The Other Side of the Coin: the Fec's Move to Approve Cryptocurrency's Use and Deny Its Viability

• Jurisdiction: United States,Federal
• Publication year: 2015
• Citation: Vol. 10 No. 4

Washington Journal of Law, Technology and Arts Volume 10, Issue 4 Spring 2015

The Other Side of the Coin: The FEC's Move to Approve Cryptocurrency's Use and Deny its Viability

Juliya Ziskina(fn*)

ABSTRACT

This Article examines the implications of the Federal Election Committee's May 2014 advisory opinion on cryptocurrency's viability within campaign finance regulation, and U.S. financial regulation more generally. Although the Commissioners sharply disagreed on whether Bitcoin is a cash or in-kind contribution, they voted unanimously to allow political committees to accept Bitcoin donations. Moreover, all the Commissioners agreed that Bitcoin donors must disclose their names, addresses, and occupations. While many view this decision as pushing Bitcoin and cryptocurrency further toward legitimacy, in actuality it undermines one of cryptocurrency's distinct functionalities: pseudonymity. Paradoxically, while it approves the use of Bitcoin in campaign finance, the FEC ruling impairs cryptocurrency's future within financial regulatory schemes.

TABLE OF CONTENTS

Introduction .................................................................................. 306

I. Currency ............................................................................... 309

A. Traditional Currency ........................................................ 309

B. Virtual Currency .............................................................. 309

C. Cryptocurrency ................................................................. 310

D. Bitcoin .............................................................................. 312

1. How Cryptocurrency Works: The Bitcoin Example .................................................................. 313

2. Uses and Acceptance of Bitcoin and Other Cryptocurrencies .................................................... 316

II. Campaign Finance Enters the Age of Bitcoin ...................... 319

A. Summary of the FEC Advisory Opinion ......................... 319

B. How Much Bitcoin Can a PAC Actually Accept? ........... 321

1. The Commissioners' Clash over Bitcoin Campaign Contribution Limits ................................................ 321

III. Implications of Regulatory Guidance on the Federal Status of Cryptocurrency ..................................................................... 323

A. The FEC's Advisory Opinion is Inconsistent with Other Federal Cryptocurrency Regulatory Schemes ............... 323

B. Cryptocurrency is Difficult to Reconcile with U.S. Financial Policy ............................................................. 324

Conclusion ................................................................................... 327

INTRODUCTION

Cryptocurrency, particularly Bitcoin, has recently attracted significant media and regulatory attention. Cryptocurrencies rely on peer-to-peer networking, which limits the need for a central, controlling authority. An entire network of Bitcoin users authenticates transactions, rather than needing a government or bank to control the flow of this form of currency. This reduces the need for interaction with financial institutions. Cryptocurrencies appeal to those who would like to remain anonymous, as payments can be made without the exchange of any personal information.(fn1) It is important to note, however, that Bitcoin is not truly anonymous.(fn2) Although using Bitcoins does not necessarily require revealing any identifying information, all Bitcoin transactions are traced on the blockchain (a public ledger of all Bitcoin transactions).(fn3) Researchers have highlighted methods to de-anonymize Bitcoin transactions.(fn4) Accordingly, Bitcoin's algorithm is more accurately described as pseudonymous, although methods exist to increase (or even ensure) its anonymity.(fn5)

Since cryptocurrency first appeared in the marketplace in the 1990s, those responsible for monetary policy, payment systems operators, businesses, and consumers have grappled with understanding how cryptocurrency works. More challenging still is deciding the manner and the extent to which cryptocurrency should be regulated, particularly in an area where the role of money is already contentious: campaign finance.

The Federal Election Commission (FEC) approved Bitcoin contributions in a unanimous advisory opinion on May 8, 2014, but the opinion is only in response to a narrow question and arguably raises more questions than it answers.(fn6) Additionally, soon after releasing the decision, the agency's six Commissioners offered divergent views on whether Bitcoin contributions must be capped at $100 per election per donor, or whether candidates, political action committees, and parties may accept the currency in larger amounts.(fn7)

This Article first notes that the regulatory status of cryptocurrency does not hinge on the FEC's divergence, but rather on its agreement. All six Commissioners agreed that Bitcoin donors are subject to existing (if not more stringent)(fn8) disclosure laws: they are required to provide names, addresses, and employment information with every donation. However, this requirement is at odds with one of the central ideas behind Bitcoin: pseudonymity.(fn9) Coupled with previous U.S. regulatory pronouncements,(fn10) the FEC opinion detracts from Bitcoin's viability within U.S. campaign finance regulations that prioritize disclosure and transparency.(fn11) Moreover, the FEC decision has far-reaching implications for not only Bitcoin, but also cryptocurrency in general. Bitcoin is currently the most widely used cryptocurrency, but the regulatory guidance can be extrapolated to apply to other current and future decentralized, pseudonymous, or anonymous virtual currencies.

Part I of this Article explains the background and technical details of cryptocurrency, with an emphasis on Bitcoin. It discusses the advantages and drawbacks, addressing its unique regulatory challenges in regards to campaign finance. Part II then discusses cryptocurrency in light of campaign finance by introducing the FEC's May 8, 2014 advisory opinion. Finally, Part III explores the implications of the advisory opinion and the Commissioners' public comments. This Article ultimately argues that the nature of cryptocurrency may not be reconcilable with the objective of transparency in campaign finance.

I. CURRENCY

A. Traditional Currency

Currency is broadly defined as "[t]okens used as money in a country."(fn12) The Financial Crimes Enforcement Network (FinCEN) defines currency as "the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance."(fn13) FinCEN terms these currencies as "real currencies."(fn14) In addition to these characteristics, relatively stable currency values are achieved by public trust in the continued rational government manipulation of the money supply,(fn15) which are features that virtual currencies may lack.

B. Virtual Currency

Unlike real currencies, virtual currencies are online payment systems that may function as "real" currencies but are not issued or backed by a central government. Therefore, they do not have legal tender status in any jurisdiction,(fn16) which means that they are not required to be accepted as forms of payment. According to the Government Accountability Office (GAO), "[a] virtual currency is, generally, a digital unit of exchange that is not backed by a government-issued legal tender. Virtual currencies can be used entirely within a [video game world], or can be used in lieu of a government-issued currency to purchase goods and services in the real economy."(fn17) In simplified terms, a virtual currency is one that is not administered or issued by a sovereign. For instance, the popular video game World of Warcraft has its own internal virtual currency that is separate from traditional, "real" currency.(fn18)

C. Cryptocurrency

Unlike virtual currencies that are associated with video game worlds, cryptocurrencies "function as a unique currency with [their] own free-floating exchange."(fn19) They are digital or virtual currencies that use cryptography for security and are difficult to counterfeit because of this security feature.(fn20) David Chaum, a computer scientist, started one of the first cryptocurrencies, known as DigiCash, in the early 1990s.(fn21) He "obtained . . . digital currency patents in the 1980s related to ensuring anonymity using cryptography."(fn22) Although DigiCash ultimately failed,(fn23) the idea of an anonymous (or pseudonymous) and cryptographic currency developed over the course of the 1990s. The idea flourished through a Cypherpunk electronic mailing list(fn24) that included individuals who "advocated the use of cryptography . . . for the protection of private individuals, against each other and against the government."(fn25) The group's members included prominent newsmakers, such as Wikileaks founder Julian Assange(fn26) and a co-founder of the Electronic Frontier Foundation (EFF), John Gilmore.(fn27) The list had a pronounced libertarian streak, opposing most regulation, advocating for privacy, and seeking to use cryptocurrencies to...