Coinbase - Molly White: Federal Elecition Commission Violations

What are the facts?

On August 1, 2024, Molly White filed a complaint with the Federal Election Commission (FEC) alleging that Coinbase, a major crypto exchange, violated federal election laws by making large donations to two Super PACS while, at the same time, negotiating a contract with the federal government, which it ultimately received.

Specifically, as explained on Public Citizen, on March 20, 2024, Coinbase made a $500,000 contribution to the Congressional Leadership Fund (a hybrid PAC). On May 30, 2024, Coinbase made a $25 million contribution to Fairshake, a super PAC aimed at installing crypto-friendly lawmakers in Government. At the time of both contributions, Coinbase was negotiating a contract with the United States Marshals Service, a federal agency, to manage digital assets that the Justice Department had forfeited as part of the DOJ’s Asset Forfeiture Fund. Coinbase as a company has now given approximately $46 million in total to Fairshake.

Why could this be a problem?

Federal election laws prohibit a federal contractor from making contributions, directly or indirectly, to “any political party, committee, or candidate for public office or to any person for any political purpose or use” at any time between the commencement of negotiations for a federal contract and the completion of performance or termination of negotiations for the contract. 52 U.S.C. 30101(8)(A)(i); 52 U.S.C. § 30119(a)(1).

The contractor contribution prohibition applies to any person “who enters into any contract with the United States or any department or agency thereof” for the “rendition of personal services” or for “furnishing any material, supplies, or equipment” or for “selling any land or building” if “payment for the performance of such contract or payment for such material, supplies, equipment, land, or building is to be made in whole or in part from funds appropriated by the Congress.” 52 U.S.C. 30119(a)(1). Critically here, the funds must be appropriated by Congress.

[11 CFR 115.1 Definition] 

Here, the Marshals’ contract that Coinbase ultimately won was first published on March 4, 2024, and offers were due on April 1, 2024. Coinbase was awarded the contract on July 1, 2024, which was also the day the contract commenced. According to White, because Coinbase made donations to PACs after the contract was published, Coinbase, as a federal contractor, violated federal election laws by making more than $25 million in donations.

There does not seem to be a dispute amongst the parties that federal contractors cannot donate to Fairshake; indeed, Fairshake’s own website makes that clear.

What was Coinbase’s Reaction to White’s Accusations?

Coinbase did not take kindly to White’s accusations, as the below Tweet stream from Coinbase’s Chief Legal Officer, Paul Grewal, confirms.

[Coinbase tweet stream from August 2024]

In short, Grewal argues, Coinbase is not a federal contractor because the monies from which it is paid are not Congressionally appropriated, in that they come out of the DOJ’s Asset Forfeiture Fund as opposed to an annual Congressional appropriation. 

Molly White rejected Coinbase’s explanation, however, and she made a supplemental filing with the FEC, taking issue with Coinbase’s counter-arguments. White wrote:

As the Supreme Court has recently explained, “an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.” Consumer Fin. Protection Bureau v. Cmty. Fin. Servs. Ass'n of Am., 601 U.S. 416, 424 (2024). Under this definition, Congress’s enactment 28 U.S.C. § 524(c)(1), creating the Assets Forfeiture Fund and authorizing the Attorney General to make expenditures from that fund for specific purposes, was an appropriation. See also Perri v. United States, 340 F.3d 1337, 1341 (Fed. Cir. 2003) (recognizing that section 524(c)(1) is “a money-authorizing statute”). Indeed, over the past five decades, both courts and the Department of Justice have considered the statutory creation of the fund to be an appropriation. San Antonio Hous. Auth. v. United States, 143 Fed. Cl. 425, 480 (2019) (discussing Perri, 340 F.3d at 1341 (Fed. Cir. 2003)); Attorney General’s Guidelines on Seized and Forfeited Property, 50 Fed. Reg. 24052, 24052 (June 7, 1985). The Congressional Research Service has similarly described the statute as a “permanent appropriation.” Cong. Res. Serv., No. 97-139, Crime and Forfeiture 24 (updated 2015), available at https://crsreports.congress.gov/product/pdf/RL/97-139/13.

Coinbase, predictably, did not agree with White’s analysis, putting White on “notice” (of what, he does not say):

Who is Correct?

Who is right? Is it Paul Grewal, the Chief Legal Officer of Coinbase, or is it Molly White, an anti-crypto internet sleuth?

Luckily, most of the facts are not in dispute.

Coinbase made donations to entities aimed at politicking (Political Action Committees) while also bidding for a federal contract. The issue presented is whether Coinbase fits the definition of a “federal contractor.” Coinbase says it does not because the funds from which the contract is paid, the DOJ’s Asset Forfeiture Fund, are not Congressional appropriations, which is a requirement to be deemed a federal contractor in the eyes of the Federal Election Commission. In short, this flame war comes down to whether or not Coinbase fits the definition of a federal contractor.

What are Congressional Appropriations?

I am not an election lawyer, and I don’t pretend to be, but I am curious as to what is or is not an appropriation. After all, the gist of the statute prohibiting donations to PACs by federal contractors seems targeted at corruption and bribery (the effect of the donation) as opposed to the source of the funds used to pay the contract. Could this be the loophole we’ve all been waiting for?

We turn first to the Congressional Budget Office (CBO), which defines the various types of Congressional spending:

Federal spending is classified in two basic categories: mandatory and discretionary. About 61 percent of the federal budget is mandatory spending, 26 percent is discretionary spending, and the rest is interest payments on debt. These categories refer to the relationship between the law that authorizes a program or activity and the law that determines the program’s spending.

Mandatory spending a/k/a direct spending: mandatory spending is the budget authority provided by laws other than appropriation acts and the outlays that result from that budget authority. (As used in the Congressional Budget Office’s semiannual report … mandatory spending refers only to the outlays that result from budget authority provided in laws other than appropriation acts.) In essence, the law that authorizes the program and determines its purposes and rules also determines its funding. Think about examples such as Social Security, Medicare, Medicaid, and SNAP. These programs are authorized by laws passed by Congress, and the funding flows from those same laws (not annual appropriations). To change the mandatory programs, Congress must amend the relevant authorizing law.

Discretionary spending: The budget authority that is provided and controlled by appropriation acts and the outlays that result from that budget authority is known as “discretionary” spending. For discretionary spending, the authorizing law that sets up the program, agency, or activity does not itself determine the funding level, which is instead set in annual appropriations legislation. For example, almost all defense spending is handled this way, along with the operating budgets of civilian agencies, medical care for veterans, grant programs such as for education and medical and scientific research, and some low-income assistance programs. This is the spending category that results in the Government getting shut down every few years.

Appropriations Act: An appropriations act is law or legislation under the jurisdiction of the House and Senate Appropriations Committees that provides authority for federal programs or agencies to make payments from the Treasury. Each year, the Congress considers regular appropriation acts, which fund the operations of the federal government for the coming fiscal year. The Congress may also consider supplemental, deficiency, or continuing appropriation acts (joint resolutions that provide budget authority for a fiscal year until the regular appropriation for that year is enacted).

The CBO explains the difference between mandatory and discretionary spending:

The authority for discretionary spending stems from annual appropriation acts, which are under the control of the House and Senate Appropriations Committees. Most defense, education, and transportation programs, for example, are funded that way, as are a variety of other federal programs and activities. Those appropriations are subject to a set of budget enforcement rules and processes that differ from those that apply to mandatory spending. As Congress considers appropriation acts, CBO tallies the budget authority those acts would provide and estimates the outlays that would result.

Mandatory—or direct—spending includes spending for entitlement programs and certain other payments to people, businesses, and state and local governments. Mandatory spending is generally governed by statutory criteria; it is not normally set by annual appropriation acts. Outlays for the nation’s three largest entitlement programs (Social Security, Medicare, and Medicaid) and for many smaller programs (unemployment compensation, retirement programs for federal employees, student loans, and deposit insurance, for example) are mandatory spending. Social Security and some other mandatory spending programs are in effect indefinitely, but some (for example, some agriculture programs) expire at the end of a given period. Roughly 60 percent of federal spending in 2012 (other than for the government’s net interest costs) was mandatory. Legislation that changed direct spending would, by itself, affect the budget deficit because no further legislative action would be required for the change in spending to occur.

While the CBO is helpful (as it always is) it does not directly answer the question - is so-called “direct spending” (such as the spending at issue here with the Marshals’ contract) considered a Congressional appropriation. With that in mind, we turn next to the Constitution:

Article I, Section 9, Clause 7:

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

The plain language of the Constitution seems to indicate that any money drawn from the US Treasury (i.e. spent by the Government) is an appropriation. In order to spend the money, an “appropriation” has to be made. The Constitution itself does not distinguish between “direct” and “discretionary” spending.

Last, we read the 2024 Supreme Court case White mentioned in her supplemental filing - CONSUMER FINANCIAL PROTECTION BUREAU, ET AL. v. COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA, LIMITED, ET AL (“CFPB”)

In CFPB, decided on May 16, 2024, Justice Clarence Thomas rejected a challenge to the constitutionality of the structure used to fund the Consumer Financial Protection Bureau, the federal agency that enforces consumer finance laws. By a vote of 7-2, the justices reversed a decision by a federal appeals court in Louisiana, which had ruled that the agency’s funding violates the Constitution because it comes from the Federal Reserve rather than through the congressional appropriations process. In this decision, the Court weighs in on what is (and is not) an appropriation.

Justice Thomas began the decision by explaining the precise issue:

Our Constitution gives Congress control over the public fisc, but it specifies that its control must be exercised in a specific manner. The Appropriations Clause commands that "[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." Art. I, §9, cl. 7. For most federal agencies, Congress provides funding on an annual basis. This annual process forces them to regularly implore Congress to fund their operations for the next year. The Consumer Financial Protection Bureau is different. The Bureau does not have to petition for funds each year. Instead, Congress authorized the Bureau to draw from the Federal Reserve System the amount its Director deems "reasonably necessary to carry out" the Bureau's duties, subject only to an inflation-adjusted cap. 124 Stat. 1975, 12 U.S.C. §§5497(a)(1), (2). In this case, we must decide the narrow question whether this funding mechanism complies with the Appropriations Clause. We hold that it does.

In short, if the Constitution requires that spending be authorized by a lawful “appropriation,” can a Government entity be lawfully funded if it is created and funded directly via statute, and not through the annual appropriations process.

The answer is yes, such a funding mechanism is lawful because it qualifies as an “appropriation” under the Constitution. As the Court thenexplained, “Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes.” Put differently:

The Appropriations Clause provides that "[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." Art. I, §9, cl. 7. Textually, the command is unmistakable-"no money can be paid out of the Treasury unless it has been appropriated by an act of Congress." Cincinnati Soap Co. v. United States, 301 U.S. 308, 321 (1937). Our decisions have long given the Appropriations Clause this straightforward reading.

As the Court opined, the Appropriations Clause applies to all money “drawn from the Treasury,” and the CFPB draws from the Fed Reserve, which would deposit the money in the Treasury if it were not otherwise spent. Thus, and it is important here, “money otherwise destined for the general fund of the Treasury qualifies,” and the CFPB’s funding, therefore, is “subject to the requirements of the Appropriations Clause.” In answering this question, the Court concluded that the CFPB’s funding source was constitutional as an appropriation, even though it allowed the agency to “choose its own level of annual funding, subject only to an illusory cap.” Appropriations, “need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause.”

The text of the statute authorizing the expenditure is the most important in determining whether it qualifies as a “congressional appropriation” or not. In the case of the CFPB, the statute provided that the money would come from the earnings of the Federal Reserve, in an amount to pay the expenses of the CFPB. This was sufficient for the funding source to be a “congressional appropriation,” which therefore satisfied the Appropriations Clause. The Bureau was saved.

What is the DOJ’s Asset Forfeiture Fund?

Luckily, the DOJ provides a handy explainer as to what the Asset Forfeiture Fund (AFF) actually is:

The AFF was created by the Comprehensive Crime Control Act of 1984 as the repository of the proceeds of forfeitures under any law enforced by members of the AFP or administered by the DOJ (28 U.S.C. § 524(c)). The AFF is a special fund with no-year budget authority available until expended and is identified in the U.S. Department of the Treasury’s (Treasury) Federal Account Symbols and Titles Book (FAST) as 15X5042. Special funds are credited with receipts from sources that are earmarked by law for a specific purpose. At the point of collection, these receipts are available immediately for expenditure pursuant to statutory requirements.

The DOJ goes on to explain:

Authorities and limitations governing the use of the AFF are specified in 28 U.S.C. § 524(c). In addition, use of the AFF is controlled by laws and regulations governing the use of public funds and appropriations (e.g., 31 U.S.C. § 1341-1353 and 1501-1558, Office of Management and Budget (OMB) Circulars, and provisions of annual appropriation acts). The AFF is further controlled by the AG Guidelines, other policy memoranda and statutory interpretations issued by appropriate authorities. Unless otherwise provided by law, restrictions on the use of the AFF retain those limitations after any AFF funds are made available to a recipient agency. Moreover, funds are available for use only to the extent that receipts are available in the AFF.

Pursuant to 21 U.S.C. § 881(e)(1) and 19 U.S.C. § 1616(a), as made applicable by 21 U.S.C. § 881(d) and other statutes, the AG has the authority to equitably transfer forfeited property and cash to state and local agencies that directly participate in the law enforcement effort leading to the seizure and forfeiture of property. All property and cash transferred to state and local agencies and any income generated by this property and cash is to be used for law enforcement purposes.

The AFF’s expenses, in turn, are divided up into “mandatory expenses” of an “indefinite authority” as well as “discretionary expenses” that come from annual Congressional appropriations. Here, as set forth. below, it is fairly clear that the monies used to pay for the Coinbase contract come from “mandatory expenses” that does not require annual appropriations by Congress. See the DOJ’s Narrative below:

Returning to the framework of CFPB, the statute that created the AFF provides that the source of the fund is public monies (i.e. property forfeited to the Government).

As specified in the governing statute, 28 USC Section 524:

 (4) There shall be deposited in the Fund—

(A) all amounts from the forfeiture of property under any law enforced or administered by the Department of Justice … ;

(B) all amounts representing the Federal equitable share from the forfeiture of property under any Federal, State, local or foreign law, for any Federal agency participating in the Fund;

(C) all amounts transferred by the Secretary of the Treasury pursuant to section 9705(g)(4)(A) of title 31; and

(D) all amounts collected—

(i) by the United States pursuant to a reimbursement order under paragraph (2) of section 413(q) of the Controlled Substances Act (21 U.S.C. 853(q)); and

(ii) pursuant to a restitution order under paragraph (1) or (3) of section 413(q) of the Controlled Substances Act for injuries to the United States.

Thus, all property forfeited by the Department of Justice (except for certain enumerated property) is forfeited to the United States (see 18 USC 981) and goes into a special government fund (i.e. the Treasury of the United States).

The statute further makes clear how these monies must be spent.

Sub-section (c) of the statute provides as follows:

(c) (1)There is established in the United States Treasury a special fund to be known as the Department of Justice Assets Forfeiture Fund (hereafter in this subsection referred to as the “Fund”) which shall be available to the Attorney General without fiscal year limitation for the following law enforcement purposes—

(A)the payment, at the discretion of the Attorney General, of any expenses necessary to seize, detain, inventory, safeguard, maintain, advertise, sell, or dispose of property under seizure, detention, or forfeited pursuant to any law enforced or administered by the Department of Justice, or of any other necessary expense incident to the seizure, detention, forfeiture, or disposal of such property including—

(i) payments for—

(I) contract services;

(II) the employment of outside contractors to operate and manage properties or provide other specialized services necessary to dispose of such properties in an effort to maximize the return from such properties; and

(III) reimbursement of any Federal, State, or local agency for any expenditures made to perform the functions described in this clause;

(ii) payments to reimburse any Federal agency participating in the Fund for investigative costs leading to seizures;

(iii) payments for contracting for the services of experts and consultants needed by the Department of Justice to assist in carrying out duties related to asset seizure and forfeiture; and

…..

(V) contracting for services directly related to the identification of forfeitable assets, and the processing of and accounting for forfeitures

The statute thus spells out specifically how these funds will be spent, at the discretion of the Attorney General.

Putting this all together, as we recall, the funding of CFPB was an “appropriation” because a Congressional statute spent public money, even though there was no limit as to how much was spent and even though Congress did not annually appropriate the funding. It is difficult to see how the funding in CFPB was an appropriation, while the funding here could not be an appropriation. The AFF was created by a Congressional statute (the Comprehensive Crime Control Act of 1984) as a way to spend forfeited property that had been deposited into the Treasury (i.e. public monies). The statute specifically states how the monies are to be spent, in accordance with CFPB. Put differently, while Coinbase’s contract is funded from forfeited assets which are not subject to annual Congressional appropriations, under the recent CFPB ruling, this is not required. Rather, all that is required is that a Congressionally-passed statute specify the source of the funds (it does) as well as the purpose for which the DOJ can use the funds (it does). Under CFPB, that is all that is needed to make the spending an “appropriation.”

Conclusion

This is a somewhat close call. While it may not have been clear prior to the CFPB ruling (which came on May 16, 2024), it is more clear after CFPB that the public monies being used to fund the AFF, even the mandatory spending part, are “appropriations.” Interestingly, the first large donation by Coinbase came before CFPB was decided, and the second large donation came just after CFPB was decided (but before the smoke had cleared). Coinbase probably gets a pass for those two. But Coinbase continues to make donations to FairShake, and has pledged to do so going forward. While the FEC is fairly toothless, and it is unlikely that the FEC will actually do anything, we think that Molly White has the better of the argument on this one.

This is the author’s opinion only, (not legal advice), and does not represent a complete legal analysis of all the complicated issues in federal election law as pertains to the Coinbase contract. Everyone should do their own reasoned analysis of the situation.