State caps or federal regulation: What's next for political crypto donations

The industry isn’t having the best of its moments now, but the topic of campaign donations in crypto remains a relatively safe space for innovation.

On Jan. 25, the Committee on Elections introduced a bill to the Kansas House of Representatives aimed at capping political donations via crypto at $100. Regardless of the success of this legislative initiative, the state of Kanzas won’t be the first jurisdiction to target anonymous donations. From authoritarian nations like Russia or China to electoral democracies like Ireland or Canada, one can find recent attempts to ban crypto donations to politicians all around the globe.

The opponents of crypto may have a strong point — it’s hard to imagine a healthy democracy where large sums of untraceable money are flowing between candidates. But the problem of “dark money” and tools to dispense it around the political system existed way before pseudonymous crypto assets arrived. The industry isn’t having the best of its moments now, but the topic of campaign donations in crypto remains a relatively safe space for innovation. Could it change by the next electoral cycle?

The 2014 rule and a $6,600 cap

The first time the United States Federal Election Commission (FEC), the independent authority responsible for enforcing election law, approached the topic of crypto donations was in 2014. Back then, digital assets weren’t nearly as big of an issue, and the price of one Bitcoin (BTC) lay around the $300 mark. Perhaps that is why the FEC took the new problem light-heartedly. It acknowledged the option to donate in Bitcoin (and Bitcoin only) but qualified it under the category of “in-kind contributions” along with such non-monetary campaign activities as giving a free consultation or a concert performance.

Despite the apparent inclusion, Bitcoin donations have been deemed to remain non-anonymous and capped at the same mark as direct cash donations. There is a basic limit of such donations that grows along with the inflation from one electoral cycle to another — by 2024, it will stand at $3,300 for the primary and the same amount for the general election. The status of “in-kind contribution” also prevented campaigners from spending received Bitcoin directly — they have to “liquidate” it and then deposit the money into their accounts.

But there is a caveat within the American political system. While the amount of personal donations may be limited, one can always support Political Action Committees (PACs) by donating up to $41,300 yearly. There are also Super PACs, which have no limit whatsoever. Technically, Super PACS cannot make any direct contributions, but they can spend unlimited amounts of funds in marketing support of their candidates independent 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 used those donations to support U.S. presidential candidates, congressional candidates, Super PACs and grassroots organizations.

The FEC has not issued any major statements on crypto donations since 2014, although Bitcoin’s total capitalization has sky-rocketed since then, not to mention the issuance and adoption of hundreds of other digital currencies.

An example of an itemization schedule for donating cryptocurrency. Source: FEC

There is also a major exception for nonfungible tokens (NFTs). In 2022, the FEC deemed it “permissible” to send NFTs to political campaign contributors without violating rules on corporate contributions. Earlier in 2019, the FEC approved an ERC-20 token issued by Omar Reyes to use in an incentives program for his congressional campaign. The agency decided the tokens to be souvenirs with no monetary value.

Kansas or California?

Over the last decade, the separate states have largely agreed with the FEC’s vague recommendations on crypto donations. It was only South Carolina, North Carolina and Kansas where lawmakers decided firmly against any donations in crypto. Early on, crypto donations started to spread slowly with the help of enthusiastic politicians like Rand Paul, Austin Petersen or Jared Polis.

However, in the 2020s, when every fifth American has dealt with crypto to some degree, and the industry itself became a sort of a problem for global regulators, the mood swung in another direction. In April 2022, Ireland became the first European country to officially prohibit political donations in crypto. As Darragh O’Brien, the Irish minister for Housing, Local Government and Heritage, explained to journalists back then, the law aimed to protect Ireland’s democratic system, “given the escalating threat of cyber warfare targeting free countries.”

This year, Kansas started to discuss political donations in the state legislature. The local House bill no. 2167 sets a cap of $100 for any political candidate in the state’s primary or general election. Moreover, even for donations under $100, the receiver would need to “immediately convert” the crypto into U.S. dollars, not use the crypto for expenditures, and not hold on to the funds.

There is, however, a case for optimism. After four years of a ban, candidates for state and local offices in California are once again allowed to accept donations in cryptocurrency. The ban was lifted by the state’s Fair Political Practices Commission (FPPC) last year after it considered three major strategies regarding crypto donations.

The option with a $100 cap, like in Kansas, was also on the table, but the FPPC decided to go with the original FEC prescription and treat donations in crypto as in-kind contributions. The Golden State joined 12 other states where political donations of digital assets are explicitly allowed.

Crypto donations in 2024

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

Anthony Georgiades, co-founder of Pastel Network, considers the FEC’s pace to be completely in agreement with general crypto regulation in the United States. With crypto still being a very new industry compared to traditional finance, the FEC is most likely unsure of how to monitor crypto donations, making it difficult to enforce any regulations. He further stated that the time for some updates on crypto donations has come, telling Cointelegraph:

“With all the recent turbulence in crypto, regulators now want to ensure there’s more clarity and transparency within the industry, and we’ll be seeing more regulation introduced by the time the next electoral cycle begins.”

Terrence Yang, managing director of Swan Bitcoin, isn’t so optimistic about the chances of getting the updates from the FEC by the next electoral cycle. Speaking to Cointelegraph, he points out the polarized nature of the current political configuration.

“Because of the split Congress, it may be harder than you think to get legislation passed. It’s unlikely any crypto election laws get added to a bill to pass both houses of Congress and get signed by the president,” he said.

Given the turmoil in markets brought about by the crypto winter of 2022, there is always a chance that new crypto donation regulations would not be friendly to the market. But, on the other hand, the area of campaign donations still remains totally free of any public scandals involving crypto.

Of course, there was the case of Sam Bankman-Fried and the $40 million he donated to both political parties in the U.S. and tried to return later. But, as with the lobbying efforts of the crypto industry in general, that technically has nothing to do with the topic of campaign donations in crypto. “In fact, there’s a very compelling case that political finance offers a genuine use case for blockchain technology, which can be leveraged to significantly enhance transparency and traceability,” Dobelle stated.

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“There’s plenty of reason to be optimistic about the future regulation of crypto donations,” Georgiades believes. It takes time for knowledge to develop and spread to regulators; the example of internet regulation, practically absent in the 1990s, is still fresh.

It’s hard to imagine a flawless implementation of regulations, but over time, the understanding of the technology will grow; regulators will become more adept and recognize where crypto has the potential to impact campaign fundraising and where the risks need to be mitigated.

“It’s just going to take patience and a lot of education to get there,” Georgiades concluded.

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