Cryptocurrency: Selected Policy Issues

Cryptocurrency: Selected Policy Issues

Cryptocurrency: Selected Policy Issues
February 15, 2023
Cryptocurrencies are digital financial instruments exchanged across public blockchains, and
recorded on ledgers, that do not require central intermediaries (e.g., commercial banks, central
Paul Tierno
banks) for clearing and settlement. Satoshi Nakamoto, an anonymous individual or collective,
Analyst in Financial
introduced the first cryptocurrency, Bitcoin, in a whitepaper in 2008 and a subsequent blockchain
Economics
in 2009. While Bitcoin was a novel form of financial transaction, it built on technology that had

been decades in the making, including blockchains, cryptography, and consensus protocols,
among others.

Cryptocurrency (or crypto) attempts to replace the current financial system, of which a central tenet is trust, with one that
does not require trust. A variety of safeguards are built into traditional banking and payments systems to foster trust and
inspire confidence, including, among others, chartering procedures, capital requirements, ongoing supervision, and deposit
insurance. In place of trust, the cryptocurrency system leverages a series of separate but concurrent incentives for different
system participants.
Cryptocurrency was initially developed as a payments system. Cryptocurrency transactions have proven to take longer and be
costlier to settle than existing payments options, creating challenges for wider adoption. Adoption challenges, combined with
crypto’s periodic bouts of sharp price fluctuations, have fueled crypto’s use as a speculative investment.
Once used by a small subset of computer scientists, cryptocurrency has gone global. The crypto market capitalization reached
a high of nearly $3 trillion in November 2021, with an estimate of more than 10,000 cryptocurrencies in circulation. This
growth was both the product of and subsequent catalyst to ongoing changes in the industry. For example, crypto was
originally accessible via less-than-user-friendly blockchains, but companies and applications created more user-friendly and
familiar systems that allow individuals and firms to “custody” their crypto in accounts or wallets at institutions. Specifically,
an entire ecosystem has developed that supports cryptocurrencies, including the custody or hosting services known as wallets,
as well as exchanges, payment platforms that support crypto, decentralized finance platforms, and dozens more. In the
process, large traditional financial intermediaries—the very type of institutions crypto wanted to make unnecessary—have
displaced the decentralized, trustless ideal. Coincidentally, since November 2021, crypto has experienced a significant
decline and lost more than $2 trillion, or greater than 70% of market value.
Currently, there is no overarching regulatory regime for crypto. Federal regulators have adapted existing regulations where
cryptocurrency resembles traditional products and services in the financial sector. Regulation has generally flowed from
enforcement actions rather than rulemaking, limiting the reach of regulators and creating regulatory ambiguity for the crypto
industry. Federal financial regulators claim varying degrees of authority over different corners of the industry.
The novelty of cryptocurrencies’ design, the brisk pace of their ascent, and the general dynamic of the crypto industry—
particularly a series of crypto company failures in 2022, highlighted by the collapse of FTX, a popular exchange—point to
various policy questions that may be of interest to Congress. Whether a regulatory regime that is tailored for crypto is
necessary is subject to debate. The current regulatory approach has kept the industry at arm’s length from the traditional
financial system, a fact that has limited broader systemic risk but whose lighter touch may have enabled fraud. Chief issues in
this debate are questions over how to balance the relative privacy crypto provides with its potential for use in illicit activity
and whether investor protections should be put in place in an industry that has been rife with scams and thefts. Inviting crypto
further into the regulatory perimeter may enhance regulation and oversight, but it may also increase systemic risk and confer
on the industry a sense of legitimacy some do not believe it deserves. In addition, the industry faces criticism for its large
carbon footprint.

Congressional Research Service

link to page 4 link to page 6 link to page 7 link to page 9 link to page 10 link to page 10 link to page 11 link to page 12 link to page 13 link to page 14 link to page 15 link to page 15 link to page 17 link to page 17 link to page 18 link to page 19 link to page 19 link to page 20 link to page 20 link to page 22 link to page 23 link to page 24 link to page 26 link to page 27 link to page 28 link to page 29 link to page 31 link to page 32 link to page 33 link to page 6 link to page 9 link to page 33 Cryptocurrency: Selected Policy Issues

Contents
Introduction ..................................................................................................................................... 1
What Is Cryptocurrency? ................................................................................................................. 3
Blockchain, Decentralized Consensus, and Cryptography ....................................................... 4
Transactions .............................................................................................................................. 6
An Overview of Crypto Markets ..................................................................................................... 7
Cryptocurrencies ....................................................................................................................... 7
Bitcoin ................................................................................................................................. 8
Ethereum ............................................................................................................................. 9
Stablecoins ........................................................................................................................ 10
Central Bank Digital Currency ................................................................................................. 11
Ways to Interact with Crypto .................................................................................................. 12
On-Chain Transactions...................................................................................................... 12
Decentralized Finance (DeFi) ........................................................................................... 14
Off-Chain Transactions ..................................................................................................... 14
Cryptocurrency Exchanges ............................................................................................... 15
Crypto on Payments Apps ................................................................................................. 16
Traditional Financial Institutions and Crypto ................................................................... 16
Selected Policy Issues ................................................................................................................... 17
Inclusion and Scalability ......................................................................................................... 17
Privacy versus Security ........................................................................................................... 19
Existing Regulation of Cryptocurrency................................................................................... 20
Applicable SEC Framework ............................................................................................. 21
Applicable CFTC Framework ........................................................................................... 23
Applicable Bank Framework ............................................................................................ 24
Applicable Money Services Businesses Framework ........................................................ 25
The Future of Cryptocurrency Regulation .............................................................................. 26
Tax Implications ...................................................................................................................... 28
Energy Intensity ...................................................................................................................... 29
Outlook .......................................................................................................................................... 30

Figures
Figure 1. Traditional Payments........................................................................................................ 3
Figure 2. How Does a Transaction Get into the Blockchain? ......................................................... 6

Contacts
Author Information ........................................................................................................................ 30

Congressional Research Service

link to page 6 Cryptocurrency: Selected Policy Issues

Introduction
In January 2009, Satoshi Nakamoto—the pseudonym of an unidentified computer scientist (or
collective of scientists)—mined the first block (or group of transactions) on the Bitcoin network a
few months after publishing the “Bitcoin Whitepaper.”1 This Genesis Block—as the first
transaction on the Bitcoin network was called—included an encoded message that referred to a
newspaper headline published around that time: “Chancellor on brink of second bailout for
banks.”2 The article the block referenced described a bailout for English banks in the immediate
aftermath of the global financial crisis. While the message was relevant historical context for
when the transaction occurred, transactions processed on the Bitcoin network include dates and
timestamps, so the reference to the English bank bailout was unnecessary. Instead, Satoshi
Nakamoto and commentators have since clarified that this allusion to banking conditions was
intended to draw a contrast between the new financial paradigm Bitcoin represented and the
traditional financial system.3 These early developers did not want to rely on a financial system
dependent on third parties—especially governments and central and commercial banks—but
instead created a system to bypass them.
Cryptocurrency’s initial use case was as a combined payment system and unit of account that
eschewed intermediaries. Traditional payments systems are composed of various banks, payments
processors, credit card networks, central clearinghouses, central banks, and a vast technological
infrastructure that supports it. In this system, banks ultimately validate customer transactions and
log the details of the transactions digitally in their private ledgers. Banks then submit these details
via messaging networks, which authorize transactions to occur, and ultimately facilitate the
exchange of funds at banks’ master accounts at a national central bank, which in the United States
is the Federal Reserve. As such, transactions between two individuals with accounts at two or
more different financial institutions involve at least two commercial bank ledgers and the ledger
of at least one central party, which acts as an intermediating agent for the transacting parties. (See
Figure 1 for a simplified version of transactions.) In addition to this massive infrastructure, the
system requires trust and security, which safeguards deposits regardless of economic conditions.
It requires that banks perform their responsibilities effectively and maintain effective risk
management controls, including over their payments systems. Moreover, it obligates banks to do
their best to safeguard their data and extend services to qualifying customers.
Cryptocurrency, on the other hand, is a payment and value storage system that functions as
“electronic cash protected through cryptographic mechanisms instead of a central repository or
authority.”4 In lieu of independent financial institutions with individual ledgers relying on third-

1 For information on the Genesis Block, see Brenden Rearick, “What Is the Genesis Block? 8 Things to Know as
Investors Celebrate ‘Bitcoin’s Birthday,’” Yahoo, January 3, 2022, https://www.yahoo.com/now/genesis-block-8-
things-know-215101010.html. Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” October 10,
2008, https://Bitcoin.org/Bitcoin.pdf.
2 The headline is from a story published in The Times on January 3, 2009. See this article at Bryce Elder, “Happy
Birthday to a Giant Ponzi Scheme,’ from Bitcoin’s Accidental Co-Creator,” Financial Times, January 3, 2023,
https://www.ft.com/content/465fb224-3fc9-4b37-81d4-39eece1041df.
3 Pymnts, “A Bitcoin Declaration of Financial Independence,” July 4, 2022, https://www.pymnts.com/blockchain/
Bitcoin/2022/a-Bitcoin-declaration-of-financial-independence/. See http://p2pfoundation.ning.com/forum/topics/
Bitcoin-open-source?id=2003008%3ATopic%3A9402&page=1 for a blog post attributed to Satoshi Nakamoto on the
role of central banks in the past.
4 Dylan Yaga et al., Blockchain Technology Overview, National Institute of Standards and Technology, October 2018,
p. iv, https://nvlpubs.nist.gov/nistpubs/ir/2018/NIST.IR.8202.pdf.
Congressional Research Service

1

Cryptocurrency: Selected Policy Issues

party mediation and securing consumer trust, the crypto system consists of a single ledger
distributed to all members of the network that is constantly updated. Users believe the system
works because they can see it and track it. The system uses cryptography and incentives for
diverse participants to secure the network.
Since 2009, the crypto industry—which now consists of thousands of cryptocurrencies and
various applications—has experienced both relatively low adoption as a payment tool and various
periods of rapid price increases and decreases. These two facets combined have helped fuel
crypto as a speculative asset at the expense of its use as a payment tool. In this context, crypto
became a victim of its own success. Using crypto for routine payments was not attractive when
holding it could yield significant return.5 Its novelty and opaqueness and the mystery behind its
origins sustain a lore that boosted cryptocurrency’s popularity.
At the same time, the industry is rife with ideological tensions that have become more visible
since the market lost more than 70% of its peak market capitalization and some of its most visible
companies—including FTX, which at its peak had been the third-largest crypto exchange—
collapsed.6
Some say the industry is a technological solution in search of a problem. Some who espouse this
view note that the technology and industry as a whole do not have an economic or productive
capacity beyond speculation or the expectation of appreciation.7 Moreover, if there is no
productive use for crypto, then its large carbon emissions and energy use appear more
problematic, according to this view. The Bitcoin network alone, for example, uses as much
energy and produces emissions comparable to nation states.8 Proponents of crypto disagree,
believing that it is a new and innovative technology with potentially valuable and paradigm-
shifting applications, many of which may not yet be realized. Internally, the recent and relentless
failure of centralized crypto institutions highlights the tension between (1) factions that adhere to
the idealistic origins of decentralization and (2) the institutions that have fueled its trajectory from
obscure technology to financial mainstay.
The rise of cryptocurrencies has produced a host of policy issues that may be of interest to
Congress. In light of crypto’s various potential use cases and factions (e.g., payments vs.
speculative investment, decentralized vs. centralized), crypto has become a Rorschach test of
sorts in which users and policymakers see in it what they value most and interpret policy
considerations through that same lens. The host of policy issues raised includes, among others:
managing the tension between public interest in privacy and government desire to monitor and
eliminate illicit financial activity, the ongoing debate on the adequacy of the existing regulatory
structure, determining whether cryptocurrencies should be considered currencies or property for
tax purposes, and the industry’s potential contribution to climate change.

5 For a discussion of the conceptual foundation of cryptocurrency, see CRS Report R45427, Cryptocurrency: The
Economics of Money and Selected Policy Issues, by David W. Perkins.
6 Associated Press, “The Downfall of FTX’s Sam Bankman-Fried Sends Shockwaves Through the Crypto World,”
November 14, 2022, https://www.npr.org/2022/11/14/1136482889/ftx-sam-bankman-fried-shockwaves-crypto.
7 See, for example, Joe Weisenthal and Tracy Alloway, “Aaron Lammer on Yield Farming and Trading in the World of
DeFi,” Bloomberg Odd Lots (Podcast), May 22, 2021, at 43:00, https://podcasts.apple.com/us/podcast/aaron-lammer-
on-yield-farming-and-trading-in-the/id1056200096?i=1000522481080; and Hilary Allen, “The Superficial Allure of
Crypto,” IMF Finance and Development, September 2022, https://www.imf.org/en/Publications/fandd/issues/2022/09/
Point-of-View-the-superficial-allure-of-crypto-Hilary-Allen.
8 For comparison and other Bitcoin-related energy statistics, see the Cambridge Bitcoin Electricity Index at
https://ccaf.io/cbeci/ghg/comparisons.
Congressional Research Service

2

Cryptocurrency: Selected Policy Issues

In March 2022, the Biden Administration issued Executive Order 14067 on Ensuring Responsible
Development of Digital Assets acknowledging these various policy implications, with the stated
objectives of protecting consumers, ensuring American and global financial stability, preventing
illicit financial activity, and promoting access to affordable financial resources.9
This report provides an overview of cryptocurrency, including the technology behind it. It
examines the different ways users can participate in the market—distinguishing on-chain
decentralized transactions from centralized off-chain transactions and the entities providing these
services. It provides an overview of some of the key assets that make up the market. Finally, it
examines policy issues, including, among others, how the existing regulatory frameworks treat
cryptocurrencies and its various functions.
Figure 1. Traditional Payments

Source: Federal Reserve, “Potential Federal Reserve Actions to Support Interbank Settlement of Faster
Payments,” 83 Federal Register 221, November 15, 2018, p. 57356, https://www.govinfo.gov/content/pkg/FR-2018-
11-15/pdf/2018-24667.pdf.
Note: See text for details.
What Is Cryptocurrency?
Cryptocurrencies consist of both the units of stored value and the networks on which they are
exchanged. The cryptocurrencies discussed in this report are decentralized and permission-less,
which means that neither a transacting participant nor a node, which is a component that supports
the system in some capacity, requires any permission or special authorization to participate in the
network or modify the ledger of transactions.10 (Some of the system-supporting participant nodes
are called validators or miners.) Cryptocurrency networks are comprised of unaffiliated
participants operating specific software that they have downloaded on individual computers—not
a central server. These key features distinguish the technology from traditional bank ledger

9 Executive Order 14067, “Executive Order on Ensuring Responsible Development of Digital Assets,”
https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-
development-of-digital-assets/.
10 Cryptocurrencies may also be permissioned. See CRS Report R47064, Blockchain: Novel Provenance Applications,
by Kristen E. Busch, for an explanation of the difference between permissioned and permission-less blockchains.
Congressional Research Service

3

Cryptocurrency: Selected Policy Issues

management, which requires specific permissions to access accounts as well as to implement and
approve transactions.
There are countless components to the underlying technology. This section provides a limited
overview of some of the primary technical components—namely, cryptographic protocols,
consensus mechanisms, and transaction details. These components were chosen because they are
useful to provide a cursory review of how the system works.11
Blockchain, Decentralized Consensus, and Cryptography12
Cryptocurrency is built on blockchain technology. The blockchain is a type of database that—in
its application in cryptocurrencies—operates as a ledger, recording the various transactions of its
participants. In the context of cryptocurrency, transactions are grouped together in blocks and,
once approved, added to the chain of previously approved blocks. According to a National
Institute of Standards and Technology report, blockchains “enable a community of users to record
transactions in a shared ledger within that community, such that under normal operation of the
blockchain network no transaction can be changed once published.”13 Computer scientists define
blockchains thus as append-only, which means once published they can be added to but not
otherwise amended. This append-only nature of blockchains, also often referred to as
immutability, is crucial because system participants, including network nodes and miners, can
identify attempted tampering.
The fact that blockchains are shared and immutable allows there to be no central intermediary
responsible for approving transactions or confirming their veracity before they are added to the
blockchain. There is also not a central body that approves which entities may approve
transactions. Cryptocurrencies instead rely on what is commonly referred to as decentralized
consensus model, in which many network participants (referred to as mining or validator nodes)
compete with each other to authorize blocks of transactions for the promise of compensation (a
block reward), usually in currency native to a specific network or blockchain.
Cryptocurrency Mining
Mining is the process whereby certain nodes in the network (called miners) validate blocks of transactions, thereby
adding blocks to the blockchain and updating the distributed ledger. The work of miners is described as generating
random numbers that meet certain parameters. This process is called hashing. Hashing converts large amounts of
data—the details of various transactions—into unique, fixed-length alphanumeric outputs, from which it is
impossible to retrieve the original inputs. For example, the hashing program can hash just one word or an entire
book, and in each case, the product wil be a different alphanumeric value of the same length. Just knowing the
output would give no additional information about the data (the word or the book from this example) added to
the block.
Miners use computers to find this fixed-length standard numerical figure by combining transaction data from the
current block, the previous block’s hash, and a nonce. (A nonce is some random number—essentially a guess—
needed to find a hash.) 14

11 For more on the technology behind cryptocurrency, see CRS Report R45116, Blockchain: Background and Policy
Issues, by Chris Jaikaran; and CRS Report R47064, Blockchain: Novel Provenance Applications, by Kristen Busch.
12 This section includes only a sampling of the technical components of some cryptocurrencies, including Bitcoin. This
list and description is not intended to be exhaustive.
13 Yaga et al., Blockchain Technology Overview, p. iv.
14 Yaga et al., Blockchain Technology Overview, p. 9.
Congressional Research Service

4

Cryptocurrency: Selected Policy Issues

Different cryptocurrencies may have different criteria. But in the proof of work consensus
mechanisms, the hash must meet certain parameters for the block to be added to the chain.
Namely, a certain number of leading zeros must precede it. Because miners use a standard
program—which creates a random hash from the block data, previous hash, and nonce—miners
cannot control the output they generate when hashing and must continue the process each time
using different nonces until one miner achieves a random hash that meets the difficulty
requirement. (Each time a hash is attempted, computers create a random 64-digit alphanumeric
string of characters. The level of difficulty of finding a correct random output increases with the
requisite number of preceding zeros.)15 The miner that generates a suitable hash is awarded a
block reward. Then the system sets about it all over again, mining the next block. Generating
hashes quickly requires significant computational power, energy consumption, and increasingly
specialized and expensive equipment.
While being the first to generate the hash is difficult, validating that the solution is correct is easy.
Moreover, because data from the preceding block is used as an input for hashing the subsequent
block, tampering with any previous block—in effect attempting to change the ledger of who owns
what—would show in subsequent blocks.16 All participants would be aware if a miner
retroactively tries to change a previous block (or mines a block with a transaction that tries to do
so). Typically, miners want only to mine on top of blocks that have been appropriately mined.
Herein lies the mechanism that allows disparate nodes that do not know each other to form a
consensus.17 Miners would not want to add subsequent blocks to a bad block out of fear that that
path of the chain will be abandoned, a new strand of the chain created, and the cryptocurrency
held on the old strand of blocks—called a fork—deemed worthless.18
The second cryptographic function that secures blockchain-based transactions is asymmetric-key
cryptography, sometimes referred to as public key cryptography. Asymmetric-key cryptography
uses two keys—private and public—to secure verification of a transaction. System participants
use the public key to encrypt the data and, as the name suggests, can publish it and make it widely
available. Encrypted messages can then be sent on to their recipients and may be decrypted only
by the private key, which is (or should be) kept secret.19

15 Anders Brownworth, “How Blockchain Works, Blockchain 101—A Visual Demo,” http://blockchain.mit.edu/how-
blockchain-works. For difficulty of generating preceding zeroes, see Vitalik Buterin, “What Proof of Stake Is and Why
It Matters,” Bitcoin Magazine, August 26, 2013, https://Bitcoinmagazine.com/culture/what-proof-of-stake-is-and-why-
it-matters-1377531463.
16 Brownworth, “How Blockchain Works.” To illustrate, this paragraph may be hashed to produce a hash output.
Moreover, data created from the hash is used as an input for transaction data in the next block, and any tampering to a
previous block would show in subsequent ones. If even one character were changed and the paragraph rehashed, the
function would produce an entirely different hash, making the edits immediately obvious, akin to a word processing
version of track changes.
17 Yaga et al., Blockchain Technology Overview, p. 18.
18 This is commonly referred to as the Byzantine Generals problem. For more on the Byzantine Generals Problem, see
Leslie Lamport, Robert Shostak, and Marshall Pease, “The Byzantine Generals Problem,” ACM Transactions on
Programming Languages and Systems, vol. 4, no. 3 (July 1982), pp. 382-340, https://www.microsoft.com/en-us/
research/uploads/prod/2016/12/The-Byzantine-Generals-Problem.pdf.
19 See CRS Report R44642, Encryption: Frequently Asked Questions, by Chris Jaikaran, and Yaga et al., Blockchain
Technology Overview, p. 11. According to the National Institute of Standards and Technology, “One can encrypt with a
private key and then decrypt with the public key. Alternately, one can encrypt with a public key and then decrypt with a
private key” (Yaga, et al., Blockchain Technology Overview, p. 11).
Congressional Research Service

5

Cryptocurrency: Selected Policy Issues

Participants use private keys to digitally sign transactions. The authenticity of private keys is
verified with the public key.20 Importantly, it is infeasible to ascertain the private key from the
available public key, therefore allowing users to share public keys. When executing transactions,
individuals use private keys to digitally sign transactions such that a recipient can use the
associated public key to confirm the authenticity of the sender.21
Figure 2. How Does a Transaction Get into the Blockchain?

Source: Euromoney Learning, https://www.euromoney.com/learning/blockchain-explained/how-transactions-get-
into-the-blockchain.
Transactions
Conceptually, currencies can be token-based or account-based. In token-based currencies, assets
must be verified or proven to be genuine. By contrast, account-based systems require user
identification verification.22 The quintessential token-based system, for example, is a physical
currency, where the primary concern is that the bill or coin is genuine. In account-based systems,
individuals and institutions must verify their identities and follow protocol, which allows them to
facilitate transactions for accounts held at financial institutions.23
Crypto (and in particular Bitcoin) has been described as both account-based and token-based.
First, it follows the definition of account-based because only a private key holder can access and
transact with crypto associated with a blockchain address, with the private key validating the user.
Bitcoin also fits the definition of token-based. The transaction history as recorded in the ledger

20 Yaga, et al., Blockchain Technology Overview, p. 11.
21 See CRS Report R45116, Blockchain: Background and Policy Issues, by Chris Jaikaran; Gary Gensler, “Blockchain
and Money,” Massachusetts Institute of Technoloby, 2018, at 55:20, https://www.youtube.com/watch?v=
0UvVOMZqpEA; and Yaga et al., Blockchain Technology Overview, p. 11.
22 For a conversation about token- and account-based systems, see Rod Garratt, Michael Lee, and Brendan Malone,
“Token- or Account-Based? A Digital Currency Can Be Both,” Federal Reserve Bank of New York, August 12, 2020,
https://libertystreeteconomics.newyorkfed.org/2020/08/token-or-account-based-a-digital-currency-can-be-both/.
23 Garratt, Lee, and Malone, “Token- or Account-Based?”
Congressional Research Service

6

link to page 18 link to page 13 link to page 13 Cryptocurrency: Selected Policy Issues

verifies that a unit or token (referred to as unused transaction output or UTXO) has not been
spent, is in essence valid, and may be transacted.24
Blockchain-based systems typically require and generate two pieces of transaction data: inputs
and outputs. In the case of blockchain-based cryptocurrency, this comprises transaction data.
Inputs are a list of “digital assets to be transferred” with proof of provenance, such as the previous
transaction (where a sender received the assets or an origin event, where new funds were
created).25 The outputs are the new assignments of ownership of input funds. For example, if
Alice wants to pay Bob $17 worth of Bitcoin, a possible input would be $20 with outputs of $17
assigned to Alice and $3 assigned as “change” back to Alice. That $3 may be used on its own or
with other unspent transactions to fuel another transaction.26
In sum, individuals who want to acquire a particular cryptocurrency for transactions (or
speculative purposes) can do so by becoming nodes on the network. (Alternatively, individuals
can purchase on centralized exchanges, as discussed in “Cryptocurrency Exchanges” below). In
transactions, a user accesses unspent funds with a private key and sends those funds to another
user on the same network.
An Overview of Crypto Markets
Cryptocurrencies may be used to facilitate transactions and may be held as speculative
investments. Since 2009, when Satoshi Nakamoto launched the first cryptocurrency blockchain,
thousands of cryptocurrencies and different classes of other digital assets have emerged. This
section provides a non-exhaustive survey of various cryptocurrencies and some representative
features.
Cryptocurrencies
The term cryptocurrency generally refers to blockchain-based digital currencies maintained on
decentralized networks. For the purposes of this report, cryptocurrencies refers to a type of digital
asset. Stablecoins (see “Stablecoins” below) are a subset of cryptocurrency. Non-fungible tokens
and digital (or metaverse) real estate are other types of digital assets. They use similar technology
but are beyond the scope of this report. Other terms used synonymously with cryptocurrency are
crypto asset and tokens, among others. The term cryptocurrencies and citation of broad market
capitalization often include stablecoins (see “Stablecoins”), which have their own distinct set of
properties—most notably that they try to maintain a peg to some underlying asset.
The two most prevalent cryptocurrencies are Bitcoin and Ether, which combined represent around
61% of the entire crypto market.27 The cryptocurrency market, which consists of between 13,000
and 20,000 cryptocurrencies, according to industry tracking websites, has been characterized by
near constant and rapid price increases and price decreases.28 Most recently, after experiencing
exponential growth from 2020 to a record high of nearly $3 trillion in November 2021, the
market capitalization fell to less than $800 billion in November 2022. Bitcoin fell from nearly

24 Garratt, Lee, and Malone, “Token- or Account-Based?”
25 Yaga et al., Blockchain Technology Overview, p. 9.
26 Yaga et al., Blockchain Technology Overview, pp. 9-10.
27 According to Coinmarketcap.com, as of February 15, 2023, Bitcoin (41.9%) and Ether (18.4%) account for about
60.3% of the market capitalization of all crypto.
28 See Coingecko.com and Coinmarketcap.com for these figures.
Congressional Research Service

7

Cryptocurrency: Selected Policy Issues

$69,000 to a two-year low of below $16,000 during this time.29 This trend has been referred to as
crypto winter. A host of cryptocurrency project and company failures in summer and fall 2022,
including the collapse of FTX, perhaps the most notable to date, were caused—and
exacerbated—by this broader market downturn.30 As of the time of this report, the total crypto
market capitalization is around $1 trillion.31
Bitcoin
Bitcoin was the first cryptocurrency to gain widespread adoption. Bitcoin runs on a public
blockchain, secured by cryptography, and uses the proof of work consensus mechanism described
above to validate transactions. It also exhibits unique characteristics. For example, the mining and
hashing and use of Bitcoin block rewards creates a relationship intended to keep block mining
(approval) times roughly stable.32 The hashing complexity is intended to ensure block approval
rates of 10 minutes.33 If the number of miners or the computing capacity being used increases—
perhaps because the Bitcoin block reward induces more miners to compete or deploy more
advanced equipment—thus mining blocks faster than 10 minutes (on average), the proof
difficulty increases. Alternatively, if the network and its participants mine blocks at a slower rate
(perhaps because the number of miners falls), the proof of work difficulty falls, ensuring that the
number of active miners is capable of meeting the 10-minute goal.34 The effort required of the
proof of work favors miners with greater computational power requiring significant amounts of
energy.35
Other notable and interrelated Bitcoin features include transactions fees, a hard cap on the
number of Bitcoin, and block reward halving. The limit on block approval rates means that
transactions are slow compared to traditional payment systems.36 Network participants can pay
transaction fees to incentivize miners to process their transactions more quickly. Although the
block reward (which is hard-coded into the design) is still the primary form of compensation,
transaction fees are expected to grow as block rewards shrink.37 For approximately every 210,000
blocks, the system “halves” the block reward miners receive for validating transactions. Halving

29 For Bitcoin prices, see https://fred.stlouisfed.org/series/CBBTCUSD.
30 See for example, CRS Insight IN11928, Algorithmic Stablecoins and the TerraUSD Crash, by Paul Tierno, Andrew
P. Scott, and Eva Su; Yueqi Yang and Hannah Miller, “Crypto’s Brutal Week Ends with a Trading Halt and Bailout,”
Bloomberg, July 1, 2022, https://www.bloomberg.com/news/articles/2022-07-01/crypto-broker-voyager-digital-
suspends-trading-withdrawals; and CRS Insight IN12047, What Happened at FTX and What Does It Mean for Crypto?,
by Paul Tierno.
31 See Coinmarketcap.com as of February 15, 2023.
32 Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” p. 3; and Andreas M. Antonopoulos, “Mining and
Consensus,” in Mastering Bitcoin, https://www.oreilly.com/library/view/mastering-Bitcoin/9781491902639/ch08.html
(O'Reilly).
33 Antonopoulos, “Mining and Consensus.”
34 Alyssa Hertig, “Bitcoin Halving Explained,” CoinDesk, March 9, 2022, https://www.coindesk.com/learn/2020/03/24/
Bitcoin-halving-explained/.
35 Joshua A. Kroll, Ian C. Davey, and Edward W. Felten, “The Economics of Bitcoin Mining, or Bitcoin in the
Presence of Adversaries,” Twelfth Workshop on the Economics of Information Security (WEIS 2013), June 11, 2016, p.
5.
36 Frederic Boissay et al., “Blockchain Scalability and the Fragmentation of Crypto,” BIS Bulletin, no. 56 (June 7,
2022), pp. 3, https://www.bis.org/publ/bisbull56.pdf.
37 Miles Carlsten et al., “On the Instability of Bitcoin Without the Block Reward,” Proceedings of the 2016 ACM
SIGSAC Conference on Computer and Communications Security, October 24, 2016, p. 1, https://dl.acm.org/doi/
10.1145/2976749.2978408. The concept of fees is also referenced in Nakamoto, “Bitcoin: A Peer-to-Peer Electronic
Cash System,” p. 3.
Congressional Research Service

8

link to page 17 link to page 17 link to page 17 Cryptocurrency: Selected Policy Issues

occurs roughly every four years.38 The original block reward was 50 Bitcoin. As of 2022, after
three halvings, miners are rewarded 6.25 for each block mined.39 Finally, the number of Bitcoin
created is capped at 21 million, when creation of new Bitcoin is to cease.40
Ethereum
Ether is the cryptocurrency native to the Ethereum blockchain, which claims to “build on Bitcoin,
with some big differences.”41 In an assessment of Bitcoin, Vitalik Buterin—Ethereum’s
founder—described Bitcoin as having a “weak version of a concept of ‘smart’ contracts.”42 Smart
contracts are programs or software that can self-execute when various participants meet some
predetermined set of criteria. Ethereum thus set out to create an “alternative protocol for building
decentralized applications … allowing anyone to write smart contracts and decentralized
applications where they can create their own arbitrary rules for ownership, transaction formats
and state transition functions.”43 In cryptocurrency and decentralized finance (see “Decentralized
Finance (DeFi)” below), smart contracts are often used to facilitate trades between users without
an intermediary. Ethereum shares some similarities with Bitcoin, including pseudonymity,
immutability, decentralization, and broadly speaking its basic functions as a unit of account and
medium of exchange, among others. However, there are some important differences.
Because of the enhanced programmability offered, the Ethereum network has become a favorite
foundation for cryptocurrency projects that require a certain level of flexibility afforded by smart
contracts, including the creation of additional tokens and the implementation of broader
decentralized finance, or DeFi, projects.44
Bitcoin has only ever been mineable—developed from nothing and with no initial allotment or
pre-sale of coins to participants—and has a hard cap of 21 million Bitcoin. This is not the case
with Ether. Ether pre-sold a majority of the initially created cryptocurrency (83.5% at the time) in
a pre-mine in 2014 and set aside the remainder for accrued expenses and a post-sale reserve.45 As
Ether became mineable and network mining activities created more Ether, the share of pre-mined
crypto (those that were purchased prior to the network going live) fell as a percentage of the total
outstanding.
While there is no hard cap on the amount of Ether that may ever enter the system, the network
recently implemented various upgrades that sought to both limit the creation of new Ether and

38 Antonopoulos, “Mining and Consensus.”
39 See https://github.com/Bitcoin/Bitcoin/blob/0d20c42a014ff95aab1447a92605c3a194cfeecc/src/
validation.cpp#L1080-L1091. At the onset, miners received 50 Bitcoin per block. This was halved to 25 in 2012, to
12.5 in 2016, and to 6.25 in 2020.
40 Antonopoulos, “Mining and Consensus.”
41 Ethereum, “What Is Ethereum?,” https://ethereum.org/en/what-is-ethereum/.
42 Vitalik Buterin, “A Next-Generation Smart Contract and Decentralized Application Platform,” Ethereum, 2014,
https://ethereum.org/en/whitepaper/.
43 Buterin, “A Next-Generation Smart Contract and Decentralized Application Platform.”
44 Ethereum allows user to create additional tokens to run on the Ethereum network using the Ethereum Request for
Comment 20 (or ERC-20 standard) and the broader implementation of broader DeFi projects (described in more detail
below in “Decentralized Finance (DeFi)”). For example, ERC-20 is a smart contract consisting of a set of standards that
developers can use to create tokens that operate on the Ethereum network. For more on ERC-20 tokens, see
https://ethereum.org/en/developers/docs/standards/tokens/erc-20/. For more on decentralized finance, see CRS Insight
IN11709, Decentralized Finance (DeFi) and Financial Services Disintermediation: Policy Challenges, by Eva Su.
45 Buterin, “A Next-Generation Smart Contract and Decentralized Application Platform.”
Congressional Research Service

9

Cryptocurrency: Selected Policy Issues

reduce existing supply.46 The first of the two changes implemented in the “London upgrade”
affected Ether supply. As a result of this upgrade, the network burns—or removes from
circulation—a certain amount of Ether from the supply with each transaction.47 In addition, the
recent and more momentous upgrade, called “the Merge,” drastically reduced the network block
reward.48 Therefore, new Ether supply increases at a much slower pace than before the Merge.49
The Merge was arguably one of the biggest things to happen to the Ethereum network since its
inception. The Merge shifted the network from proof of work to a proof of stake consensus
protocol.50 Ethereum, like Bitcoin, was initiated using proof of work but with the ambition from
its origins of shifting consensus protocols.51 Proof of stake is an alternative method for securing a
blockchain that proponents believe is less energy intensive.52 Proof of work requires miners to
compete with each other to solve computationally intensive, cryptographically secured puzzles,
which prioritize network nodes with computation power. In proof of stake, by contrast, any
validating node that “stakes,” or deposits, at least 32 Ether enters a pool of potential validators
that may be randomly selected to submit the next block.53 The network can seize validator-staked
Ether for malicious activity or other offenses. Ethereum’s founder claimed that the shift would
reduce the Ethereum network’s power consumption and emissions by greater than 99% and
reduce global energy consumption by 0.2%.54
Stablecoins55
Cryptocurrencies such as Bitcoin and Ether fluctuate in value based on market supply and
demand. By contrast, stablecoins are digital assets “designed to maintain a stable value relative to
a national currency or other reference assets.”56 For example, the Tether stablecoin is tied to the

46 Taylor Locke, “Ethereum Has Destroyed Almost $6 Billion Worth of Its Own Cryptocurrency on Purpose. Here’s
Why,” Fortune, March 2022, https://fortune.com/2022/03/21/ethereum-destroyed-billions-in-ether-supply/. The
proposal is the Ethereum Improvement Proposal 1559, or ‘London.’
47 Ethereum, “EIP-1559: Fee Market Change for ETH 1.0 Chain,” press release, April 13, 2019,
https://eips.ethereum.org/EIPS/eip-1559#eth-burn-precludes-fixed-supply.
48 What occurred is more technical: Block rewards were swapped for stake or validator rewards, which were capped at
about 1,600 per day. Base fees continued to be burned while validators/stakers received priority fees.
49 Calculated as the number of newly issued ETH/existing supply.
50 Buterin, “A Next-Generation Smart Contract and Decentralized Application Platform.”
51 Ethereum, “Launching the Ether Sale,” press release, July 22, 2014, https://blog.ethereum.org/2014/07/22/launching-
the-ether-sale.
52 For more on the energy requirements and implication of cryptocurrency, see CRS In Focus IF12286, Recent
Cryptocurrency Developments: Energy and Environmental Implications, by Kristen E. Busch and Corrie E. Clark.
53 Ethereum, “Proof of Stake (POS),” https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/.
54 Aoyon Ashraf, “Vitalik Buterin Says Ethereum Merge Cut Global Energy Usage by 0.2%, One of Biggest
Decarbonization Events Ever,” CoinDesk, September 15, 2022, https://www.coindesk.com/business/2022/09/15/
vitalik-buterin-says-ethereum-merge-cut-global-energy-usage-by-02-one-of-biggest-decarbonization-events-ever/, and
Vitalik Buterin (@VitalikButerin), “‘The merge will reduce worldwide electricity consumption by 0.2%’ -
@drakefjustin,” https://twitter.com/VitalikButerin/status/1570299062800510976.
55 The uses, regulatory treatments, and policy implications of stablecoins are as varied as those of crypto generally, but
they are outside the remit of this report. For more on stablecoins, see CRS Insight IN11713, How Stable Are
Stablecoins?, by Eva Su; CRS In Focus IF11968, Stablecoins: Background and Policy Issues, by Eva Su; CRS Legal
Sidebar LSB10753, Stablecoins: Legal Issues and Regulatory Options (Part 1), by Jay B. Sykes; and CRS Legal
Sidebar LSB10754, Stablecoins: Legal Issues and Regulatory Options (Part 2), by Jay B. Sykes.
56 President’s Working Group on Financial Markets, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, Report on Stablecoins, November 1, 2021, https://home.treasury.gov/system/files/136/
StableCoinReport_Nov1_508.pdf.
Congressional Research Service

10

Cryptocurrency: Selected Policy Issues

U.S. dollar and set equal in value to $1.57 Total market capitalization for stablecoins is more than
$140 billion.58 One primary use of stablecoins is trading of other cryptocurrencies. According to
an industry data source, nearly 75% of trading on all crypto platforms is between stablecoins and
other tokens.59
Proponents often point to stablecoins’ relative stability as an advantage for their use in payments.
However, despite their name, stablecoins do not always maintain their stable value. While
stablecoins typically attempt to maintain a peg to a fiat currency, issuers may attempt to achieve
this goal in different ways. Certain stablecoins attempt to achieve this peg by holding “reserve
assets.”60 Others may use algorithms or smart contracts to manage the supply of tokens and guide
their value to various reference assets.61
Central Bank Digital Currency62
In recent years, the Federal Reserve as well as central banks around the world have begun
discussing and exploring the prospect of a central bank digital currency (CBDC). A CBDC can
entail many definitions or features. Depending on how they are designed, CBDCs may or may not
use similar technologies to existing cryptocurrencies. Broadly, the idea behind CBDCs is that
issuing and managing a digital currency by a central bank may realize at least some of the
anticipated benefits of cryptocurrencies but with greater efficiency and fewer risks.63 For
example, CBDCs could be used for payments, much the way crypto was originally intended.
However, CBDCs would be legal tender and would exist as dollars themselves instead of having
values designed to be linked to dollars. Some experts are skeptical of the utility or value of
CBDCs given that central-bank-issued currency already is easily and inexpensively exchanged
electronically.64
In a January 2022 report, the Federal Reserve defined CBDC as “as a digital liability of the
Federal Reserve that is widely available to the general public.”65 Various central banks and the
Bank for International Settlements defined a “general purpose” or retail CBDC as “a digital

57 Tether stablecoins are also known as USDT; see https://coinmarketcap.com/currencies/tether/. With a market
capitalization of more than $68 billion, USDT is the third-largest cryptocurrency.
58 Coingecko, “Stablecoins by Market Capitalization,” https://www.coingecko.com/en/categories/stablecoins.
59 U.S. Securities and Exchange Commission, “President’s Working Group Report on Stablecoins,” Chair Gary Gensler
comment on Report, November 2021, https://www.sec.gov/news/statement/gensler-statement-presidents-working-
group-report-stablecoins-110121#_ftn3. See https://www.theblock.co/data/crypto-markets/spot for recent data.
60 Report on Stablecoins, p. 4.
61 For more on this form of algorithmic stablecoins, see CRS Insight IN11928, Algorithmic Stablecoins and the
TerraUSD Crash, by Paul Tierno, Andrew P. Scott, and Eva Su.
62 The policy considerations raised by CBDCs, including their goals and uses, legal requirements, and features and
design, are outside the scope of this report. For more information on CBDCs, see CRS Report R46850, Central Bank
Digital Currencies: Policy Issues, by Marc Labonte and Rebecca M. Nelson.
63 Kristalina Georgieva, “The Future of Money: Gearing up for Central Bank Digital Currency,” speech at the Atlantic
Council, February 9, 2022, https://www.imf.org/en/News/Articles/2022/02/09/sp020922-the-future-of-money-gearing-
up-for-central-bank-digital-currency.
64 Sulabh Agarwal and Ousmène Jacques Mandeng, “Why CBDC Stands to Benefit Not Harm Banks,” Accenture Blog,
September 23, 2022, https://bankingblog.accenture.com/why-cbdc-stands-to-benefit-not-harm-banks.
65 Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital,
January 2022, https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf.
Congressional Research Service

11

link to page 6 Cryptocurrency: Selected Policy Issues

payment instrument, denominated in the national unit of account, that is a direct liability of the
central bank.”66 Different countries’ CBDCs may vary substantially in design and features.67
The Biden Administration entered the debate on a U.S. CBDC, noting that one “may have the
potential to support efficient and low-cost transactions, particularly for cross‑border funds
transfers and payments, and to foster greater access to the financial system, with fewer of the
risks posed by private sector-administered digital assets.”68 For this reason, the Administration
mandated that the Department of the Treasury and various other agencies produce a report on the
future of money and include a section on the implications of a CBDC, including for growth and
stability.69 The subsequent report, published in September 2022, was noncommittal and
recommended advancing work on a possible CBDC “in case one is determined to be in the
national interest.”70 Treasury announced in the report that it will lead an interagency working
group to coordinate and consider implications of adopting a CBDC.71 The working group—which
is to consist of the Federal Reserve, the National Economic Council, the National Security
Council, the Office of Science and Technology Policy, and the Treasury Department—does not
appear to have been formed yet.
Ways to Interact with Crypto
The discussion of crypto presented above (see “What Is Cryptocurrency?”) provides a description
of one type of crypto interactions, called on-chain transactions, where users access a
decentralized ledger directly. Users may also engage with crypto in intermediated transactions on
centralized platforms such as cryptocurrency exchanges and payment companies, called off-chain
transactions, which is how the vast majority of nonexpert consumers transact in crypto.
On-Chain Transactions
On-chain transactions are transactions processed over the blockchain, the network of nodes that
maintain the system publishing ledgers and validating or mining transactions. Users send and
receive cryptocurrency on-chain using public and private “keys,” which are unique strings of
alphanumeric characters.72
 Private keys: Private keys are codes that secure ownership of cryptocurrency and
allow owners to transact with their crypto. Individuals sign transactions in
cryptocurrency with private keys. The keys represent ownership, leading some in
the industry to coin the expression “not your keys, not your crypto.” However,
private keys can be long and easily misplaced, leading to other issues.73

66 Bank for International Settlements, Central Bank Digital Currencies: Foundational Principles and Core Features,
October 9, 2020, https://www.bis.org/publ/othp33.htm. The list of central banks includes the Bank of Canada, the
European Central Bank, the Bank of Japan, Sveriges Riksbank, Swiss National Bank, the Bank of England, the Federal
Reserve, and the Bank for International Settlements.
67 See CRS Report R46850, Central Bank Digital Currencies: Policy Issues, by Marc Labonte and Rebecca M. Nelson.
68 E.O. 14067, “Executive Order on Ensuring Responsible Development of Digital Assets.”
69 E.O. 14067, “Executive Order on Ensuring Responsible Development of Digital Assets.”
70 U.S. Department of the Treasury, The Future of Money and Payments: Report Pursuant to Section 4(b) of Executive
Order 14067, September 2022, https://home.treasury.gov/system/files/136/Future-of-Money-and-Payments.pdf.
71 U.S. Department of the Treasury, The Future of Money and Payments.
72 Public keys are often equated to blockchain addresses. In reality, the addresses are derivations of the public key. See
Yaga et al., Blockchain Technology Overview, p. 12.
73 Nathanial Popper, “Lost Passwords Lock Millionaires out of Their Bitcoin Fortunes,” New York Times, January 12,
Congressional Research Service

12

link to page 7 link to page 17 Cryptocurrency: Selected Policy Issues

 Public keys and crypto addresses: Public keys and their related addresses are
considered pseudonymous, which means that users are identified by their public
keys or their derived addresses—not by names, Social Security numbers, or other
official forms of identification. Therefore, while the blockchain is public and all
transactions are visible, determining the identity behind a public key address is
difficult, and tracing transactions requires considerable effort.74
For the most part, only cryptocurrencies that are “native” to a blockchain or network are
compatible at a network address. For instance, Ether cannot transact on the Bitcoin blockchain,
while Bitcoin cannot transact on Ethereum.75
Validation and mining, performed by other nodes or users and governed by specific procedures,
finalize transactions after users have entered their public and private keys, as described above in
the “Blockchain, Decentralized Consensus, and Cryptography” section. Transactions generally
require that an initiator remits a fee. Similar to crypto generated from mining, fees compensate
miners for their role in maintaining the system. Fees can fluctuate depending on the amount of
transactions or congestion on the network at any giving time. The size of a fee offered can
influence the processing time.76
Users may store and access their cryptocurrency in “wallets”—software or hardware designed to
enable transfers of cryptocurrency. Wallets can broadly be grouped into one of three types:
custodial, non-custodial, and cold storage. Custodial wallets are provided by centralized
intermediaries (which would be said to be acting as “custodians” in traditional finance, hence the
moniker) and utilized in off-chain transactions. They are described in more detail in the later
section, “Off-Chain Transactions.” The remaining two types are used for on-chain transactions:
 Non-custodial wallets. Non-custodial wallets are not hosted by third-party
institutions but rather managed directly by users to facilitate on-chain
transactions. They are pieces of computer software that maintain the public and
private key pairs necessary to access and sign the assets for transmission to
blockchains and “store the address on a blockchain where a particular asset
resides.”77 Non-custodial wallet holders who lose private keys will lose access to
the cryptocurrency stored in the wallets.78 There are no customer identification or
know-your-customer checks associated with most of these wallets. Because non-

2021, https://www.nytimes.com/2021/01/12/technology/Bitcoin-passwords-wallets-fortunes.html.
74 For one academic paper analyzing on-chain activity on the Bitcoin network, see Igor Makarov and Antoinette
Schoar, Blockchain Analysis of Bitcoin Market, National Bureau of Economic Research (NBER), Working Paper no.
29396, October 2021, https://www.nber.org/papers/w29396. For websites publishing blocks with block details, see, for
Bitcoin blockchain, https://blockstream.info/, and for Ethereum network transactions, https://etherscan.io/.
75 This point is strictly true. However, there are some caveats. The Ethereum network’s ERC-20 is a series of standards
that allow users to build new tokens on the Ethereum network and underlying technology. Moreover, cryptocurrencies
from one blockchain can be “wrapped” (entered into and held in a smart contract) with an equal value offered in
exchange on a different blockchain. See Robert Stevens, “What Are Wrapped Tokens?,” CoinDesk, February 4, 2022,
https://www.coindesk.com/learn/what-are-wrapped-tokens/.
76 Alyssa Hertig, “A Guide to Saving on Bitcoin’s High Transaction Fees,” CoinDesk, February 26, 2021,
https://www.coindesk.com/tech/2021/02/26/a-guide-to-saving-on-Bitcoins-high-transaction-fees/.
77 Lucas Mearian, “What’s a Crypto Wallet (and How Does It Manage Digital Currency)?” Computer World, April 17,
2019, https://www.computerworld.com/article/3389678/whats-a-crypto-wallet-and-does-it-manage-digital-
currency.html.
78 Alexandra D. Comolli and Michele R. Korver, “Surfing the First Wave of Cryptocurrency Money,” Department of
Justice Journal of Federal Law and Practice: Technology and Law, vol. 69, no. 3 (May 2021), p. 198,
https://www.justice.gov/usao/page/file/1403671/download.
Congressional Research Service

13

Cryptocurrency: Selected Policy Issues

custodial wallets do not involve third parties, they do not support purchase or
sales of cryptocurrency using fiat currency. That service is provided only by
third-party intermediaries. Instead, non-custodial wallet holders can transact only
on-chain. Non-custodial wallets are typically formatted to specific blockchains.
Holding multiple cryptocurrencies on-chain would require maintaining multiple
wallets, although there are some wallets that support multiple coins.
 Cold-storage wallets. Cold-storage wallets are pieces of hardware that allow end
users to store cryptocurrencies offline, a practice that shields them from hacking.
These devices can look and function like USB drives. Users may connect cold-
storage wallets to the internet to perform transactions.79
Decentralized Finance (DeFi)
On-chain use of cryptocurrency underpins DeFi. DeFi generally refers to a use of cryptocurrency
and its enabling protocols and technologies (such as digital ledger technology and smart
contracts) to operate an alternative financial system that disintermediates traditional financial
players such as banks and brokers.80 While regulated third-party intermediaries such as banks,
brokers, and exchanges facilitate transactions in the traditional financial system, DeFi uses
various smart contracts to allow any network participant that meets smart contract criteria to
directly fill the roles of automated market makers and liquidity providers, among others, to
facilitate transactions in crypotocurrency.81
Off-Chain Transactions
Off-chain transactions, the far more common form of transaction for consumers without
sophisticated expertise, are any transactions that occur outside of, and do not generate
transactions on, the main blockchain. Instead, they are generally processed and recorded by
intermediaries where customers hold accounts.82 There are a variety of ways off-chain
transactions can occur. Distinct commercial solutions, such as exchanges or payment platforms,
operate separately and parallel to blockchain networks to facilitate buying, holding, selling, and
trading cryptocurrencies. They hold the cryptocurrencies in custody for users, and transactions
occur on private ledgers—essentially the same way they do with banks. Transactions that occur
on off-chain platforms usually occur between parties on the same platform and entail physical
debiting and crediting of digital balances. Unlike on-chain transactions, these platforms are
intermediated, are typically instantaneous, may have lower fees, and allow participants to hold
multiple cryptocurrencies in their wallets or accounts.83

79 See footnote 32 in Comolli and Korver, “Surfing the First Wave of Cryptocurrency Money,” p. 198. See also Jake
Frankenfield, “Cold Storage: What It Is, How It Works, Theft Protection,” Investopedia, October 4, 2022,
https://www.investopedia.com/terms/c/cold-storage.asp.
80 U.S. Department of the Treasury, Crypto-Assets: Implications for Consumers, Investors, and Businesses, September
2022, p. 10, https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf.
81 Automated market makers (AMMs) use smart contracts to define the prices of assets. AMMs often use equations to
balance the supply of trading pairs. Liquidity providers provide liquidity to AMMs to balance the supply of trading
pairs in exchange for fees and governance tokens. For definitions, see Andrey Sergeenkov, “What Is an Automated
Market Maker?,” CoinDesk, March 9, 2022, https://www.coindesk.com/learn/2021/08/20/what-is-an-automated-
market-maker/. For more on DeFi, see CRS Insight IN11709, Decentralized Finance (DeFi) and Financial Services
Disintermediation: Policy Challenges, by Eva Su.
82 Xenia Soares, “On-Chain vs. Off-Chain Transactions: What’s the Difference?” CoinDesk,
https://www.coindesk.com/learn/on-chain-vs-off-chain-transactions-whats-the-difference/.
83 Soares, “On-Chain vs. Off-Chain Transactions.”
Congressional Research Service

14

Cryptocurrency: Selected Policy Issues

 Custodial wallets. Custodial wallets, also referred to as hosted wallets, are
maintained by third-party institutions that facilitate off-chain transactions,
including crypto exchanges and payment applications with crypto offerings.
Because a third party maintains a custodial wallet, loss of a security key or
password does not result in loss of the wallet’s contents. Like conventional
digital wallets, customers may fund custodial crypto wallets using bank accounts,
but they can also accept transfers from non-custodial wallets. While most
custodial crypto wallets offer the option to buy, sell, or trade certain digital
assets, only some allow payments and transfers. Digital asset platforms execute
transactions for third-party custodial wallets on the account holder’s behalf and
record them on the books of the custodian (or “off-chain”) rather than on the
distributed ledger blockchain of the coin.
Cryptocurrency Exchanges
Cryptocurrency exchanges are online platforms where users can buy, sell, and trade various
cryptocurrencies. The digital assets are stored in a custodial wallet, which is essentially an
account that shares more in common with a typical investment account than a noncustodial
wallet. While centralized exchanges may provide a more “user-friendly” interface with crypto,
they do so by replacing many of the unique aspects of crypto with an entity that resembles a
traditional financial institution but without the same regulation. Unlike the process in on-chain
transactions, interacting with cryptocurrency through exchanges is centralized, and individuals
must often use government identification or Social Security numbers and provide addresses to
transact. They may also hold multiple coins—offerings vary by exchange—in their wallets.
Failures among centralized crypto institutions have created an internecine feud between
proponents of decentralization and others that support intermediaries.
Typically, exchanges do not execute customer transactions directly on the blockchain of the
specific currency traded. The transactions do not require the exchange of public and private keys,
nor are the other actions associated with on-chain transactions, such as mining, conducted.
Instead, exchanges “match client transactions on an internalized offchain basis, in over the
counter markets, or by using the company’s own assets.”84 Exchanges typically record customer
transactions on the blockchain of a specific cryptocurrency only when a user withdraws the
currency from the exchange to an address on the blockchain (in other words, from a hosted wallet
to an unhosted wallet). Crypto exchanges are described as offering “borderless” assets but operate
like closed loops with internal supply and demand dynamics that can often lead to different prices
for the same assets across platforms.85 Such price discrepancies may lead arbitrage traders to
exploit these differences for financial gain.86

84 Izabella Kaminska, “Why Coinbase’s Stellar Earnings Are Not What They Seem,” Financial Times, April 8, 2021,
https://www.ft.com/content/cadd6eba-1dd7-4f31-94e0-2dc43ace7b0f. This article explains the mechanics of Coinbase,
which are assumed to be roughly similar across other exchanges.
85 Bob Pisani and Todd Haselton, “Here’s Why Bitcoin Prices Are Different on Each Exchange,” CNBC, December 12,
2017, https://www.cnbc.com/2017/12/12/why-Bitcoin-prices-are-different-on-each-exchange.html.
86 Andrewy Sergeenkov, “Crypto Arbitrage Trading: How to Make Low-Risk Gains,” CoinDesk, March 2022,
https://www.coindesk.com/learn/crypto-arbitrage-trading-how-to-make-low-risk-gains/.
Congressional Research Service

15

Cryptocurrency: Selected Policy Issues

Crypto on Payments Apps
Payments platforms such as PayPal, Venmo, and Cash App, among others, also allow customers
to buy and hold cryptocurrencies off-chain.87 The specific cryptocurrencies supported, services
permitted, and type of ownership offered differ by platform. PayPal advertises that its users can
buy, hold, transfer, and sell four cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.
Notably, PayPal’s crypto terms of service are clear that individuals do not own a “specific,
identifiable, Crypto Asset,” that the company combines users’ crypto balances in one or more
omnibus accounts, and that users own the “right” to the asset as well as the asset’s gains or
losses.88 While that distinction is not necessarily problematic, it may be consequential if the
platform is offline or its crypto portal is not functioning appropriately when an individual wants
to make a transaction. Some platforms allow users to download their crypto to unhosted wallets,
while others allow users to maintain it solely on their platforms. PayPal allows users to make
purchases with crypto. In such transactions, PayPal facilitates a sale of cryptocurrencies, the fiat
currency proceeds from which are used to make purchases.89
Traditional Financial Institutions and Crypto
Traditional financial institutions, including banks and asset managers, have also begun
participating in the crypto ecosystem. This section highlights some examples of the ways
traditional financial institutions are integrating cryptocurrency into their offered services. It is not
intended to be an exhaustive review of all existing relationships or potential partnerships in the
industry.
Conceptually, banks can participate in crypto markets directly by offering crypto products such as
loans backed by crypto collateral or crypto investments. They can also gain indirect exposure to
crypto by offering traditional banking services to crypto firms. Alternatively, crypto firms may
seek bank charters, and bank holding companies may seek to form crypto subsidiaries, thus
providing other channels through which the banking system and crypto can interact.90
One way banks participate in crypto is through offering custody services. Custody services is
generally defined as settlement, safekeeping, and reporting of customers’ marketable securities.91
Some banks offer these types of services in addition to their core banking activities, while others
focus specifically on custody and fiduciary activities.92 Bank of New York Mellon (BNY), for
example, the largest custodian bank, provides primary custodial services of reserves for the USD

87 PayPal, “PayPal Launches New Service Enabling Users to Buy, Hold and Sell Cryptocurrency,” press release,
October 2020, https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-Service-Enabling-Users-to-Buy-
Hold-and-Sell-Cryptocurrency; PayPal, “Customers Can Now Buy, Hold and Sell Cryptocurrency Directly Within the
Venmo App with as Little as $1,” press release, April 20, 2021, https://newsroom.paypal-corp.com/2021-04-20-
Introducing-Crypto-on-Venmo.
88 PayPal, “PayPal Cryptocurrency Terms and Conditions,” last updated December 14, 2022, https://www.paypal.com/
us/webapps/mpp/ua/cryptocurrencies-tnc?locale.x=en_US.
89 PayPal, “PayPal Cryptocurrency Terms and Conditions.”
90 Federal Reserve System, Federal Deposit Insurance Company, and Office of the Comptroller of the Currency, Joint
Statement on Crypto-Asset Risks to Banking Organizations, January 2023, https://www.federalreserve.gov/newsevents/
pressreleases/files/bcreg20230103a1.pdf.
91 See Office of the Comptroller of the Currency, “Custody Services,” https://www.occ.treas.gov/topics/supervision-
and-examination/capital-markets/asset-management/custody-services/index-custody-services.html.
92 For more on custody services, see CRS In Focus IF11997, Bank Custody, Trust Banks, and Cryptocurrency, by
Andrew P. Scott.
Congressional Research Service

16

Cryptocurrency: Selected Policy Issues

Coin (USDC), a stablecoin issued by Circle.93 In addition, BNY announced in October 2022 that
it would permit select clients to hold and transfer Bitcoin and Ether.94 State Street Bank is also
reportedly considering offering this service.95
Silvergate, a regional bank member of the Federal Reserve System, offers more specialized
crypto-related services, including the Silvergate Exchange Network (SEN). SEN is a network that
allows its various crypto clients to send U.S. dollars and euros among themselves, “enabling near
real-time transfers and immediate availability of funds.”96 The bank also advertised Bitcoin-
collateralized lending.97
Asset managers have also begun engaging in crypto activity. For example, Fidelity recently began
allowing their employees to invest a portion of their retirement accounts in Bitcoin.98 BlackRock
announced in August 2022 that it launched a spot Bitcoin private trust, which it offers to
institutional investors.99
Selected Policy Issues
The relative novelty of how cryptocurrency transactions occur—especially in contrast to
traditional finance—introduces a host of policy issues. Moreover, recent events, including
concern over the potential use of crypto to evade sanctions on Russia and the failure of various
cryptocurrency platforms, have increased the attention these policy issues have drawn. This
section assesses policy issues that may be of interest to Congress, including, among others, the
need to balance competing priorities of privacy and security and the evolving state of regulation.
Inclusion and Scalability
Crypto industry proponents often cite a purported potential to improve financial inclusion as a
rationale for crypto.100 In its current form, the technology does not live up to this promise of

93 Circle Internet Financial, “Circle Selects BNY Mellon to Custody USDC Reserves,” press release, March 31, 2022,
https://www.prnewswire.com/news-releases/circle-selects-bny-mellon-to-custody-usdc-reserves-301514681.html.
94 BNY Mellon, “BNY Mellon Launches New Digital Asset Custody Platform,” press release, October 11, 2022,
https://www.bnymellon.com/us/en/about-us/newsroom/press-release/bny-mellon-launches-new-digital-asset-custody-
platform-130305.html.
95 Yueqi Yang, “Wall Street Courts Crypto Custody, but with Fingers Crossed,” October 27, 2022,
https://www.bloomberg.com/news/newsletters/2022-10-27/bny-mellon-bk-state-street-stt-court-crypto-custody-with-
fingers-crossed.
96 See Silvergate Bank, “Silvergate Exchange Network,” https://www.silvergate.com/solutions/digital-currency/sen.
97 See Silvergate Bank, “SEN Leverage,” https://www.silvergate.com/solutions/digital-currency/sen-leverage.html.
98 Fidelity, “A First-of-Its-Kind Investment Account Opportunity,” press release, https://www.fidelityworkplace.com/s/
digitalassets.
99 Scott Chipolina and Brooke Masters, “BlackRock Pushes into Crypto Market with Bitcoin Private Trust,” Financial
Times, August 11, 2022, https://www.ft.com/content/0948f1a9-ad0b-4126-9ae8-5ce4e212c07e.
100 See for example Christine Moy and Jill Carlson, Cryptocurrencies Can Enable Financial Inclusion. Will You
Participate?, World Economic Forum, June 9, 2021, https://www.weforum.org/agenda/2021/06/cryptocurrencies-
financial-inclusion-help-shape-it/; and Jack Dorsey and Alex Gladstein, “Bitcoin 2021: Banking the Unbanked,” June
5, 2021, https://www.youtube.com/watch?v=rSSnyJpFNZU. Also, see U.S. House Committee on Financial Services,
“Waters Delivers Opening Statement at Full Committee Hearing On the President’s Working Group Report on
Stablecoins,” press release, February 8, 2022, https://financialservices.house.gov/news/documentsingle.aspx?
DocumentID=409075. Rep. Waters in her opening statement addresses the need to ensure “financial inclusion is front
and center.” See also Ritchie Torres, “A Liberal Case for Cryptocurrency,” The Daily News, May 17, 2022,
https://www.nydailynews.com/opinion/ny-oped-a-liberal-case-for-cryptocurrency-20220317-
Congressional Research Service

17

Cryptocurrency: Selected Policy Issues

inclusion, as adoption rates remain low due in part to scalability issues (i.e., the ability to work
efficiently as a payment tool at large volumes). Some believe it may be harmful. According to a
report produced in response to Executive Order 14067:
While the data for populations vulnerable to disparate impacts remains limited, available
evidence suggests that crypto-asset products may present heightened risks to these groups,
and the potential financial inclusion benefits of crypto-assets largely have yet to
materialize.101
The pro-inclusion argument focuses on certain aspects of crypto, including its availability to
anyone with an internet connection, its accessibility or storage anywhere, and dispensation with
the need for trust.102 Regardless of the merits of these arguments, however, cryptocurrency has
not caught on as a payment tool. Moreover, use of crypto, especially for payments, is generally
considered to be less efficient—it is costlier and slower to settle—than traditional methods of
payments.103 According to researchers at the Bank for International Settlements, “inherent
limitations of blockchains,” including the incentive structure and the fragmentation of disparate
decentralized networks, prevent any one cryptocurrency blockchain from scaling, or growing to
accommodate more users efficiently.104 As such, whereas Visa can reportedly process between
1,700 and 24,000 transactions per second, it takes 10 minutes to process a block containing a
transaction on the Bitcoin blockchain, resulting in an average of three to four transactions
processed each second.105 (Ethereum times are slightly better.106) Fees for crypto transactions can
also be significant, especially when the networks are busy processing many transactions, whereas
fees on traditional networks are between 1% and 3% of a transaction.107
Beyond the limitations and costs of its payment application, critics question crypto’s potential as
a “wealth-building tool.”108 Citing crypto’s failure to develop “past the use case as a speculative

n6iaevmh5jeszkpiaqwcog742q-story.html.
101 U.S. Department of the Treasury, Crypto-Assets: Implications for Consumers, Investors, and Businesses, September
2022.
102 Trust is cited as a primary reason some individuals refuse to participate in the traditional banking system. See, for
example, Paola Boel and Peter Zimmerman, “Unbanked in America: A Review of the Literature,” Economic
Commentary, vol. 2022, no. 7 (May 2022), https://www.clevelandfed.org/en/newsroom-and-events/publications/
economic-commentary/2022-economic-commentaries/ec-202207-unbanked-in-america-a-review-of-the-literature.aspx.
103 Paul Vigna, “Why Bitcoin Hasn’t Gained Traction as a Form of Payment,” Wall Street Journal, February 9, 2021,
https://www.wsj.com/articles/why-Bitcoin-hasnt-gained-traction-as-a-form-of-payment-11612886974. While Bitcoin
settlement is faster than traditional card network settlements that affect merchants, payments are instantaneous for
payers/customers.
104 Boissay et al., “Blockchain Scalability and the Fragmentation of Crypto.”
105 Visa, “Visa Acceptance for Retailers,” https://usa.visa.com/run-your-business/small-business-tools/retail.html. Visa
transaction estimates are based on average daily transactions processed divided by seconds in a day. The 24,000 figure
was achieved in test conditions. For information on Bitcoin average daily transactions, see Bitcoin, “Frequently Asked
Questions,” https://Bitcoin.org/en/faq#transactions, and https://ycharts.com/indicators/Bitcoin_transactions_per_day.
See also Kyle Croman et al., “On Scaling Decentralized Blockchains (a Position Paper),” International Conference on
Financial Cryptography and Data Security, August 31, 2016, p. 108, https://doi.org/10.1007/978-3-662-53357-4_8.
106 Boissay et al., “Blockchain Scalability and the Fragmentation of Crypto,” p. 3.
107 Boissay et al., “Blockchain Scalability and the Fragmentation of Crypto,” p. 3. For average Ethereum transaction
fees, see BitInfoCharts, “Ethereum Avg. Transaction Fee Historical Chart,” https://bitinfocharts.com/comparison/
ethereum-transactionfees.html#3y. While fees for both cryptocurrencies are relatively low, average Bitcoin fees were
$62 in April 2021. Crypto proponents typically point to Layer 2 solutions such as the Bitcoin Lightning network as
ways the industry is providing solutions to scalability. Layer 2 solutions are built “on top of” the public chain, “inherit”
the base network’s security, and typically aim to expand its scalability and efficiency by moving computation off-chain
to enable privacy or save computing resources. Despite these claims, Layer 2 solutions have also been slow to catch on.
108 Tonantzin Carmona, “Debunking the Narratives About Cryptocurrency and Financial Inclusion,” Brookings
Congressional Research Service

18

link to page 28 Cryptocurrency: Selected Policy Issues

asset,” one skeptic notes that crypto’s ability to “quickly drop to nothing” is particularly risky for
populations that structurally have the least financial cushion to fall back on after losses.109
Similarly, crypto may also exhibit characteristics of “predatory inclusion,” wherein access to the
innovation with high risks and without appropriate consumer benefits had adverse consequences
for participants.110 Failure and fraud at firms with large retail trades accentuate these drawbacks.
Privacy versus Security
Some individuals are attracted to cryptocurrency because its pseudonymous nature may be an
advantage in a legitimate desire for privacy from government. However, the same characteristics
that provide that privacy may also make crypto a useful tool for engaging in illicit activity. The
extent of cryptocurrency’s association with money laundering and other forms of illicit activity is
the subject of considerable debate. Older research suggested that illicit finance represented nearly
half of all Bitcoin activity.111 A more recent study estimates it to be 3%, while industry analysis
places the figure for all of cryptocurrency (not just Bitcoin) as low as 0.15%.112 Therefore, the
practical considerations of balancing the potential privacy provided by cryptocurrency’s
pseudonymity with the requirement that financial institutions comply with the Bank Secrecy Act
(BSA) to implement anti-money laundering (AML) and “know your customer” programs has
emerged as a fundamental policy issue.113
The balance of privacy and security depends in large part on whether transactions occur off-chain
on centralized platforms or via on-chain transactions. Exchanges and other third-party platforms
that allow users to hold and transfer crypto must comply with the BSA and implement customer
identification programs (see “Applicable Money Services Businesses Framework” below). These
programs may limit the ability of bad actors to use exchanges for illicit activities, although some
reports have found exchanges’ implementation of these programs to be lacking.114
Applying AML regulations to on-chain transactions is not as simple. In on-chain transactions,
neither participants nor facilitators need to seek approval to submit or validate transactions,
respectively. Similarly, transactions do not require approvals from intermediaries that are the
hallmark of trust-based traditional financial systems. These transactions contain some
impediments to money laundering—they are publicly visible to regulators and blockchain

Institution, October 26, 2022, https://www.brookings.edu/research/debunking-the-narratives-about-cryptocurrency-and-
financial-inclusion/.
109 Carmona, Debunking the Narratives About Cryptocurrency and Financial Inclusion.
110 Carmona, Debunking the Narratives About Cryptocurrency and Financial Inclusion.
111 Sean Foley, Jonathan R. Karlsen, and Talis J. Putnins, “Sex, Drugs, and Bitcoin: How Much Illegal Activity Is
Financed Through Cryptocurrencies?,” Review of Financial Studies, October 21, 2018.
112 Makarov and Schoar, “Blockchain Analysis of the Bitcoin Market;” and, Chainalysis, “Crypto Crime Trends for
2022: Illicit Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency
Activity,” press release, January 6, 2022, https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/.
113 31 U.S.C. §5311 et seq.
114 Financial Crimes Enforcement Network, FinCEN Guidance: Application of FinCEN’s Regulations to Certain
Business Models, May 9, 2019, https://www.fincen.gov/sites/default/files/2019-05/
FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. For a report of lax AML and “know your customer”
implementation, see Angus Berwick and Tom Wilson, “How Crypto Giant Binance Became a Hub for Hackers,
Fraudsters and Drug Traffickers,” Reuters, June 6, 2022, https://www.reuters.com/investigates/special-report/fintech-
crypto-binance-dirtymoney/; and, U.S. Department of the Treasury, “OFAC Settles with Virtual Currency Exchange
Kraken for $362,158.70 Related to Apparent Violations of the Iranian Transactions and Sanctions Regulations,”
November 28, 2022, https://home.treasury.gov/system/files/126/20221128_kraken.pdf.
Congressional Research Service

19

Cryptocurrency: Selected Policy Issues

analysts—and funds may be traced using chain analytics and users’ public key addresses.115 Still,
various tools—including privacy-enhanced blockchains that obscure addresses and services such
as mixers and tumblers—obfuscate analysts and hamper detection.116 As such, attempts to apply
similar regulations to pseudonymous participants, verified by miners and validators that might
also sit outside of the sender’s jurisdiction, may not be feasible or practical.
Because cryptocurrencies are not a widely accepted form of payment, most users must convert
their holdings to fiat currency if they want to buy goods or services, putting a large responsibility
on exchanges that do not have long track records with AML compliance.
Existing Regulation of Cryptocurrency
The financial industry is subject to an array of regulations. The goals of various regulations
include promoting market integrity and efficiency, consumer and investor protection, and
financial stability, among others. Regulations can be prudential (i.e., aimed at creating safety and
soundness); require disclosure and reporting; set standards; and create limits on prices and
rates.117 Finally, regulations may be applied to institutions, markets, or activities.118 One
simplified example of this framework is that regulators use disclosure and reporting requirements
to regulate the securities industry with the goal of promoting market integrity and efficiency and
promoting investor protection. Unlike banks, which have stricter prudential requirements,
securities regulation is intended to inform investors about risks and allow them to make their
decisions accordingly. Policymakers must balance the costs of regulation (e.g., barriers to entry,
cost of capital) with benefits (e.g., efficiency, customer protection).
The regulation of cryptocurrency is unsettled and evolving. Currently, there is not a
comprehensive framework for regulating the range of cryptocurrencies, other digital assets, and
trading platforms that parallels regulation of securities or commodities. Neither Congress nor
federal regulators have created new comprehensive rules specific to crypto. Instead, various state
and federal financial industry regulators apply existing regulations to cryptocurrencies and digital
asset exchanges using legal categories developed for traditional financial products and services.
Those rules have primarily been applied through enforcement on a case-by-case basis rather than
through rulemaking, meaning firms may operate in violation of rules for extended periods of time
before enforcement actions are undertaken.
Regulators may treat digital assets as securities, commodities, or payment platforms depending on
the specific circumstances. For example, cryptocurrency exchanges are licensed at the state level
and register with the Financial Crimes Enforcement Network (FinCEN) as money services
businesses. Meanwhile, the chairs of both the Commodity Futures Trading Commission (CFTC)
and Securities and Exchange Commission (SEC) have issued guidance and enforcement actions
and have brought litigation arguing that some digital assets are commodities and others securities

115 For an example of how chain analysis has been implemented, see U.S. Department of Justice, “Two Arrested for
Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency,” press release, February 8, 2022,
https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency.
116 For a discussion of some of these issues, see CRS Insight IN11920, Russian Sanctions and Cryptocurrency, by
Kristen E. Busch and Paul Tierno.
117 For a complete look at financial regulation, see CRS Report R44918, Who Regulates Whom? An Overview of the
U.S. Financial Regulatory Framework, by Marc Labonte.
118 CRS Report R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework, by Marc
Labonte.
Congressional Research Service

20

Cryptocurrency: Selected Policy Issues

under their respective jurisdictions, but they have not reached a consensus.119 Part of the problem
is disagreement about what cryptocurrency is from a legal perspective. Regulators have broad
authority to interpret traditional rules as applicable to crypto, but those interpretations may be
challenged in court with industry-wide implications. As a result, which rules apply to
cryptocurrency varies by product, and whether they are applied consistently, are being determined
on an ongoing basis. Moreover, regulation is not binary: Crypto firms may be regulated in some
activities or aspects and not in others.
This report does not discuss regulation of stablecoins, which face a unique set of policy issues
and proposals—although some of the issues discussed below are also relevant to stablecoin
regulation. Nor does it focus on how specific types of digital assets are regulated, including, for
example, which types of assets SEC has jurisdiction over versus those it does not regulate.
Applicable SEC Framework
Securities most often refers to equity (or stock) and debt (bonds) and “investment contracts,”
which companies use to fund themselves and their operations.120 In the more than a decade since
the founding of the first cryptocurrency, various observers, including the previous and current
chairs of the SEC, have asserted that some cryptocurrencies are securities and should be regulated
the same way.121 (The designation of certain digital assets as securities has emerged as another
key policy issue. For a comprehensive look of digital asset securities, see CRS Report R46208,
Digital Assets and SEC Regulation, by Eva Su.)
In an April 2022 speech, SEC Chair Gary Gensler stated that “many of the tokens trading on these
[crypto trading and lending platforms] may well meet the definition of ‘securities.’”122 Notably,
Gensler has also said that Bitcoin is likely not a security.123 The implications for these two views
suggests a regulatory environment in which a platform that trades a cryptocurrency the SEC
deems to be a commodity may be subject to SEC regulation. But it is unclear whether SEC
jurisdiction would apply to non-securities trades on that same platform.
The SEC has also produced a framework it considers when evaluating whether digital assets meet
the definition of investment contract and should subsequently be subject to securities

119 For example, CFTC Chair Rostin Benham believes both Bitcoin and Ether are commodities, while SEC Chair
Gensler has agreed only that Bitcoin is. Chris Brummer, “DC Fintech Week 2022,” https://www.youtube.com/watch?
v=Kzcb9cRlEpI&t=11197s (the relevant interview begins at 3 hours, 5 minutes); “Bitcoin, Ethereum Are
Commodities, Says CFTC Chair Rostin Behnam,” CNBC, May 16, 2022, https://www.cnbc.com/video/2022/05/16/
bitcoin-ethereum-are-commodities-says-cftc-chair-rostin-behnam.html; and Gary Gensler, “Kennedy and Crypto,”
SEC, September 8, 2022, https://www.sec.gov/news/speech/gensler-sec-speaks-090822.
120 The actual definition of securities is considerably longer and may be found in Section 2(a)(1) of the Securities Act
of 1933, Section 3(a)(10) of the Securities Exchange Act of 1934, Section 2(a)(36) of the Investment Company Act of
1940, and Section 202(a)(18) of the Investment Advisers Act of 1940.
121 Testimony of SEC Chair Jay Clayton in U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs,
Chairman’s Testimony on Virtual Currencies: The Roles of the SEC and CFTC, February 6, 2018,
https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-
commission.
122 Gary Gensler, “Prepared Remarks of Gary Gensler on Crypto Markets Penn Law Capital Markets Association
Annual Conference,” SEC, April 4, 2022, https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422.
123 For example, see Benjamin Pimentel, “Gensler: Bitcoin May Be a Commodity,” Protocol, May 23, 2022,
https://www.protocol.com/fintech/gensler-sec-Bitcoin-commodity; and Andrew Ackerman, “SEC’s Gensler Signals
Support for Commodities Regulator Having Bitcoin Oversight,” Wall Street Journal, September 8, 2023,
https://www.wsj.com/articles/secs-gensler-supports-commodities-regulator-having-Bitcoin-oversight-11662641115.
Congressional Research Service

21

Cryptocurrency: Selected Policy Issues

regulations.124 Traditionally, the SEC has used the Howey Test to determine whether any
investment contract—not just cryptocurrencies—is a security. According to the Howey Test, an
investment contract is defined by four key features: (1) the investment of money (2) in a common
enterprise (3) with a reasonable expectation of profits and (4) to be derived from the efforts of
others.125 The framework provides additional details describing each prong of this test. Notably,
whether a particular cryptocurrency qualifies as a “security” under the Howey Test depends on
the “specific facts and circumstances” of each asset and whether the various thresholds of the
definition are met.126 The SEC has also brought several enforcement actions against
cryptocurrency issuers for failing to register their cryptocurrencies as “securities” or failing to
receive exemptions prior to conducting securities offerings.127
There is also the issue of implementation. As discussed above, the SEC has been clear it believes
that the laws and regulations that apply to traditional securities apply to many cryptocurrencies
and exchanges, that this existing regime is adequate to regulate them, and that both should
register with the agency.128 Notably, none of the largest crypto exchanges by volume has
registered as a national securities exchange. However, the SEC has not created any new
regulations or registration processes tailored for crypto. In March 2022, the SEC proposed
amending the definition of exchange to include “Communication Protocol Systems,” which some
believe would “capture” digital asset platforms.129 To date, no further rulemaking has been
undertaken relating to that proposal.130 While some crypto platforms have registered as alternative
trading systems (ATSs), none of the largest crypto exchanges by volume have filed as an ATS,
and the SEC chairman has suggested it is an imperfect solution.131 Similarly, while some
cryptocurrencies have registered with the SEC, none with any significant market capitalization
has done so.132 The fact that most cryptocurrencies and platforms have not registered with the

124 SEC, “Framework for ‘Investment Contract’ Analysis of Digital Assets,” April 3, 2019, https://www.sec.gov/
corpfin/framework-investment-contract-analysis-digital-assets.
125 SEC, “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The Howey Test derives from the
Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). See also CRS Report R45301, Securities
Regulation and Initial Coin Offerings: A Legal Primer, by Jay B. Sykes.
126 SEC, “Framework for ‘Investment Contract’ Analysis of Digital Assets.”
127 See, for example, SEC v. Telegram Group Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020); SEC v. Kik Interactive Inc.,
492 F. Supp. 3d 169 (S.D.N.Y. 2020); SEC Release No. 10445, Order Instituting Cease-and-Desist Proceedings
Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order, In the
Matter of Munchee Inc. (Dec. 11, 2017).
128 SEC, “What Are Crypto Trading Platforms? Office Hours with Gary Gensler,” July 28, 2022,
https://www.youtube.com/watch?v=aWl55tTZ50Q.
129 SEC, “Amendments Regarding the Definition of ‘Exchange’ and Alternative Trading Systems (ATSs) That Trade
U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities,” 87 Federal
Register, March 18, 2022.
130 Gensler, “Prepared Remarks of Gary Gensler on Crypto Markets Penn Law Capital Markets Association Annual
Conference.”
131 SEC, “Data: Alternative Trading System (‘ATS’) List,” press release, November 2022, https://www.sec.gov/foia/
docs/atslist; and Gensler, “Prepared Remarks of Gary Gensler on Crypto Markets Penn Law Capital Markets
Association Annual Conference.” Some of the ATSs use blockchain technology to provide market services. According
the SEC, “An ATS is a trading system that meets the definition of ‘exchange’ under federal securities laws but is not
required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange
Act Rule 3a1-1(a).”
132 See Christopher Murrer, “U.S. SEC Approves the First Full Securities Registration for a Company Issuing Crypto-
Tokens,” A Blog by Baker McKenzie, August 31, 2020, https://blockchain.bakermckenzie.com/2020/08/31/u-s-sec-
approves-the-first-full-securities-registration-for-a-company-issuing-crypto-tokens/; and Daniel Kuhn, “SEC Gives
YuNow’s Etehereum Token ‘Props’ RegA+ Approval,” CoinDesk, July 11, 2019, https://www.coindesk.com/markets/
Congressional Research Service

22

Cryptocurrency: Selected Policy Issues

SEC but continue to operate unimpeded, seemingly counter to the SEC officials’ public
pronouncements, may create confusion in the marketplace over what is required of various
participants under existing laws and regulations.
Applicable CFTC Framework
The CFTC was established in 1974 to regulate commodities futures and options markets
originally dominated by agricultural products but extended to include contracts based on financial
variables.133 The CFTC administers the Commodity Exchange Act (CEA), which defines
commodities as various agricultural products, including wheat, cotton, rice, among others, as well
as “all services, rights, and interests … in which contracts for future delivery are presently or in
the future dealt in.”134
In 2014, the CFTC chairman at the time identified the CEA’s broad definition of the term
commodity as the basis for the agency’s role in regulating virtual currency derivatives. The
chairman noted, “While the CFTC does not have policies and procedures specific to virtual
currencies like Bitcoin, the agency’s authority extends to futures and swaps contracts in any
commodity,” which he asserted the CEA defines “very broadly.”135 The CFTC’s chair thus said
that “[d]erivative contracts based on a virtual currency represent one area within our
responsibility.”136
The CFTC reiterated that interpretation shortly thereafter in a September 2015 enforcement action
against a company named Coinflip that operated Derivabit, a Bitcoin options and futures
platform. In the enforcement action, the CFTC concluded that Bitcoin and other virtual currencies
are “commodities.”137 A separate federal court decision later supported the CFTC’s position. In
CFTC v. McDonnell, a federal district court ruled that the CEA’s definition of the term
commodity encompasses virtual currency.138
Currently, the CFTC implements its authority over digital assets through enforcement actions and
guidance.139 CFTC-registered entities allow trading of futures and options for Bitcoin and Ether,
which trade on various CFTC-registered designated contract markets and are cleared by
registered derivatives clearing organizations.140

2019/07/11/sec-gives-younows-ethereum-token-props-reg-a-approval/.
133 See CRS Report R43117, The Commodity Futures Trading Commission: Background and Current Issues, by Rena
S. Miller.
134 7 U.S.C. §1a(9).
135 Testimony of CFTC Chairman Timothy Massad, in U.S. Congress, Senate Committee on Agriculture, Nutrition and
Forestry, December 10, 2014, https://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-6.
136 Testimony of Massad, in U.S. Congress, Senate Committee on Agriculture, Nutrition and Forestry.
137 CFTC Order Coinflip, Inc. d/b/a Derivabit, et al, Respondents, Dkt. No. 15-29 (CFTC Sept. 17, 2015),
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/
enfcoinfliprorder09172015.pdf, United States of America Before the Commodity Futures Trading Commission, (CFTC
Docket No.15-29).
138 CFTC v. McDonnell, 287 F. Supp. 3d 213, 216 (E.D.N.Y. 2018).
139 CFTC, “What Is a Bitcoin Futures ETF?,” https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/
BitcoinFuturesETF.html.
140 See, for example, CFTC, “CFTC Grants DCO Registration to LedgerX LLC,” press release, July 24, 2017,
https://www.cftc.gov/PressRoom/PressReleases/7592-17.
Congressional Research Service

23

Cryptocurrency: Selected Policy Issues

The CFTC’s authority in spot markets is limited to enforcing prohibitions on fraud and
manipulation.141 Some observers have concluded that a large amount of fraud in these markets
escapes enforcement—an outcome that may be attributable to the CFTC’s small size and limited
resources.
Applicable Bank Framework
At the federal level, there are ostensibly two ways banks can participate in the crypto landscape.
First, national banks can seek approval from the Office of the Comptroller of the Currency (OCC)
to provide limited crypto services. These services include crypto custody services, holding
stablecoin reserves, and using node verification networks and stablecoin for payments.142 In
November 2021, the OCC published Interpretive Letter 1179, confirming three earlier letters that
permitted nationals banks to provide the aforementioned services if they can do so “in a safe and
sound manner” and only after the banks first notified their supervisory offices and received
written approval.143 Second, an institution may seek a national bank trust charter, which limits the
holder to “fiduciary capacity” operations permitted by federal statute and laws in the states where
the trust bank or company is located.144 The OCC has recently approved three limited purpose
national bank trust charters for three cryptocurrency native firms. The approved business models
for the firms differ, and the firms are approved to engage in those activities enumerated in OCC
approval letters.145
Two states—New York and Wyoming—have established frameworks in which crypto firms may
obtain special state banking charters. In New York, firms may apply for limited purpose trust
company charters.146 The application includes filing a business plan with the New York State
Department of Financial Services and holding surety bonds, among other requirements.147 Like
the BitLicense, another New York–specific crypto firm designation, the state’s special purpose
charter allows an institution to conduct a virtual currency business. It also provides additional
“benefits” including permission to “exercise fiduciary powers” and to engage in money

141 See CFTC, “Bitcoin Basics,” https://www.cftc.gov/sites/default/files/2019-12/oceo_Bitcoinbasics0218.pdf; and
LabCFTC, A CFTC Primer on Virtual Currencies, October 17, 2017, https://www.cftc.gov/sites/default/files/idc/
groups/public/documents/file/labcftc_primercurrencies100417.pdf.
142 Benjamin W. McDonough, Interpretive Letter #1179, November 2021: Chief Counsel’s Interpretation Clarifying:
(1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a
National Trust Bank, OCC, November 18, 2021, https://www.occ.gov/topics/charters-and-licensing/interpretations-
and-actions/2021/int1179.pdf.
143 McDonough, Interpretive Letter #1179, November 2021. At around the same time, the bank regulators, consisting of
the OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation issued a notice that they had participated
in a crypto-asset sprint and would continue to provide guidance regarding banks’ ability to engage in various crypto
activities. See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, OCC, “Joint
Statement on Crypto-Asset Policy Sprint Initiative and Next Steps,” November 23, 2021, https://www.occ.gov/news-
issuances/news-releases/2021/nr-ia-2021-120a.pdf.
144 Jonathan V. Gould, Interpretive Letter #1176, Chief Counsel’s Interpretation on National Trust Banks, OCC,
January 11, 2021, https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/int1176.pdf; and
McDonough, Interpretive Letter #1179, November 2021.
145 For a complete discussion of state and national bank engage in crypto activities, see CRS In Focus IF11997, Bank
Custody, Trust Banks, and Cryptocurrency, by Andrew P. Scott.
146 New York State Department of Financial Services, “Virtual Currency Businesses,” https://www.dfs.ny.gov/
virtual_currency_businesses; and “Banks and Trusts,” https://www.dfs.ny.gov/apps_and_licensing/banks_and_trusts/
commercial_banks_trusts.
147 New York State Department of Financial Services, “Commercial Banks and Trust Companies,”
https://www.dfs.ny.gov/apps_and_licensing/banks_and_trusts/commercial_banks_trusts.
Congressional Research Service

24

Cryptocurrency: Selected Policy Issues

transmission without an additional license.148 Institutions with limited purpose trust company
charters in New York include Coinbase Custody Trust, Paxos Trust Company, and NYDIG Trust
Company, among several others.149 Limited purpose trust companies do not accept deposits and
are not insured by the Federal Deposit Insurance Corporation.150
Wyoming’s charter is called a special purpose depository institution (SPDI). SPDIs are “banks
that receive deposits and conduct other activity incidental to the business of banking, including
custody, asset servicing, fiduciary asset management, and related activities.”151 The Wyoming
Division of Banking has suggested that SPDIs are likely to focus on digital assets but can also
operate in traditional asset and cash management and engage in other purposes permitted under
applicable law. SPDIs are prohibited from making loans with customer deposits of fiat currency
and must hold certain high-quality liquid assets with a value of at least 100% of depository
liabilities.152
Applicable Money Services Businesses Framework
Cryptocurrency exchanges often register as money services businesses (MSBs) in order to
operate. The regulatory framework for MSBs is largely a state-based licensing regime and applies
to many nonbank institutions, including several crypto-related companies, such as cryptocurrency
trading platforms, payment platforms that allow customers to buy and hold cryptocurrency, and
automated teller machines (ATMs) that sell or allow the transfer of cryptocurrencies.153 However,
specific approaches to include crypto in MSB regulation vary by state. For instance, some states
have created additional programs (e.g., New York’s BitLicense), while others (e.g., Wyoming)
have exempted digital currency businesses from MSB regulation altogether.154 Moreover, the
supervisory programs (exam frequency, the depth and breadth of exams, and dedicated resources)
vary considerably by state.
At the federal level, these crypto firms (exchanges, payment platforms, ATMs) are considered
MSBs and must register with the Financial Crimes Enforcement Network.155 As such, they must
comply with AML laws. Among other things, those laws require financial institutions to establish
customer identification programs and abide by certain reporting and recordkeeping
requirements.156 FinCEN is not a regulator, however, so registration with FinCEN does not
subject crypto firms to federal regulation outside of AML compliance.

148 New York State Department of Financial Services, “Virtual Currency Businesses.” The BitLicense is a New York
State designation required of companies that wish to engage in virtual currency exchange.
149 New York State Department of Financial Services, “Virtual Currency Businesses.”
150 New York State Department of Financial Services, “Banking Interpretations,” https://www.dfs.ny.gov/legal/
interpret/lo060216a.htm.
151 Wyoming Division of Banking, “Special Purpose Depository Institutions,”
https://wyomingbankingdivision.wyo.gov/banks-and-trust-companies/special-purpose-depository-institutions.
152 Wyoming Division of Banking, “Special Purpose Depository Institutions.”
153 Exchanges may seek money transmitter licenses based on state law or convention. For a state-by-state overview of
regulations, see Bloomberg Law, “Cryptocurrency Laws and Regulations by State,” May 26, 2022,
https://pro.bloomberglaw.com/brief/cryptocurrency-laws-and-regulations-by-state/.
154 Bloomberg Law, “Cryptocurrency Laws and Regulations by State.” For New York’s BitLicense, see
https://www.dfs.ny.gov/virtual_currency_businesses; and for Wyoming, see https://law.justia.com/codes/wyoming/
2021/title-40/chapter-22/section-40-22-104/.
155 FinCEN, FinCEN Guidance: Application of FinCEN’s Regulations to Certain Business Models.
156 For a deeper look at how MSBs are regulated and some policy issues around the regulation of digital asset
exchanges, see CRS Report R46486, Telegraphs, Steamships, and Virtual Currency: An Analysis of Money Transmitter
Congressional Research Service

25

Cryptocurrency: Selected Policy Issues

The Future of Cryptocurrency Regulation
There appears to be a growing consensus among domestic and international policymakers of the
need for greater clarity and coordination and new regulation. In its annual report for 2021, the
Financial Stability Oversight Council (FSOC) noted that “regulatory attention and coordination
are critically important in light of the quickly evolving market for these assets.”157 Lael Brainard,
the vice chair of the Board of Governors of the Federal Reserve System, highlighted in a July
2022 speech that despite the novelty, the “crypto financial system turns out to be susceptible to
the same risks that are all too familiar from traditional finance” and that regulators should include
digital assets in the “regulatory perimeter.”158 The Financial Stability Board expressed similar
concerns in the international domain, noting that “the rapid evolution and international nature of
these markets also raise the potential for regulatory gaps, fragmentation or arbitrage.”159 It
continued that while the industry is not so large and interconnected with traditional finance to
create stability concerns now, it is appropriate “to ensure that like risks are subject to like
regulatory outcomes.” Most recently, an FSOC report published pursuant to the President’s
executive order noted that “large parts of the crypto-asset ecosystem are covered by the existing
regulatory structure” and that it “emphasizes the importance of continued enforcement of existing
rules and regulations.”160 Nevertheless, it identified what FSOC sees as various gaps, including
limited federal oversight of spot markets and opportunities for regulatory arbitrage, among others,
and called for legislation to empower regulators to address these gaps.161
Calls for greater regulation of the industry preceded the November 2022 collapse of FTX, a
prominent cryptocurrency trading platform. While it is unclear whether stricter regulations may
have prevented the situation at FTX, which was a Bahamas-based entity, AML statutes have been
applied to companies in foreign jurisdictions when the proceeds of illegal activity were included
in banking transactions that cleared in the United States. U.S. regulations may also apply if the
company actively sought customers in the United States.
Regardless of jurisdiction, the events at FTX are relevant because they shine a light on practices
by U.S.-based exchanges that may be of interest to Congress. The first is whether and how these
firms—many of which are not registered as traditional securities exchanges and therefore are not
subject to the same regulatory framework as traditional exchanges—should be regulated. In
addition, most cryptocurrency exchanges currently operate concurrently as (1) exchanges,
providing a platform on which their customers can buy and sell; (2) broker-dealers, in which role
they are themselves the buyers and sellers; and (3) custodians, providing custody services for
their customers. Moreover, some exchanges are partners in issuing stablecoins, which may then
be traded on exchanges, some of which cannot be directly redeemed. This is counter to how
traditional exchanges, which are neutral and do not take positions, operate.162 Policymakers and

Regulation, by Andrew P. Scott.
157 FSOC, 2021 Annual Report, December 17, 2021, p. 17, https://home.treasury.gov/system/files/261/
FSOC2021AnnualReport.pdf.
158 Lael Brainard, “Crypto-Assets and Decentralized Finance Through a Financial Stability Lens,” Bank of England
Conference, July 8, 2022, https://www.federalreserve.gov/newsevents/speech/brainard20220708a.htm.
159 Financial Stability Board, Assessment of Risks to Financial Stability from Crypto-Assets, February 16, 2022, p. 1,
https://www.fsb.org/wp-content/uploads/P160222.pdf.
160 FSOC, Report on Digital Asset Financial Stability Risks and Regulation, October 3, 2022, p. 111,
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
161 FSOC, Report on Digital Asset Financial Stability Risks and Regulation.
162 See Craig Pirrong quote in Kaminska, “Why Coinbase’s Stellar Earnings Are Not What They Seem.”
Congressional Research Service

26

Cryptocurrency: Selected Policy Issues

other observers have argued that playing these multiple roles simultaneously may pose conflicts
of interest.163
Unlike traditional brokers, which must segregate customer funds, crypto exchanges may have
comingled funds, making it difficult for customers to recover funds if the exchange were hacked
or went bankrupt. As such, Congress may choose to require that they segregate customer funds.
Additional policy issues can be summed up in three, still-unanswered policy questions. First, is
the current authority sufficient and clear, or does the environment require congressional action?
There is lack of consensus on this first issue. While the SEC has repeatedly expressed the belief
that existing laws are sufficient, there are areas where the CFTC believes additional authorization
is required.164 The other two policy questions are closely intertwined: Assuming broad new
regulatory authority is required, is it better to create a new, overarching structure, or is a
refinement of the existing framework sufficient? If the current framework is refined, who should
have authority?
Congress may choose to establish some rubric that distinguishes digital asset commodities from
securities and create procedures for registering the two types of digital assets and their respective
exchanges. Congress may consider amending the definitions of commodity or security to
accommodate certain types of digital assets, as there appears to be a lack of consensus among
regulators. It may also decide to designate new terms for assets that it believes fall outside
existing frameworks. For example, legislation could require that one type of asset fall under the
primary jurisdiction of one regulator while also assigning specific responsibilities to another
regulator.165 Such legislation may distinguish digital commodities that were available to certain
investors before they were publicly available from those that were not and use that or some other
trait as a factor in designating the primary regulator.
Congress may choose to expand the authority of the CFTC or SEC or encourage them to engage
in rulemaking using their existing authorities. As the stickiest issue appears to be determining
whether one of thousands of cryptocurrencies that may be traded is a commodity or security,
requiring the CFTC and SEC to deliberate collectively on the classification of newly listed digital
assets may help provide clarity. Finally, additional regulatory requirements are likely to create
new responsibilities for agencies, and Congress may choose to provide additional funding to
either or both of the agencies depending on how mandates change.166
Beyond the practical discussion of who should be the primary regulator and which regulatory
framework applies in which set of circumstances, there are issues that are perhaps even more
fundamental. The lack of an overarching regulatory framework with clear delineations can be
awkward, because in the absence of clear rules of the road, less-informed participants may
assume that the products have a stamp of approval when they do not. Alternatively, from an
industry perspective, regulatory ambiguity creates the potential for sudden shifts in the regulatory
landscape that may hinder current industry activities or offerings. While the discussion in this
section has thus far been limited to the regulation of relatively new crypto entities, policymakers

163 Gensler, Kennedy and Crypto; and Gary Gensler, Prepared Remarks of Gary Gensler on Crypto Markets Penn Law
Capital Markets Association Annual Conference.
164 For example, Gensler believes the securities framework is sufficient. Benham believes his agency requires explicit
congressional authority in at least one area: commodity token spot markets. See footnote 119 above for sources.
165 According to one bill, an “ancillary asset” would be under the jurisdiction of the CFTC but would have disclosure
reporting requirements with the SEC.
166 Jennifer Schonberger, “SEC’s Gensler: The ‘Runway Is Getting Shorter’ for Non-Compliant Crypto Firms,” Yahoo
Finance, December 7, 2022, https://finance.yahoo.com/video/sec-gensler-runway-getting-shorter-161605453.html.
Congressional Research Service

27

Cryptocurrency: Selected Policy Issues

may also ask whether crypto activities should be available to traditional financial institutions or
whether there should be any required separations. Both cases—establishing clear rules and
providing an avenue to integrate with traditional finance—may also confer a level of legitimacy
some observers do not believe the crypto industry deserves and create systemic risk no one is
likely to want.
Tax Implications
The Internal Revenue Service treats cryptocurrency as property for tax purposes.167 This means
that receipt of crypto as a form of payment, and the sale or exchange of crypto, may have tax
consequences.168 Whether the resulting income (or loss) from a transaction involving crypto is
characterized as capital or ordinary income would depend on how such assets were being used.169
For example, crypto received in exchange for a service would be categorized as ordinary income,
and the taxpayer would include the fair market value of the crypto received when computing
gross income.170 Alternatively, when crypto is exchanged for another asset or converted into fiat
currency (e.g., dollars), the transaction would result in a capital gain or loss.171 The amount of the
gain or loss would depend on fair market value of the asset received and the taxpayer’s “basis” in
the crypto (which is generally the fair market value of the crypto at the time of the transaction).172
Because cryptocurrencies are not widely accepted for day-to-day payments, cryptocurrency
owners must often convert their cryptocurrency into fiat currency before it can be used. That
conversion would typically constitute a taxable event.173
The Infrastructure Investment and Jobs Act (P.L. 117-58) imposes additional data reporting
requirements for brokers. Brokers must provide returns (1099-B) for taxpayers’ trades performed
on their platforms.174 The law also requires that individuals and companies who receive more than
$10,000 in crypto proceeds from a single transaction in the course of their trade or business file
returns with respect to the transaction.175 Such information must include the identity of the
sender.176

167 Internal Revenue Service (IRS), “Frequently Asked Questions on Virtual Currency Transactions,”
https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.
168 IRS, “Digital Assets,” https://www.irs.gov/businesses/small-businesses-self-employed/digital-assets.
169 IRS, LB&I International Practice Service Concept Unit, p. 3, https://www.irs.gov/pub/int_practice_units/
fcu_cu_c_18_2_1_04.pdf; IRS, Notice 2014-21: IRS Virtual Currency Guidance, April 14, 2014, https://www.irs.gov/
irb/2014-16_IRB#NOT-2014-21; and IRS, Publication 544: Sales and Other Dispositions of Asset, February 16, 2022,
https://www.irs.gov/pub/irs-pdf/p544.pdf.
170 IRS, “Frequently Asked Questions on Virtual Currency Transactions.”
171 IRS, “Frequently Asked Questions on Virtual Currency Transactions.” There are many caveats to this. First,
presumably, the person is not a dealer, and second, the person must hold the asset for the holding period, etc.
172 IRS, “Frequently Asked Questions on Virtual Currency Transactions.”
173 IRS, “Frequently Asked Questions on Virtual Currency Transactions.”
174 See CRS In Focus IF11910, Cryptocurrency Transfers and Data Collection, by Mark P. Keightley and Andrew P.
Scott; and Laura Davison, “How Taxing Crypto Got Changed by Biden’s Infrastructure Law,” Bloomberg, November
17, 2021), https://www.bloomberg.com/news/articles/2021-11-17/how-taxing-crypto-got-changed-by-infrastructure-
law-quicktake. Soon after the law was signed, various Members of Congress expressed interest in altering the definition
of broker to omit software developers, miners, and various other parties.
175 26 U.S.C. §6050I.
176 Davison, “How Taxing Crypto Got Changed by Biden’s Infrastructure Law.” This would be reported on Form 8300.
Tim Shaw, “The Long Read: Catching Up with Crypto,” Thompson Reuters, April 29, 2022,
https://tax.thomsonreuters.com/news/the-long-read-catching-up-with-crypto/.
Congressional Research Service

28

link to page 7 Cryptocurrency: Selected Policy Issues

Energy Intensity177
The energy-intensive nature of the technology and process underpinning the cryptocurrency
ecosystem has emerged as a key policy issue. This section aims to introduce some of the issues.
For a comprehensive look at crypto energy intensity and attendant environmental concerns, see
CRS Report R45863, Bitcoin, Blockchain, and the Energy Sector, by Corrie E. Clark and Heather
L. Greenley.
As discussed above (“Blockchain, Decentralized Consensus, and Cryptography”) the proof of
work consensus mechanism is a key design feature that secures the network and maintains the
integrity of the distributed ledger for certain cryptocurrencies. It requires that mining nodes
engage in computationally complex processes that require sophisticated computers and significant
amounts of energy. In addition, the hardware performing these functions can generate significant
heat and demand significant amounts of energy to cool the equipment. Various factors contribute
to the amount of energy consumption used in mining, including the type of hardware computing
power, the network hashrate, the difficulty of proof of work calculations, and the thermal
regulation of the hardware.178 Recent estimates of the amount of energy used by the Bitcoin
network alone is about 82.5 terawatt hours, or roughly equivalent to the amount of energy used by
the country of Belgium in one year.179
President Biden’s Executive Order 14067 directed the White House Office of Science and
Technology Policy and its partners to prepare a report that, among other things, would examine
“the potential for these technologies to impede or advance efforts to tackle climate change at
home and abroad; and the impacts these technologies have on the environment.”180
The resulting report has various general recommendations, which include improving collection of
data, encouraging mining companies to report their locations, improving environmental
performance of equipment, and supporting research and development that would improve the
“environmental sustainability of digital assets, including crypto-assets,” among others.181 The
report recommends that various stakeholders try to devise more environmentally responsible
crypto technologies. If interventions to reduce energy use fail, the report recommends the
Administration use executive action and suggests that Congress “might consider” legislation to
“eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.”182
The report also urges the Administration to work with Congress, the Department of Energy, and
other agencies to “promulgate and regularly update energy conservation standards for crypto-
asset mining equipment, blockchains, and other operations.”

177 For an in-depth look at environmental issues related to cryptocurrency, see CRS Report R45863, Bitcoin,
Blockchain, and the Energy Sector, by Corrie E. Clark and Heather L. Greenley; and CRS In Focus IF12286, Recent
Cryptocurrency Developments: Energy and Environmental Implications, by Kristen E. Busch and Corrie E. Clark.
178 For more information on energy and environmental-related policy options for cryptocurrency mining, see CRS
Report R45863, Bitcoin, Blockchain, and the Energy Sector, by Corrie E. Clark and Heather L. Greenley.
179 University of Cambridge Judge Business School Centre for Alternative Finance, “Cambridge Bitcoin Electricity
Consumption Index,” at https://ccaf.io/cbeci/index/comparisons. Consumption changes regularly, as do country
comparisons.
180 E.O. 14067.
181 White House Office of Science and Technology Policy, Climate and Energy Implications of Crypto-Assets in the
United States, September 8, 2022, https://www.whitehouse.gov/wp-content/uploads/2022/09/09-2022-Crypto-Assets-
and-Climate-Report.pdf.
182 White House Office of Science and Technology Policy, Climate and Energy Implications of Crypto-Assets in the
United States.
Congressional Research Service

29

link to page 12 Cryptocurrency: Selected Policy Issues

Some market participants have committed to undertaking a shift to less energy-intensive
consensus protocols, such as proof of stake (see “Ethereum”).183
Outlook
Cryptocurrencies will likely continue to be of interest in the 118th Congress. Price volatility is
likely to create gains for some and losses for others. More failures of exchanges or platforms
cannot be ruled out, potentially leading to large losses for some and destabilizing the industry
generally. Unsophisticated investors, drawn by promises of big payouts without understanding the
instruments or their risks, might be especially vulnerable. Overall, market developments are
highly uncertain and may merit close monitoring by policymakers. Congress faces options for
oversight and legislation that may aim to make significant changes to the regulatory framework
applied to crypto.

Author Information

Paul Tierno

Analyst in Financial Economics

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

183 Under the proof of stake consensus mechanism, “validators”—the name given to node operators who take the place
of miners from the proof of work consensus model—do not compete for the ability to mine a block, but they are
selected to validate transactions. This mechanism dispenses with the complex cryptographic calculations and the
associated hardware and energy needs. Instead, validators stake their holdings for the opportunity to generate more.
Congressional Research Service
R47425 · VERSION 1 · NEW
30