns are required to collect donor information for bitcoin contributions, but it is harder to confirm that information compared to credit cards or checks, he said.

“The chances that the FEC will have the capacity to investigate if a bitcoin was contributed in the name of another person, it’s just extremely unlikely that they’re going to be able to do that,” he said.

Elections regulators are aware of some of the concerns that remain with crypto campaign contributions. Democratic FEC Commissioner Ellen Weintraub told Bloomberg Law March 14 it would be hard for the FEC to trace bitcoin to ensure its donor’s true identity is known.

“My concern about all of that is that the whole basis of it is it is more anonymous,” she said.

Others disagree that bitcoin could somehow be easier to abuse than other forms of donations. “I just never bought into that argument,” former Republican FEC Chairman Lee Goodman told Bloomberg Law, adding that cash and prepaid debit cards can also be manipulated.

The FEC and the Justice Department have “plenty of tools” available to look behind the use of this property, including subpoena powers of bitcoin wallets and computers if necessary, Goodman said.

Another complication: It’s unclear just how much crypto campaigns can accept from a single donor. There was disagreement along party-lines at the time of the 2014 advisory opinion vote on whether a committee could accept up to the $2,700 per campaign, or stay capped at $100. This has led to a divergence of interpretations on how much campaigns can accept in crypto.

It also leaves the door open for super PACs, which are political groups that aren’t bound by donation caps, to accept unlimited amounts of bitcoin, Noti said.

No Easy Reporting

Even tracking crypto donations is problematic. The FEC’s standard donation reporting rules and the 2014 guidance are leaving gaps in the data, campaigns and election finance practitioners told Bloomberg Law.

Many campaigns use crypto platforms Coinbase or BitPay to accept and convert their crypto donations into dollars almost immediately. Many donations aren’t large enough to be itemized and those that are may not be identified as originating in bitcoin or other cryptocurrencies.

“Even if the FEC had some sort of basic way to track this stuff, they would have no idea from our standpoint that we’d gotten any bitcoin,” said Jeffrey Carson, the campaign manager for Missouri U.S. Senate candidate Austin Petersen, a Republican.

“It’s complicated, there’s a lot of gray area,” Carson told Bloomberg Law.

No Clarity on the Horizon

All this ambiguity could be clarified through a rulemaking. But as the 2018 election approaches, FEC commissioners say there are no current plans for regulations to clarify the issue.

“We’re not likely to take it up in the absence of people asking a lot of questions,” FEC Chairwoman Caroline Hunter told Bloomberg Law March 14.

Still, many campaigns want greater clarity on how much crypto they can accept and how to report it. “I think what you’ve seen is the regulatory community trying to do the best it can with a situation where we can all benefit from more clear guidance,” Brian Svoboda, campaign finance lawyer and partner at Perkins Coie LLP, told Bloomberg Law.

Goodman was one of the FEC Republican commissioners who believed candidates can accept crypto donations up to the standard $2,700 election limit. He said the FEC Democrats’ view that campaigns should limit themselves to $100 has had a chilling effect on campaigns.

“Many people are going to be careful and regulate themselves to the lowest permissible use of the cryptocurrency,” Goodman said. Despite that wariness, Goodman said he expects cryptocurrency use to gain traction “in all realms of commerce, as well as political contributions.”

Crypto Donors Emerge

Campaigns have a number of reasons to take on the compliance burden of bitcoin donations despite the lack of clear guidance.

Those reasons come down to investment, savings, and optics. Campaigns could treat bitcoin donations like an investment instrument, holding on to it as the price rises and selling at a later date.

FEC data makes it difficult to determine whether any campaigns are actively holding on to bitcoin donations for investment, but potential appreciation could be one of the biggest benefits of accepting such donations, one campaign consultant told Bloomberg Law. “One would think that if you’re a savvy investor then that may be a risk you’d be willing to take with your campaign funds instead of turning the bitcoin contribution down altogether,” Emily Hoover, Director of Compliance at Campaign Financial Services, a campaign finance and consulting firm.

Crypto payment processors also charge lower fees, as little as 1 percent, compared to around 4 percent charged by credit card processors. “Saving three to four percent of all those contributions is a big, big deal,” said Petersen campaign manager Carson.

And tech-savvy candidates see crypto campaign contributions as a differentiator. Dubbed the “crypto candidate,” California Democrat Brian Forde’s U.S. House campaign regularly pulls in crypto donations above $200 and up to the $2,700 limit, his campaign manager Joe Bowen said.

Donors who’ve never been politically active before are donating to Forde’s campaign in cryptocurrency, Bowen said.

Other political operators are taking note. More than a half-dozen campaigns, political action funds, and committees have reached out to Forde for more information on crypto donations, Bowen said.

“I wouldn’t be surprised to see more candidates and committees like the [Democratic National Committee] or state democratic parties starting to offer the option,” he said.

With assistance from Dan Stoller

To contact the reporters on this story: Michaela Ross in Washington at mross@bloomberglaw.com; Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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