Will bitcoin donations become a factor in the next election cycle?

The Federal Election Commission has carefully avoided making a definitive statement on the legality of bitcoin donations to political candidates. Late last year, the FEC went so far as to say that it would be investigating bitcoin donations before the next mid-term elections, but offered no insight about how current donations should be handled. With bitcoin now a hot topic in the financial world, and a boom in bitcoin activity expected to start this summer, the FEC no longer has the option to delay their decision. The future of American politics could be determined, at least in part, by bitcoin.

Tomorrow, the FEC officially considers a formal request for a ruling on virtual currencies.

Federal Election rules limit how much money candidates can accept from donors, and impose a variety of rules on disclosing the source of direct campaign donations for both candidates and parties. Currently, these rules assume that donations will be in cash, services or in-kind donations. Bitcoin exists in a gray area, working as a commodity under IRS rules, but having almost all of the most important features of cash in real-world application. Although the value of bitcoin can be volatile, there are currently no rules preventing donor or special interest from donating as much bitcoin as they like to a campaign.

This is a problem, because bitcoin is also far more anonymous than other forms of donation. A political donor with very deep pockets could easily purchase, say, $1 million in bitcoin and donate it directly to a particular candidate’s campaign. Meanwhile, that same donor would be limited to a mere $2,600 in direct cash contributions. The would also be no easy way for authorities to identify the donor, something that’s already proving difficult in the existing system. Bitcoin could completely break the existing campaign finance rules if this issue is left unaddressed.

In a story published today on CNNMoney, reporter Jennifer Liberto noted that state-level politicians are already eyeing bitcoin’s potential.

Texas Attorney General Greg Abbott, who is running for governor in that state, said last week he’d accept donations in Bitcoin. The Libertarian Party also collects between $10,000 and $20,000 in bitcoin each year. It’s a small percentage of the $1 million it raises annually, according to Libertarian Party Executive Director Wes Benedict.

The FEC’s ruling on bitcoin is widely expected to reflect the IRS perspective, treating bitcoin donations as in-kind contributions. More on this story as it develops.