With the Elections Bill on the horizon, the UK government is in the process of weighing-up whether to bring in strict controls on political donations made in cryptocurrency – or to ban them altogether. Now an interesting case study has emerged from Spain that underlines the unique risks that crypto financing could present to our democracy.
Two weeks ago crypto “kingpin” Álvaro Romillo Castillo was arrested by Spanish police for his role in masterminding a $300 million crypto scheme that defrauded 3,000 investors. The investigation revealed that Castillo also made a $115,000 contribution to the election campaign of Luis Pérez Fernández, a Member of the European Parliament and leader of the party, Se Acabó La Fiesta, which has radical rightwing policies.
According to media reports, the Public Prosecutor’s Office in Spain has now requested an investigation into allegations that Castillo helped Fernandez with the creation of multiple crypto wallets that could receive anonymous donations, bypassing regulatory oversight.
It comes on the back of a separate European political scandal linked to bitcoin donations over the summer, which almost toppled the Czech government. In this case, former Czech Justice Minister, Pavel Blazek, accepted a bitcoin donation worth $45 million from convicted drug trafficker, Tomas Jirikovsky. Blazek’s successor at the Ministry of Justice, Eva Decroix, commissioned an external audit into the donation which concluded that it should have been refused due to the significant risk that it came from the proceeds of crime.
What are the lessons from Europe for the UK?
- If a plot to obscure the source of political donations with the use of multiple crypto wallets could happen in Spain, it could very easily happen here.
- If it did happen in the UK, the lack of a comprehensive ban on anonymous donations would make it harder to detect and take enforcement action against under the current political financing regime.
- The UK is also exposed to a crypto donations scandal like the one in Czechia, as there are currently no clear rules banning UK political parties from receiving donations that might be linked to criminality.
While there are some disparities in political financing regulations in the UK and Spain, they are similar in the fact that they are both full of loopholes and open to the risk of abuse from bad actors following the introduction of crypto into the donations ecosystem. In both countries, crypto donations are regulated in the same way as their fiat equivalents.
When it comes to the unique risks posed by crypto donations, the key difference between Spain and the UK is that while Spain has a total ban on anonymous donations, the UK allows anonymity for individual and cumulative donations from the same source under the value of £500.
This loophole makes it more difficult for the Electoral Commission to detect and enforce against the use of ‘smurfing’ with crypto donations – where large crypto contributions are fragmented into much smaller chunks, such as under the value of £500, to evade reporting thresholds and permissibility checks. Alarmingly, there is also a lack of legal clarity in the UK that donations made from the proceeds of crime are prohibited. Without a clear prohibition on receiving funds that may derive from criminality, there will always be a risk that donations to political parties could themselves be used to legitimise or clean dirty money – as the scandal in Czechia over bitcoin donations showed.
It remains to be seen whether Spanish authorities will launch a wider investigation into allegations that Castillo and Fernandez set up a scheme to attract anonymous donations via multiple crypto wallets in breach of electoral law.
While there are currently no high-level political calls in Spain or at an EU-level to ban crypto donations, it has been encouraging to see MPs in the UK begin to raise the alarm over the unique risks they could pose to UK democracy – especially under the currently threadbare political financing rules framework. The UK government must now heed these warnings as it puts the final touches on its eagerly awaited Elections Bill.
What’s the latest on political crypto donations in the UK?
The current uptake of crypto donations in UK politics has been slow and limited. But the lack of specific regulations around them is keeping the door open to a future scandal as we have seen in Spain.
Only three UK political parties currently accept crypto donations, Reform UK, Homeland Party and the Other Party. Ahead of future elections this list is set to grow, with Advance UK hinting that it could open a crypto wallet, as it waits for the Electoral Commission’s approval of its application to register as a political party.
In recent weeks, Nigel Farage has confirmed that Reform UK has now received a few crypto donations. The latest quarterly donations data is due to be published by the Electoral Commission in the coming weeks, but due to the slow wheels of political finance transparency it may not be until March next year that we will know the details of any crypto donations – and then only if the donations exceed the £11,180 reporting threshold.
For now, it’s very difficult to track these donations independently and in real time as Reform UK’s third-party crypto payment provider, Radom, recycles intermediary crypto wallets amongst its clients. Unlike Reform, the Homeland Party has made its wallet address public and it reveals that it has only ever received one bitcoin donation with a value of roughly £27.
The Electoral Commission’s guidance to political parties around accepting crypto donations consists of a few paragraphs, last updated two years ago. While there are promising signs that the Commission is working on new crypto specific rules, we will be keeping an eye on whether it reflects best practice emerging in other jurisdictions.
Ultimately, unless the UK prohibits crypto donations altogether as has happened in Ireland, Brazil and Greenland, and until it makes sure that parties may not accept donations that come from the proceeds of crime, the UK will continue to be vulnerable to seeing a repeat of the crypto donation scandals that have unfolded in Spain and the Czechia.
What actions should now be taken?
- As an urgent step, enforcement agencies and the Electoral Commission should closely communicate with their Spanish counterparts to understand the implications of the Castillo case for the UK.
- The government should use its upcoming Elections Bill to ban cryptocurrency donations to political parties and candidates.
- As we wait for the Elections Bill to be published and subsequently passed, the Electoral Commission should bring in statutory guidance that places tight restrictions on crypto donations by introducing statutory guidance that:
- Prohibits donations using cryptocurrency designed to enable anonymity and/or without a public ledger
- Requires political parties to conduct especially rigorous permissibility checks, to only use FCA-regulated payment providers for receiving crypto donations, and to only accept donations made from a wallet with an FCA-regulated payment provider
- Requires political parties to convert crypto donations into pounds sterling within 48 hours of receipt
- Sets an upper limit on the amount of cryptocurrency that parties may receive in any donations
- Addresses risks of crowdfunding and cryptocurrency donations from overseas voters.
