California Greenlights Cryptocurrency for Political Donations

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Last week the California Fair Political Practices Commission (FPPC) approved a resolution allowing cryptocurrencies to be used as donations for political campaigns. The decision overturns a previous ruling prohibiting these types of contributions, but it came with a few caveats.

The commission originally banned crypto donations in September 2018 due to concerns that they would be untraceable, circumvent contribution limits and allow foreign entities to contribute to political campaigns.

Now, these types of contributions will be allowed so long as all cryptocurrencies go through a payment processor that will verify who is donating the funds and then convert the digital currency to dollars before transferring it to the appropriate group.

“In drafting this regulation, we had to address the inherent concern with cryptocurrency and the opportunity it presents for illegal contributions,” said David Bainbridge, general counsel for the commission, during the July 21 hearing.

One of the safeguards listed in the resolution states that payment processors must be U.S.-based and registered with the Financial Crimes Enforcement Network. The reason for this, Bainbridge said, is to ensure that payment processors are subject to federal regulations and to ensure the availability of records for audits and investigation purposes.

Another topic the resolution addresses is market volatility concerns.

The resolution states that contribution amounts would be locked in at the fair market value as soon as processors receive a crypto donation, Bainbridge explained. This process would ensure that whatever the dollar value is when the payment processor receives and processes these donations would be the fair market value of the contribution.

Furthermore, payment processors must also employ “Know Your Customer” (KYC) protocols during this conversion process, which, in this case, involves verifying the identity, suitability and risks associated with a contributor.

“Basically, somebody who wants to pay you in crypto, a lot of times, could be pseudonymous, maybe not anonymous, so you would have to identify that person and, more importantly, have blockchain forensics in place to track the money,” said Alex Christian, CEO of Data Mynt. “It tells you if the money is coming in from a mixer, a money laundering operation, ransomware, or even a sanctioned entity.”

As for processing crypto donations and transferring them, this can be done in a few ways.

“How we do it is we accept, let’s say Bitcoin, and one of these action committees or political groups wanted to use us, well, they can accept any number of cryptocurrencies and we immediately within a minute or two settle it in an asset-backed stablecoin, like USDC,” Christian explained.

“We push it to a bank account in cash to exchange it for what we call fiat currency and then push it to the bank account. Some processors, like WorldPay and PayPal, can do this instantaneously, but they can’t necessarily do the crypto piece of it,” he added.

A few additional steps are needed to facilitate these types of contributions, such as having an invoice function.

“Either you have a payment button where somebody can fill out their information and donate however much they want up to the limit, or you could send somebody effectively what is an invoice for a certain amount, and they would have to fill out the information,” Christian said.

The issue with the latter option is that it could slow down a payment processor from locking in the fair market value of a donation because it would have to confirm the contributor’s identity first.

“You could receive a donation from an online wallet and verify the person,” Christian said. “If a person isn’t able to get verified, that’s where the financial crime and investigation piece comes into it.”

During the hearing, the FPPC voiced a similar message about verifying contributors’ identities, stating that the resolution would be passed so long as KYC protocols enable payment processors to know the identity of each contributor it receives funds from.

Political campaigns will officially be able to receive crypto donations 60 days after the FPPC’s decision.