Molly White's Citation Needed - Coinbase appears to have violated campaign finance laws with a $25 million super PAC donation

Episode Date: July 30, 2024

Actively involved in contract negotiations with a federal government agency, Coinbase was likely prohibited from making its $25 million contribution to the Fairshake crypto super PAC in May 2024.Originally published on July 30, 2024, and updated on August 5.

I'm Molly White, and you're listening to the audio feed for the Citation Needed Newsletter. You can see the text version of the newsletter online at citation needed.news. Coinbase appears to have violated campaign finance laws with a $25 million super PAC donation. Actively involved in contract negotiations with a federal government agency, Coinbase was likely prohibited from making its $25 million contribution to the fair-shake cryptocurrency-focused superpac. in May 24. This issue was originally published on July 30th, 2024, and was updated on August 5th. With $45.5 million in corporate contributions, American cryptocurrency exchange Coinbase is the

largest donor to Fairshake, a newly minted superpack focused solely on installing political candidates who will be friendly to the cryptocurrency industry, and ousting those with a history of pushing for stronger regulations and consumer protections when it comes to an industry that has long been a regulatory wild west. Coinbase's donations to the SuperPack came in three installments. $5 million contributed in November 2023, $15.5 million in December 20203, and another infusion of $25 million on May 30, 2024. Coinbase announced the latter contribution a few days later on their blog on June 3rd, in a post titled How to Get Regulatory Clarity for Crypto.

They repeated dubious claims about the number of Americans who own cryptocurrency and the so-called grassroots nature of their stand-with-crypto advocacy group and described their spending as an attempt to, quote, send a clear message to political candidates that it is bad politics to be anti-crypto. This $25 million contribution, however, appears to be in violation of federal campaign finance laws that prohibit contributions from current or prospective federal government contractors. This would be by far the largest known illegal campaign contribution by a federal contractor. The contract.

On March 4th, 2024, the U.S. Marshal Service, an agency of the U.S. Department of Justice, published a contract opportunity for a provider to help them with, quote, managing and disposing of large quantities of popular cryptocurrency assets. The Marshal Service is in charge of hold. in cryptocurrency assets that have been seized as a result of law enforcement activity, including at least 164,000 bitcoins with an estimated market price of around $10 billion. And the Marshals periodically sell these assets once litigation has concluded. Bids for the Marshall Service contract were due on April 1st, 2024.

On July 1st, 2024, the $32.5 million contract was awarded to Coinbase, and Coinbase published a blog post promoting its selection for the federal contract the same day. According to the government website, the contract began on July 1st, 2024, and will end on June 30, 2025 at the earliest. Campaign finance law prohibits federal government contractors from making contributions or promising to make contributions to political entities, including super PACs like Fairshake. According to the FEC website, which is paraphrasing the law, quote, the prohibition begins when the request for proposals are sent out or the negotiations have begun, whichever is earlier, and ends when performance under a contract is completed or negotiations have terminated, whichever is later. This prohibition, and similar such anti-corruption laws, are often

called pay-to-play laws. With a request for proposals issued on March 4, 2024, and a contract that will end no sooner than June 30, 2025, the $25 million dollar contribution on May, May 30th, 2024 by Coinbase to the Fairshake Superpack is well within the prohibited time period. Another coinbase contribution of $500,000 on March 20, 24 to the Congressional Leadership Fund, which is the committee supporting House Republicans, also falls within the prohibited timeframe. After reviewing Coinbase's contributions and government contract, campaign finance expert and public citizen government affairs lobbyist Dr. Craig Holman confirmed, quote, it is illegal for a federal contractor to make a campaign contribution to any federal

committee, including a super PAC. It is appropriate to file a complaint with the FEC. Historical cases. The largest illegal campaign contribution from a federal contractor to date appears to have been $1 million in 2022, contributed by the Marathon Petroleum Company to the respective super PACs for both House and Senate Republicans, one of which is the very same congressional leadership fund that received Coinbase's $500,000 donation. At the time, a unit of the Marathon company was in negotiations for a small, one-off contract to provide jet fuel to a government agency. Marathon's lawyers claimed that the company had not historically engaged in federal contracting and that they were unaware that the company was negotiating a federal contract at the time of the

contributions. The violation resulted in an $85,000 fine. According to FEC data, fines have been levied against other federal contractors for similar illegal contributions, though none of those contributions have rivaled the $25.5 million amount in these contributions by Coinbase. Past enforcement actions include one against Hamilton Company, who donated $300,000 to Americans for Prosperity Action, and was fined $56,000 in March 2022, against Ashbrit, who had donated $500,000 to America First Action, Inc., and was fined $125,000. $25,000 in July 2021 and an enforcement action against Amec Construction, whose employees had made various contributions in the amount of at least $16,935, and was fined $85,000 in October 2005.

A 2022 analysis of FEC enforcement trends by the law firm Holland and Knight observed that civil penalties against corporations that violated federal contractor prohibitions tended to be closely correlated to the amount of the violation, typically ranging from 17 to 19% of the amount. They also observed, however, that many violators obtained at least partial refunds of their contributions, in many cases offsetting the penalties. A possible loophole. Holman noted that some corporations have sidestepped FEC restrictions on federal contractors by claiming that the campaign contribution came from one entity, while a government contract

was awarded to another. This most notably occurred in the case of a $2.5 million contribution in 2012 by the Chevron Oil Company, also to the Congressional Leadership Fund. Holman, working with the advocacy group Public Citizen, filed a complaint in concert with several environmental advocacy groups. However, the FEC ultimately dismissed it after accepting the Chevron Corporation's argument that Chevron, the political donor and Chevron USA, the government contractor, were separate entities. despite the companies sharing a CEO and mailing address, and despite Chevron USA being a wholly owned subsidiary of Chevron. Holman criticized the FEC's decision at the time as one, quote, that could create a loophole a million dollars wide for other companies to exploit. A later petition

to the FEC to close the loophole resulted in a three-to-three deadlock. It's not evident that Coinbase is trying to exploit this very loophole with this campaign contribution, but it is at least possible. The government contract and the campaign contribution are tied to Coinbase Inc. and simply Coinbase, with mailing addresses in New York and California, respectively. Quote, FEC records are often quite general, noted Holman, describing the difficulty this sometimes causes in establishing that a donor and a government contractor are the same entity. Quote, it probably is the same, but I cannot confirm this with the data available. Coinbase claims to be, quote, a decentralized company with no headquarters, suggesting that its business entities may not be closely tied to either particular location

or mailing address. In multiple state records, Coinbase Inc. uses the same New York address as on the government contract as its registered address, and uses the same Oakland address as on the FEC contribution record as its mailing address. Coinbase does have multiple subsidiaries, including one each registered in California and New York, although neither is mentioned by name in either the government contract or the FEC reporting. Various subsidiaries also use the same New York and California addresses as used on the government contract and FEC filings. The New York subsidiary is the Coinbase Custody Trust Company LLC, which shares the address used in the government contract, and it's possible that this is an entity involved in the government contract. However,

for Coinbase's own business onboarding documents for Coinbase Prime, which is Coinbase's institutional service being used by the Marshals, explain that businesses that use Coinbase Prime will enter into contracts with Coinbase Inc and either its local or international subsidiary, in this case, Coinbase Custody Trust Company. If Coinbase Custody Trust Company is indeed an entity involved with a government contract, despite not being mentioned by name, its parent Coinbase Inc. is likely also a party. While Coinbase's documents note that businesses do have the option to only contract with the trust company and not with Coinbase Inc, this is for the custody-only solution, which does not include the institutional trading services that the marshals have contracted from

Coinbase. A spokesperson for the Fairshake Political Action Committee reached on July 30th, did not respond to requests for comment on the Coinbase entity that donated to the PAC, whether Fairshake had solicited the donation, or whether Fairshake had confirmed. with Coinbase at the time of the donation their status as a federal contractor. The Fairshake website does note that federal contractors are prohibited from contributing to the Super PAC, as does the website for the Congressional Leadership Fund. Coinbase's response. A Coinbase spokesperson, reached on July 30, declined to answer questions about which

entities were associated with the government contract or the political contribution, or to respond to broader inquiries about the apparent campaign finance violation. They stated only that, quote, Coinbase complies with all applicable laws, including campaign finance law. Two days after this article was published, Coinbase's chief legal officer, Paul Greywall, took to Twitter to argue that the company's political contributions were not in violation of campaign finance laws.

He further condemned this article as, quote, misinformation, which he insinuated may have been, quote, intentional. Graywall asserted that Coinbase is not a federal contractor, and thus is not subject to the prohibition, pointing to a definition of the term within the Code of Federal Regulations as those who were paid, quote, in whole or in part from funds appropriated by the Congress. He also pointed to a Q&A document that was published as an update to the request for proposals, RFP, on April 18th, and which contains questions between unidentified prospective contractors and answers from the U.S. Marshal's Service. One such Q&A entry identifies the Department of Justice's Assets forfeiture Fund as the source of the funding for the contract ultimately awarded to Coinbase.

Quote, Coinbase is not a federal contractor under the plain language of 11 CFR 115.1. U.S.MS isn't paying us with appropriated funds, something it made clear in the public RFP. Graywall concluded in his tweet. While this Q&A document seems to be what Graywall is drawing upon for his claims that the Marshal Service, quote, made clear in the public RFP that they would not be, quote, paying Coinbase with appropriated funds, there does not appear to be any statement within the RFP that explicitly addresses whether the funds for the contract are appropriated by Congress or not. If Greywall's explanation were to be accepted, it would be another massive loophole in laws intended to prevent the appearance of or actual corrupt

pay-to-play behavior by federal contractors looking to secure multi-million dollar government contracts such this one. However, lawyers at public citizen weighed in, quote, Graywall's argument that funds in the assets forfeiture fund are not appropriations is incorrect. Just this year, the U.S. Supreme Court rejected a similar contention, making clear that an appropriation is simply, quote, a law that authorizes expenditures from a specified source of public money for designated purposes. Consistent with the court's holding, a report published by the Congressional Research Service explicitly describes the Department of Justice's asset forfeiture fund as appropriated by Congress.

When met with that point, Graywall argued, quote, this isn't about the Constitution's appropriations clause or references to contractors that have nothing to do with political spending. It's about political spending by parties deemed to be government contractors by the rules that actually are relevant, 11 CFR 115.1, 28 U.S.C. 524C.1, etc. As the DOJ's asset forfeiture management staff have confirmed, AFF is, quote, one of the leading non-appropriated sources of funding for federal law enforcement today. I'm sorry, but this is what a payment in seized crypto by USMS happens to be. However, over the past five decades, both courts and the Department of Justice have considered the statutory creation of the AFF to be an appropriation.

The complaint. I have, with the help of public citizen, submitted a formal complaint to the Federal Election Commission. Because Graywell responded to the allegations only after the original complaint had been filed, we also filed a supplement to address his argument that Coinbase is not a federal contractor. You can view the text of the complaint on Public Citizens' website, view Public Citizens' press release, or read the full PDF version submitted to the FEC. Next, the FEC will review the complaint to ensure it satisfies the criteria for a proper complaint. The commission will then notify Coinbase and invite them to reply, within 15 days, after which they will vote on whether there is reason to believe a violation

has occurred. If they find there is reason to believe a violation occurred, they will open an investigation or begin conciliation discussions with Coinbase. An apparent campaign finance violation of historic size is not a good look for an industry attempting to regain legitimacy in the political sphere. Earlier overtures to politicians and regulators largely came from the cryptocurrency exchange FTX, whose CEO, Sam Bankman-Fried, had aimed to be the adult in the room, representing the industry and policy discussions on Capitol Hill. The collapse of his cryptocurrency exchange in November 2022, which revealed the massive fraud ongoing at the company, burned many of the bridges the industry had built with Congress and embarrassed the many

politicians who had accepted substantial donations from his company or illegally routed through its executives. Some political action committees that also receive funds from FTCS and Sam Bankman-Fried may have to forfeit some or all of the money illegally given to them. Campaign finance violations played a role in the criminal case against FTC's executives, and one executive convicted on a campaign finance charge, Ryan Salem, will be reporting to prison in the near future to begin his more than seven-year sentence. Ultimately, the case against Sam-Bankman-Fried primarily focused on the financial fraud, and he, was convicted and sentenced to 25 years in prison. The harm to consumers as a result of the

FTX collapse and the related disasters in the cryptocurrency world had seemed, for a time, to convince lawmakers of the need for stronger consumer protections in the fraud-ridden cryptocurrency industry. Those memories, unfortunately, seem to be growing ever more distant for some politicians as the industry is waving nearly $200 million under their noses. Thanks for listening to this issue of the citation needed newsletter. To learn how to support my work, visit mollywhite.net slash support. If you'd like to read the text versions of these episodes, sign up to receive the newsletter in your email,

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