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Why Bitcoin Will Remain A Bit Player in Politics

BY Sarah Lai Stirland | Monday, November 11 2013

FEC memo says Bitcoin ok for political campaigns but shouldn't be treated as cash (Flickr/antanacoins)

U.S. political campaigns will likely be allowed to accept Bitcoin donations later this month, but don’t expect the development to spur a revolution in digital donations anytime soon.

Federal Elections Commission lawyers issued a draft advisory opinion on Friday on the question of how political campaigns should handle Bitcoin donations. The lawyers said that political committees should treat the donations as in-kind contributions like stocks, and not as 'money,' as defined under federal campaign finance law. As a result of that finding, the FEC's lawyers also said that political campaigns won't be allowed to pay for any services or goods with Bitcoin. The attorneys also said that campaigns and committees should value Bitcoins at the time that they are received using either the methods provided by a payment processor, or via the valuations of some of the popular Bitcoin exchanges. If the contributions exceed the annual $5,000 individual limit, the balance must be returned to the donors.

The public will have the opportunity to submit comments on the advisory opinion until noon November 13. The commission will likely vote on the opinion later this month.

Bitcoin’s meteoric rise in value and use in 2013 makes it an intriguing medium for digital payments in the political world with its low transaction fees relative to credit card processors. The Founders Fund-backed Bitcoin merchant services firm Bitpay reported earlier this year that more than 10,000 small businesses now use its services. Yet those who've used the crypto-currency say that as a method of payment it's far from seamless.

Bitcoin is a digital currency created in 2009 by a person or a group known as Satoshi Nakamoto. Through cryptography and an open ledger, it allows individuals and businesses to pay each other directly through software without going through an intermediary like a credit card company, or a bank. According to Bitcoincharts.com, there are almost 12 million units of Bitcoin outstanding, with almost 42 transactions a minute. (That compares with an average of about 200,000 Visa card transactions a minute.) The creator of the system has limited the issuance of Bitcoins to 21 million units.

As might be expected, the Libertarian Party started accepting Bitcoin donations this April, the month after the U.S. Financial Crimes Enforcement Network issued guidelines on its thinking about the legal status of the various players in the Bitcoin ecosystem. Executive Director Wes Benedict said that many of the party’s members demanded the capability.

“Libertarians are for free markets on everything, that includes the freedom to use whatever currency you want, not just the dollar,” he said. “That was certainly part of it.”

So far, the party’s received “well over” $5,000 worth of Bitcoin donations, an amount that Benedict characterized as “not a large amount.” In order to avoid complications in its reports to the Federal Election Commission, the party uses Bitpay to immediately convert those donations into dollars.

The Conservative Action Fund (CAF), a grassroots hybrid political action committee backed largely by the Southern conservative activist and electrical engineer Shawn McCutcheon, told the FEC in an August filing that it intended to “accept Bitcoins as monetary contributions and in-kind contributions,” and that it wanted clarification on how it should handle the donations. Friday's advisory opinion was a response to that request.

In a phone conversation, the PAC’s lawyer Dan Backer, the founder and principal attorney behind the election law firm DB Capitol Strategies, said that the PAC would require all donors of more than $50 to identify themselves as required by law.

He didn't have a comment on the advisory opinion Friday, saying that he hadn't looked at it yet.

“I expect that in the 2014 elections, many candidates will be taking Bitcoin contributions, especially the Libertarian candidates, but I don’t think it’s ever going to amount to a significant amount of the political economy,” he said. Instead, Bitcoin will just be an attractive option for smaller campaigns that could benefit from any kind of donations at all.

“If you’re a Libertarian candidate out there struggling to get your message out there in the face of liberal media and conservative establishment resources, every dollar matters, and every donor is a potential volunteer, so it matters to certain candidates and to certain contributors to give in Bitcoin, but I don’t think it’s going to have any substantial economic impact overall.”

Several conservative-leaning candidates also experimented in the 2012 election cycle by setting themselves up to accept Bitcoin donations. But two of those candidates with whom techPresident spoke said that, based on their experiences, they also don’t expect the virtual currency to become a popular way to donate any time soon.

“It worked out great for my sphere of influence, and for the supporters and volunteers that I have, but for larger campaigns, it’s probably not worth the hassle,” said Mark Warden, a Libertarian-leaning realtor, and New Hampshire state representative who ran for re-election in 2012.

He estimates that he raised half of the $2,000 for his campaign with Bitcoin. Much of the money came from enthusiasts who want to encourage mainstream adoption of the currency. Warden said that he initially had to decline some of the donations because they came from Europe and Russia. Like the Libertarian party, he cashed out the donations and converted them to dollars immediately. He reported the value of the Bitcoin at the time that the donation arrived. If the campaign didn’t happen to cash in the digital currency immediately and the value of the donation rose, Warden said that he would report the change in value as a capital gain.

Warden first started thinking about accepting Bitcoin donations when his contract Web developer asked to be paid in the currency. After informally clearing the legality of accepting Bitcoin donations with New Hampshire’s secretary of state’s office, Warden used Bitpay to set his donation system up.

Similarly, Jeremy Hansen, a Norwich University computer science professor in Vermont, says that he doesn’t think “the bang is worth the buck,” for larger political campaigns.

Hansen ran as an independent in 2012 for the Vermont State Senate. In his case, his friend the tech entrepreneur Josh Jones helped him build a form on his site to accept Bitcoin donations. Hansen said he made the move to generate publicity for his campaign. He also reports receiving around half of his $2,000 campaign money from Bitcoin donations. He also consulted with the state's legal authorities before going ahead with his plan.

“Bitcoin is not frictionless,” Hansen said. “I’m a computer science professor for God’s sake, and it took me time to work through the mechanics of getting the bits and pieces running. This is not the sort of thing that’s going to be mainstream.”

While the fee structure might be attractive for campaigns and businesses, the payment infrastructure for donors doesn't exist in a wider context, he notes.

Indeed, this account from Wired.com’s Robert McMillan this July seems to indicate it’s still a pretty painful process to pay for things in Bitcoin despite its conceptual promise.

Still, CAF had hoped to fully participate in the Bitcoin economy by both converting any donations into dollars, as well as keeping some of the donations in a Bitcoin wallet. The FEC's advisory opinion says that any donations to other campaigns or committees would have to be converted into dollars and disbursed from a PAC's campaign depository.

CAF had wanted to pay for goods and services with Bitcoins, or donate them to political candidates and their committees.

The good news for those in the political world who are constantly searching for better ways to make donating money more efficient is that there’s a torrent of innovation in mobile payments, and electronic payments in general.

Erik Nilsson, a veteran of the political fundraising world, and vice president of the Republican-leaning payment processing and campaign finance management firm CMDI, remains optimistic.

“For 2016, I think we will have a host of new technologies that will be making substantial inroads in replacing the traditional credit card companies as the facilitators of transactions,” he writes in an e-mail.

In the shorter term, for 2014, he thinks one-click donations will become standard, and that campaigns and committees could start experimenting with innovations such as mobile digital wallets, and Square Cash, which enables people to pay for things via e-mail.

The big limitation for political campaigns is manpower, says NGP VAN’s General Manager of Fundraising and Compliance Louis Levine.

“I think that campaigns are always looking to keep up with how people are making payments. But the reality is that most of these new and different ways to pay don’t currently generate enough volume to make sense for campaigns. There are various reasons for this, but they primarily stem from the fact that maintaining all those different accounts takes actual staff time, and in most cases they aren’t well suited for the disclosure and record keeping requirements that the FEC imposes, which creates even more work on the back end.”