How cryptocurrency is sneaking into state elections

Introduction

Oct. 26, 2018: This story has been corrected.

This story was co-published by Politico Magazine.

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 fund 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 was first traded in 2010, it has been linked to illicit activities including money laundering, fraud and, most recently, foreign state actors trying to affect U.S. elections. Studies show cryptocurrency users can employ pseudonyms and transfer virtual money across international borders with just a few clicks — without 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, negating the goal of 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.

But on the state level, those donations are subject to a patchwork of policies. At least eight states and the District of Columbia allow crypto contributions and have created limitations or added language to their election manuals addressing the issue. At least seven others, though, have banned cryptocurrency contributions altogether, fearing foreign meddling or insufficient resources and knowledge to regulate bitcoin contributions.

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.”

Bitcoin capital of America

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.

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 re-election, 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 them 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 last year to over $26 million from 743 donors, according to BitPay spokesperson Jan Jahosky. The average donation has increased seven-fold 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 nearly half a million dollars’ worth of 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.

New tools, new rules

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 coin was worth less than $1. In December 2017, it topped more than $17,000 per coin.

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.

To whoever tried to give us $130,276 in #Bitcoin on Saturday, we had to refuse your donation. Please donate $5400 to…

Posted by Austin Petersen on Monday, June 18, 2018

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 first elected in 2014 and is seeking re-election. “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 worth $998.01 on Dec. 4, 2017. Kumar reported the bitcoin as a nonmonetary contribution valued at $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.

Correction, Oct. 26, 2018, 8:20 p.m.: An earlier version of this story incorrectly reported the number of House candidates who raised cryptocurrency donations and the total amount they raised. Federal election records show eight candidates raised contributions worth at least $550,000 since 2014.