Is Bitcoin Secretly Messing with the Midterms?
Is Bitcoin Secretly Messing with the Midterms?
Four
years after bitcoin was allowed in federal elections, most states are still in
the dark about how to handle the donations.
Democrat Brian Forde raised nearly half a million
dollars of bitcoin for his unsuccessful bid for a California congressional seat
this year, but then had to field questions from election watchdogs about a
contribution from Hong Kong.
Republican Austin Petersen, a U.S. Senate candidate from
Missouri, received the largest single bitcoin donation in federal election history,
but was forced to return the virtual currency in June because it exceeded
federal contribution limits.
Libertarian Phil Anderson, who's running for governor in
Wisconsin, decided to continue accepting crypto contributions even though
Wisconsin, like most states, has not decided how to regulate or track crypto
contributions.
In an era of Russian hackers, super PACs and shell corporations
being used by foreign entities to influence voting, officials tasked with
maintaining the integrity of state and local elections have one more thing to
worry about: crypto-candidates. The Center for Public Integrity found 20
crypto-candidates of various political stripes, seeking all levels of office,
who have been requesting or have received cryptocurrency to support their
efforts. At least three were candidates in a state that has since banned such
donations. Another was accepting cryptocurrencies marketed as untraceable. The
confusion over campaign cryptocurrency is widespread, and the implications are
far from isolated. But the effort to establish uniform rules is lagging behind.
“Cryptocurrency is like the Wild West in terms of regulation,”
said Joseph Argiro, a cryptocurrency analyst with ICO Alert, which maintains a comprehensive
list of cryptocurrencies. “This is the new way of raising money. It’s no
surprise that politicians are jumping on board.”
Since bitcoin began to trade in 2010, it has been linked to
illicit activities including money laundering and fraud. Most recently, foreign
state actors have used it to try to influence U.S. elections. Studies show
cryptocurrency users can employ pseudonyms and transfer virtual money across
international borders with just a few clicks — involving no intermediaries or
banks. Unlike cash or checks that campaigns have historically depended on, the
source of some cryptocurrencies cannot be inspected easily by the public,
despite efforts for election transparency.
During a June Senate Crime and Terrorism Subcommittee hearing titled
“Protecting Our Elections: Examining Shell Companies and Virtual Currencies as
Avenues for Foreign Interference,” election experts illuminated the scope and
threat of virtual currencies that are now used by more than 3 billion people.
“The greatest emerging threat of foreign funds reaching the
coffers of political candidates, or to be used to fund other influence
operations, are the increasing number and liquidity of privacy coins,”
testified Scott Duekeke, director of threat analysis company DarkTower.
Even so, the Federal Election Commission, the U.S. agency tasked
with enforcing campaign finance laws, decided to allow bitcoin contributions in
2014.
California, so often a state breaking new legal ground, was the
latest to act, last month banning those types of contributions to candidates
running for state office.
“Hardly a day passes that there isn’t some other indication that
there is someone out there who wishes us ill, foreign and or domestic,” said
California Commissioner Frank Cardenas during the Sept. 20 Fair Political
Practices Commission hearing that resulted in the ban.
“The acceptability of cryptocurrency in California elections? That
day may come,” Cardenas added. “For now, it’s not worth the risk.”
So is cryptocurrency a hazard to democracy as geographic boundaries dissolve in
this digital world? Or is it the dawn of a crypto-future? Depends on who you
ask.
A study published in January by the Center
on Sanctions and Illicit Finance, a program at the Foundation for Defense of
Democracies, and Elliptic, a cryptocurrency analyst, found less than 1 percent
of all transactions entering conversion services worldwide were linked to
illicit activities, including money laundering and online extortion.
And experts at the forefront of this financial technology argue
that bitcoin could actually bring more transparency to the democratic process
by offering new, unhackable tools to track money in politics.
But cryptocurrency analyst Argiro said unless regulators decide
which coins politicians can and can’t accept — more than 2,000 different
virtual currencies existed in mid-October compared with about 1,500 in early
March of this year — it will be hard to ensure Russian hackers or other bad
actors are not funding U.S. elections using cryptocurrencies. The Center for Public Integrity found it’s
nearly impossible to identify actual crypto contributions in some state
campaign-finance reports.
“It’s definitely important for the states to put in political
surveillance on these types of campaign contributions,” he said. “But the
industry is so new that the tools are still being developed to facilitate that
surveillance. And that’s why people are fearful.”
***
If there is a center of the political bitcoin movement, it’s
probably New Hampshire.
Called the bitcoin capital of America, New Hampshire is also one of the states that has not passed clear rules about reporting cryptocurrency contributions. The result is a raft of libertarian-leaning early adopters operating in a regulatory vacuum that puts the onus on the candidate to disclose how much they have received and from whom.
Called the bitcoin capital of America, New Hampshire is also one of the states that has not passed clear rules about reporting cryptocurrency contributions. The result is a raft of libertarian-leaning early adopters operating in a regulatory vacuum that puts the onus on the candidate to disclose how much they have received and from whom.
In 2012, then-New Hampshire Republican state Rep. Mark Warden decided
to return crypto contributions that came from Europe and
South Africa, according to The Washington Post.
Republican Andrew Hemingway made headlines in 2014
when he became the first-ever gubernatorial contender to use cryptocurrency
contributions in his campaign. His bitcoin donations amounted to about 20 percent of his overall funds,
Hemingway told CNBC earlier this year. Hemingway did not make it to the general
election.
This cycle, at least three candidates running for state office in
New Hampshire are requesting cryptocurrencies.
The website of state Rep. Caleb Dyer, a Libertarian and former
Republican running for reelection, can accept 10 different types of
cryptocurrencies including Monero, a “privacy coin” marketed as
untraceable and anonymous.
Dyer has said that he received $269.62 in donations, but he has
not filed campaign reports to document any contributions including when he
first ran for office in 2016, according to state officials. New Hampshire
doesn’t require candidates to file campaign finance reports if they do not
spend more than $500.
Dyer’s webpage requires all donors to disclose
their names, addresses, occupations and employers. Dyer, who has described
himself as a "hardcore bitcoin user” who also founded Free State Crypto
Consulting to help small businesses accept bitcoin, did not respond to multiple
requests for comment.
Because it is untraceable, Monero should not be used by political
candidates, according to Argiro, the ICO Alert cryptocurrency analyst. Its
transactions cannot be linked to a particular user or real-world identity.
Bitcoin, on the other hand, operates in a public system called a blockchain
that allows anyone to view all the transactions coming in and out of all
virtual accounts.
But federal and most state and local crypto-candidates and their
donors are not currently required to disclose wallet addresses — their unique
account numbers — that would make those transactions traceable.
Most candidates are turning to BitPay, a payment processing service similar
to PayPal, to help facilitate these types of contributions. To use BitPay,
donors must register a name, address and check a box attesting they are
eligible to vote in a U.S. election, but Argiro said it is not difficult for
someone to create fake accounts, even with this system.
Since 2014, when the first crypto contributions were reported,
eight U.S. House candidates have raised at least $550,000 worth of
cryptocurrencies for their campaigns from contributors in 20 states, according
to a Center for Public Integrity analysis of campaign filings. Candidates
report the initial donations as in-kind contributions and can hold them in a
virtual wallet until they liquidate them.
But the FEC has not created a different tag or category to track
crypto contributions, making them nearly impossible to identify but for a memo text box on candidates’ itemized
reports — which is recommended but not required.
At the state level, tracking crypto contributions is even harder.
Michael J. Malbin, director of the Campaign Finance
Institute, a nonpartisan think tank, said he does not know of any
organization tracking cryptocurrency campaign contributions.
This lack of data makes it difficult to trace just how much
cryptocurrencies have grown in state and local elections nationwide.
BitPay donations to nonprofit clients — political candidates but
also religious organizations, philanthropy and other volunteering, civil or
social organizations — have more than doubled in the past year to the
equivalent of more than $26 million from 743 donors, according to BitPay
spokesperson Jan Jahosky. The average donation has increased seven times from
about $4,700 per donor in 2017 to $35,000 this year, BitPay data show.
In California, at least one federal and two state candidates,
including Democratic gubernatorial candidate Gavin Newsom, welcomed cryptocurrencies via
their campaign sites before the ban there, according to BitPay.
Newsom has since taken down the cryptocurrency donate buttons from
his site, but it’s not clear what, if anything, he will do with any bitcoin
contributions he received. His campaign did not return requests for comment.
Forde, a Southern California coder and former Obama White House
adviser, raised the equivalent of nearly half a million dollars in bitcoin,
more than all current and past House candidates combined, before losing in the
June Democratic primary for a seat in the U.S. House of Representatives.
One of Forde’s contributions came from Hong Kong. Documents show
federal election regulators flagged the overseas contribution. Forde’s
campaign responded that it had procedures in place to
confirm that all contributions are made from “permissible sources.” Forde told
the Center for Public Integrity the contributor is a U.S. citizen who is a
close friend. U.S. citizens are allowed to donate from foreign countries. The
FEC said the contribution is still under review.
***
Even candidates who want clarity have a hard time getting
satisfaction from election officials who struggle with the technological
complexity that cryptocurrencies present.
In April, Anderson, the Wisconsin candidate for the governor’s office this year and chair of the state’s Libertarian Party, went before the Wisconsin Ethics Commission asking for an opinion after one of his supporters offered a contribution in bitcoin. The commission discussed the issue but was unable to come up with a decision.
“I have zero confidence that they will be taking up the issue
before the midterms,” Anderson told the Center of Public Integrity. “So I’m
just going to keep accepting bitcoin.”
So far, he said he has received more than $2,000 in cryptocurrencies
from about a dozen donors. Half of those donors were from outside the state, according to Anderson. But
he has not published his wallet address, making it difficult to independently
trace the donations.
Anderson said he is not trying to bypass or violate any state
election laws and argued that denying bitcoin contributions would violate his
donors’ freedom of speech.
Most of the states that have explicitly allowed crypto political
contributions are following the FEC’s 2014 decision that opened the door to
virtual campaign donations. It came in response to Make Your Laws PAC, an obscure committee based
in Durham, North Carolina, that asked to accept the equivalent of $100 per
election per person as in-kind contributions.
Colorado and Washington added a $100 limit to such campaign
donations and treat bitcoins as cash. Officials in Connecticut, Delaware and
Wisconsin have taken up the issue but were unable to make an official ruling.
Other states such as Montana and Arizona kept their same donation
limits and ruled bitcoins should be reported as an in-kind contribution or as
miscellaneous income from the sale of an asset if it’s converted to dollars.
The FEC’s opinion states bitcoins should be valued at the time of the
contribution and held in a virtual wallet, but candidates must report any earnings or losses from its
sale — which can be dramatic given its volatility. In 2010,
when bitcoin was first traded, a single bitcoin was valued at less than $1. In
December 2017, its value exceeded $17,000 per bitcoin.
Petersen, the Republican U.S. Senate candidate
from Missouri, made headlines when he posted on his campaign’s Facebook account
on June 18:
“To whoever tried to give us $130,276 in #Bitcoin on Saturday, we had to refuse
your donation. Please donate $5400 to http://austinpetersen.com/bitcoin in
order to comply with FEC regulations. Also, start a PAC or something mate! #cryptocurrency.”
Petersen lost the GOP primary bid to challenge Democratic
incumbent Sen. Claire McCaskill. Multiple requests for
comment to Petersen went unanswered.
Deep in Silicon Valley, Saratoga City Councilman Rishi Kumar continued to request
cryptocurrency contributions via his website nearly one month after
California’s political watchdogs passed the ban.
“That was a mistake,” said Kumar, who was elected in 2014 and now
seeks reelection. “I’ve taken the wallet addresses down and will return the
bitcoin we received.”
He said his campaign was not aware the state had banned
cryptocurrency donations until the Center for Public Integrity contacted him
for the story.
His blockchain transactions show he received one bitcoin donation
valued at $998.01 on Dec. 4, 2017. Kumar reported the bitcoin as a nonmonetary
contribution equivalent to $879, according to a state report filed on Feb. 1,
2018.
His website also had a note in bold red print at the top stating:
“Citizenship is NOT required to make a contribution.” But lower down the site
had a copy of the state’s contribution rules saying donors have to be U.S.
citizens.
“I will make sure to change that, but I have not received money
for my campaign from people that are not U.S. citizens,” said Kumar.
“Transparency is extremely important for me.”
He added that he is hopeful California officials take up the issue
after the midterm elections and reverse their decision.
“This is the future,” he added. “As an elected official, it is my
responsibility to stay at the forefront of technological advances. For me,
accepting cryptocurrencies was an innovative strategy.”
Chris Zubak-Skees contributed to this report.
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