The first-ever crypto donation to a UK political party has now been made, according to recent media reports. We don’t yet know the source or value of the donation. But it seems probable that Reform UK is the beneficiary as it is one of only two UK political parties, alongside the largely unheard of ‘The Other Party’ to have opened a crypto wallet.
Speaking to The Observer this weekend, our executive director, Dr Susan Hawley, called this “a watershed moment in political financing” as MPs and policymakers now decide what should be done to mitigate the unique risks that crypto donations present to our democracy.
What are the risks?
A major concern is how cryptocurrency could be used to facilitate attempts to destabilize our democracy by hostile foreign states.
In 2022, the US Department of State released intelligence reports which allege that Russia has spent more than $300m since 2014 on influencing and interfering in elections across the world, including direct payments to political parties, candidates and officials, using cryptocurrency as one of its tools. Since then, we have seen crypto play a central role in Russia’s recent malign interference activities in Moldova.
On a technical level, there are many questions hanging over the traceability of cryptocurrency donations and the implications this has for political parties and regulators being able to judge if they are permissible under electoral law.
Theoretically, the use of a blockchain to publicly record cryptocurrency transactions should make tracking the source of donations straightforward. But in reality, it’s a bit more complicated than that.
The fundamental challenge is how far back through the transaction chain you need to go to identify the ultimate origin of a crypto donation.
Malign actors or impermissible crypto donors aiming to slip through the net have several options open to them when it comes to disrupting and obfuscating the chain of traceability. The use of secrecy coins, mixer accounts, ‘smurfing’ (when multiple wallets are used to fragment large transactions), ‘chain hopping’, and coin swapping services can all be used to throw-off ‘Know Your Donor’ and permissibility checks.
Then there is the question of whether crypto donations can be effectively regulated. Chair of the Electoral Commission, Vijay Rangajaran, recently told the Joint Committee on the National Security Strategy (JCNSS), that it is “very hard” to trace the source of crypto donations, particularly if they are made from abroad, because the resources needed are “very significant” . The Electoral Commission currently has no powers to get information from overseas.
At the same time, overall regulation of cryptocurrencies in the UK is in its infancy. Even under proposed rules, which are still in development, risks will remain. For instance, some decentralised crypto platforms will continue to be exempt from know your customer (KYC) or anti-money laundering (AML) rules.
To ban or to regulate?
In July, senior minister Pat McFadden told a previous session of the JCNSS that the government is open to the idea of a ban on crypto donations due to issues with their traceability. But the government’s election strategy published just days later as a prelude to the upcoming Elections Bill, failed to substantively address the unique risks posed by cryptocurrency.
Over the recent party conference season, we heard from many cross-party MPs who are sympathetic to the idea of a total ban – following the example set by countries such as Ireland and Brazil. In fact, crypto donations were a hot topic on all the panels held on political financing and foreign interference.
The Electoral Commission has recently made some strong indications that it will be issuing renewed guidance to political parties and candidates about accepting crypto donations. As an interim measure, this is welcome. Crypto donations are currently regulated in the same way as cash donations – laid out in two paragraphs of guidance issued by the regulator two years ago.
But the real question is whether the upcoming Elections Bill could be used to prohibit these donations altogether. This will need to be balanced against whether it is possible to develop robust enough regulations to mitigate the risks of allowing crypto into the UK’s political finance without incurring significant costs both to the Electoral Commission and political parties as a result.
As we recently laid out in a written evidence submitted to the Joint Committee on the National Security Strategy, any regulation has to match the unique risks that crypto donations present and be placed on a statutory footing.
We looked at some examples of regulatory approaches in North America and have suggested some best practice recommendations.
The Electoral Commission should introduce statutory guidance that:
- Prohibits donations using cryptocurrency designed to enable anonymity and/or without a public ledger
- Requires political parties to use an Financial Conduct Authority-regulated cryptocurrency payments provider to facilitate the donations as well as laying out what particular permissibility checks they need to conduct given the unique nature of crypto
- Requires political parties to convert crypto donations into pounds sterling within 48 hours of receiving them
- Sets an upper limit on the amount of cryptocurrency parties may receive in any donations
- Addresses risks of crowd-funding and cryptocurrency donations from overseas voters, including requiring parties to flag suspicious patterns.
However, there are important questions over whether the Electoral Commission would have the resources and in-house expertise to investigate and enforce any breaches of this guidance and future regulations, while keeping up with the evolving risks presented by the rapidly changing, and sometimes mercurial, crypto industry.
The current proposals in the government’s elections strategy are not sufficient for addressing the challenges posed by crypto donations.
As it finalises the Elections Bill, the government must now carefully weigh up whether it’s worth the risk of allowing crypto to seep in the political financing ecosystem and the costs to the taxpayer of the Electoral Commission taking on this extra regulatory strain. What is for certain is that until tighter regulation – or even a ban – is brought in, the Electoral Commission and the government should regard all cryptocurrency donations as very high risk.
