Michigan Department of State: Crypto Not ‘A Valid Way to Receive Political Contributions’

The Michigan Department of State has clarified its stance on the use of Bitcoin and other forms of cryptocurrency for contributions to political campaigns.

In response to a letter from William Baker, a Republican candidate who lost the general election for Michigan House of Representatives District 60 on 6 November 2018, the Michigan Department of State, which is headed by Secretary of State Ruth Johnson, has declared that cryptocurrencies are not valid for the purpose of donations to political campaigns. 

More specifically, Baker's letter was a "Request for a Declaratory Ruling on if a Digital Currency Exchange could be a valid Secondary Depository, under Section 169.221 Part 6 of the Michigan Campaign Finance Act, for the purpose of accepting Digital Currency donations during a campaign."

Baker's argument was that a digital currency exchange (DCE), "which allows individuals and businesses to maintain accounts for the collection and exchange of digital currencies into legal tender," should be considered "a valid secondary depository" (the primary being financial institutions that provide bank accounts) "so long as the DCE additionally allows for the transfer of legal tender from these accounts to other financial institutions (the official depository of the committee)."

Baker's letter also made the rather bold claim that "it should be self-evident that digital currencies are a valid way to receive political contributions," and stated that "the main issues yet to be resolved are how to record their value and how to use them once they have been received."

Michigan's Department of State, in a letter to Baker dated 8 November 2018, made an "interpretative statement", which noted that the implicit question in Baker's letter was "whether committees may accept contributions made via Bitcoin and other forms of cryptocurrency." The Department said that it disagreed that it was "self-evident" that "digital currency is a valid way to receive political contributions as the law does not authorize such a vehicle," and it had never "determined that digital currencies are a valid way to receive political contributions."

So, the first problem for the Department was to determine whether under the Michigan Campaign Finance Act (MCFA) "a committee may accept contributions made via Bitcoin and/or other forms of cryptocurrency." Their review concluded that "that contributions may not be made via Bitcoin" (but the Department's letter makes it clear that this conclusion also applies to other cryptocurrencies). 

The Department had four main reasons for coming to this conclusion:

  • "Bitcoin’s value is extremely volatile," and as with stocks and other commodities, "Bitcoin’s worth fluctuates daily," which means that "there is no way to ascertain the precise monetary value of one Bitcoin on any particular day."
  • "Bitcoin is an anonymous peer-to-peer digital currency which operates without any governmental oversight and without the involvement of financial institutions." (This is a problem since "the MCFA expressly bars anonymous contributions."
  • "Cryptocurrency is not a mere transfer of controlled funds deposited or withdrawn through a financial institution, but rather is traded anonymously through an electronic platform." (In other words, the Department did not consider digital currency exchanges as "financial institutions", which is a problem since MCL 169.221 requires that a political committee hold an "account in a financial institution," and "financial institutions" do not offer cryptocurrency accounts.)
  • "Allowing committees to accept contributions made via a cryptocurrency whose value fluctuates daily would create a quagmire for reports required under section 33 of the Act," since "it is unknown what value the committee should report – the value of the cryptocurrency on the day it is purchased by the donor, or the value of the cryptocurrency on the day of the contribution, or its value on the date the contribution is reported on a campaign statement."

As for Baker's second question, i.e. "whether a digital currency exchange is a valid secondary depository to accept contributions," the Department declined to consider this question. Since it had already made the conclusion that "cryptocurrency is not a valid means to accept contributions," it was deemed "unnecessary to determine" if digital currency exchanges are valid secondary depositories under section 21 of the MCFA. Also, in a previous interpretative statement ("Interpretive Statement to Joseph Olson, August 4, 1993"), the Department had determined that "a committee is required to hold assets only in a bank, savings and loan association or credit union and cannot hold its assets in another investment vehicle."

According to a report by Associated Press published on 21 September 2018, although the "Federal Elections Commission allows bitcoin donations to federal candidates," the various states do not all share the same view. For example, states such as South Carlolina and California have banned the use of crypto for political donations, whereas "states like Colorado and Montana allow them with restrictions."

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Bitwise’s Global Head of Research: ‘Bitcoin Is Like Gold … Just in the 1970s’

Siamak Masnavi

In an article published earlier this week, Matthew Hougan, the Global Head of Research at Bitwise Asset Management, argues that Bitcoin is too volatile to be considered a "store of value", but that is OK because if you want to become wealthy, what you really want is "an emerging store of value". 

Hougan's article for Forbes, which came out on Wednesday (August 21), was addressing the claim made in a Barron's article published on August 16 that questioned the claim that Bitcoin is a safe haven asset.

In particular, Hougan highlighted this paragraph from the Barron's article:

This week certainly would appear to qualify as a good test for an asset’s safe-haven bona fides... There was a market meltdown in Argentina, escalating trade tensions between the U.S. and China, inversion of the Treasury yield curve (viewed as a recession indicator), grim economic news from Germany, and anti-government protests in Hong Kong.

The author of the Barron's article was trying to point that despite all the global turmoil that week, Bitcoin ended the week down 10%.

Hougan says that we should not take from this that Bitcoin is not digital gold. He says that, in fact, Bitcoin is behaving just like gold did in the 1970s. 

According to Hougan, "safe haven assets are supposed to be boring." For example, he points out that gold's annualized rate of return since 1980 is only 2.3% per year, which when adjusted for inflation, comes to -0.7% per year. In other words, it has been basically been "holding its value", which is what you want in a "store of value."

He then says that if, however, "you’re interested in wealth creation," then "history suggests you don’t actually want a store of value; you want an emerging store of value" (i.e. "an asset that has all the characteristics of a store of value, but doesn’t yet have widespread acceptance amongst investors").

Hougan looked at the history of gold and found that the "vast majority of returns gold has enjoyed in the modern era came in the 1970s":

  • 1970s: 1,365% 
  • 1980s: -22% 
  • 1990s: -28% 
  • 2000s: 281%
  • 2010s: 50%

He says:

The 1970s was, of course, when the U.S. abandoned the gold standard. At the time, people didn’t know what to make of gold. Would it succeed as a 'safe haven' asset, untethered from the dollar, or be cast aside as a 'barbarous relic,' as John Maynard Keynes once called it? The result was a period of significant volatility, as the two forces argued back and forth. There were years, like 1975, when gold tumbled in value, falling 25%. And years, like 1979, when it soared, rising 120%

He also says that the daily price volatility of 1970s gold was not that different from Bitcoin's daily price volatility:

There was daily volatility too: In 1973, gold’s price moved more than 3% one out of every ten days! Sounds almost like bitcoin to me.

He then notes that just like the uncertainty about the future of gold back then made it a risky asset to own, it was that risk that "led to gold’s volatility and strong returns," and that as "evidence mounted that gold would in fact continue to serve as a safe haven, returns spiked and more investors made gold a part of their portfolios." Hougan believes that the same scenario is now playing out for Bitcoin.

Hougan considers Bitcoin to be "an emerging store of value" that will keep increasing in value over time as more and more investors "gain greater confidence in bitcoin’s place in the world" and as it gets "easier for institutional investors and financial advisors to buy."

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