Executive summary

This brief explores the current state of digital asset regulation and the varying stances that stakeholders take on the issue. It also discusses the relevance of digital asset regulation in the modern world and provides recommendations for regulatory improvement.

Overview

Cryptocurrency is a digital currency designed to work through a computer network that is not reliant on any central authority. Cryptocurrencies such as Bitcoin or Ethereum utilize cryptography and a decentralized network to enable secure transactions. Cryptography is the practice of using mathematical and computational techniques to protect information from unauthorized access. This process ensures that cryptocurrency transactions are anonymous and reliable. A decentralized network is any network where control is held by multiple nodes rather than a single authority. This network works in conjunction with the processes of cryptology to operate. Given the anonymous nature of the blockchain, the decentralized network that dictates the flow of cryptocurrency assets, cryptocurrency has become a key factor in digital crime, sprouting regulatory concerns. In early 2020, the U.S. Treasury Department announced that it would take a more aggressive approach to dealing with cryptocurrencies to reduce financial crime and address a lack of transparency. Since then, both state and local authorities have sought various methods of regulating digital currency. At the federal level, agencies such as the Department of Treasury, Securities and Exchange Commission (SEC), Internal Revenue Service (IRS), and Financial Crimes Enforcement Network (FinCEN) have spearheaded cryptocurrency anti-fraud enforcement. Notably, in 2023 alone, the SEC took 26 cryptocurrency enforcement actions. On the local level, states have varying levels of cryptocurrency laws. For example, California and Arizona have a comprehensive cryptocurrency regulatory framework while Alaska and Colorado lack any cryptocurrency-specific legislation. Some scholars suggest that the lack of uniform crypto regulation could adversely affect investor confidence and overall returns. The FTX failure of 2022—leading to $8 billion in missing assets—points to the potential need for more scrutiny regarding cryptocurrencies and the blockchain. This potential need is only underscored when considering the mainstream success cryptocurrencies such as Bitcoin and Ethereum have achieved in recent years. However, when considering a regulatory framework for cryptocurrency, policymakers must carefully implement security measures without greatly hindering innovation in the field. This poses a significant challenge to regulatory authorities, especially considering the complex, technical nature of the blockchain.

Pointed Summary

• Digital currencies have become mainstream financial investments.
• This draws attention to concerns about fraud, crime, and failures.
• These concerns must be tackled head-on by policy.

Relevance

Digital currencies have gained widespread attention as investment vehicles. However, these currencies are highly volatile with recent market crashes such as the FTX Collapse highlighting instability. The current regulatory landscape is ill-prepared to tackle these challenges, especially as market growth will likely continue.

In addition to concerns over volatility, fraud and security is a considerable challenge. Crypto fraud cost American investors $5.6 billion just last year. There is a strong imperative to tackle the issue of fraud head-on, however current regulation may fall short considering the lack of a consistent, federal framework. Reconsidering regulation is an essential step to solvency.

Fraud is often coupled with other forms of financial crime such as money laundering and tax evasion. By implementing regulation, governments can monitor these activities more closely, reducing the risks to the larger financial system. Financial crime is especially challenging to tackle with crypto due to the anonymity afforded by cryptography and the Blockchain, underscoring the relevance of policy consideration in today’s world.

History

1. Current Stances

At least 35 states, Puerto Rico, and the District of Columbia have introduced cryptocurrency legislation in the 2024 legislative session. Much initial skepticism over crypto has dissipated with its popularity and mainstream success. However, there is no clear consensus on the future of crypto regulation. Proponents of decisive regulatory action point to the risk of fraud and cybercrime while opponents worry that crypto regulation could greatly stifle innovation. While legislators are confident that crypto is here to stay, the public is still generally unfamiliar with its nuances. A 2024 Pew Research study revealed that 63% of Americans say “they have little to no confidence that current ways to invest in, trade or use cryptocurrencies are reliable and safe.” While confidence in crypto has increased in recent years, it still remains at relatively low levels compared to traditional, centralized currencies.

Trump’s stance on crypto has shifted over the years. Initially displaying skepticism during his 2020 campaign, he has taken a more open perspective on crypto policy in his 2024 campaign, heavily criticizing SEC Chair Gary Gensler’s harsh crypto regulation and promising to fire Gensler and to make the U.S. “the crypto capital of the planet.” With Trump’s election in 2024, the executive stance on cryptocurrency will likely favor less regulation, leaving more room for innovation.

Congress has generally left crypto policymaking to the agencies and courts (i.e. SEC). However, recent bills have been introduced that challenge this norm. In July, Sen. Cynthia Lummis of Wyoming introduced the Strategic Bitcoin Reserve Act, calling on the U.S. Treasury to establish a secure, decentralized network of Bitcoin vaults. The Financial Innovation and Technology for the 21st Century Act (FIT21) was passed by the House in May with bipartisan support despite vocal opposition from President Biden. The policy generally reduces SEC oversight on crypto regulation. SEC Chair Gensler argued that the legislation would “create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts.” The bipartisan support for this bill signals that Congress generally prefers less intrusive crypto regulation while the Biden-Harris administration prioritizes security in crypto transactions over innovation.

Tried Policy

Congress has generally been reserved regarding crypto regulation. However, a couple of bills have been proposed in addition to the  Strategic Bitcoin Reserve Act that remains in committee and the FIT21 that is waiting to move to the Senate after approval in the House. In 2022, the Senate Agriculture Committee considered the Digital Commodities Consumer Protection Act. If passed, the bill would place crypto regulation under the Commodity Futures Trading Commission (CFTC). While the bill marks a push toward increased legislative clarity of digital assets, it has not been re-introduced in the current legislative session.

Despite inconsistent involvement at the Federal level, the New York State Department of Financial Services (NYSDFS) introduced BitLicense in 2015, aiming to crack down on crypto fraud and laundering. Entities are required to obtain a BitLicense or charter under the New York Banking Law before conducting virtual currency business activity in the state. The first BitLicense was issued to mixed reviews as critics found the regulations to be “cumbersome.” Some argued that BitLicense greatly hindered industry growth by disincentivizing new businesses in the field through a tedious application process. In 2020, New York regulators implemented a more lenient version of Bitlife in response to the criticism. The new framework allows prospective licensees to collaborate with existing licensees to help overcome “actual or perceived hurdles” in obtaining BitLicense by leveraging prior expertise. On July 1, 2025, California’s Digital Financial Assets Law (DFAL) is set to take effect. The law provides a similar licensing framework to BitLicense, signaling that more states may be seeking to take a clearer position on digital asset regulation. 

Policy Problem

A. Stakeholders

Digital asset regulation affects a large variety of entities, from small private investors to large exchanges with trading volumes in the tens of billions. Thus, it is imperative that policymakers consider all possible groups impacted by cryptocurrency regulation.  

As cryptocurrency becomes a more trusted and popular form of exchange with a market cap reaching $3 trillion in recent years, everyday consumers will continue to be impacted by industry regulation. The current lack of cryptocurrency regulation leaves consumers at risk of fraud. Losses from cryptocurrency-related investment fraud rose to $3.96 billion in 2023 alone. Regulation may also increase disclosure standards for cryptocurrency, allowing consumers to better assess the risk of digital asset investment. The lack of risk mitigation of the FTX exchange led to consumer losses of over $8 billion. Ultimately, government standards greatly dictate the transparency levels of firms. Risks of fraud and inconsistent disclosure practices leave consumers at risk, making digital asset regulation a pressing issue.

Firms and exchanges are also affected heavily by crypto regulation. Initiatives like BitLicense and the DFAL pose significant hurdles to new firms aiming to enter the crypto market. Regulations can also greatly limit the freedom of exchanges, potentially decreasing profitability and increasing total costs for firms. As with any financial regulatory framework, increased digital asset regulation may limit the freedom of firms and exchanges to help increase consumer protections. The stake of firms and exchanges in digital asset regulation is undeniable. Fairshake, a crypto-funded PAC, has raised over $200 million to elect pro-crypto congressional candidates.  

B. Risks of Indifference

The global cryptocurrency market is projected to grow at a Compound Annual Growth Rate (CAGR) of 12.49% through 2023. As the digital asset market continues to grow, risks of fraud and the need for investor protection only increase. If policymakers fail to address the pressing challenges of fraud and financial crime in the cryptocurrency industry, issues on the blockchain become more pervasive and harder to detect.

Moreover, without regulation providing guidelines for firm transparency, investor confidence will likely decline, stagnating growth in the industry. Digital asset regulation also serves as a fallback to prevent widespread financial failures. These failures severely shock crypto markets and lead to volatility and instability. If policymakers fail to act, these harms and risks will only be perpetuated in the future.

C. Nonpartisan Reasoning

While most stances on crypto legislation are divisive and partisan, highlighted by President Biden and Trump’s opposing stances on the issue, there are a few paths to bipartisan solvency regarding digital asset regulation. 

First, policies combining basic consumer protections with anti-money laundering measures could satisfy both Democratic and Republican priorities. Democrats generally prioritize consumer protections that prevent deception and malpractice in business. On the right, Republicans have historically prioritized maintaining law and order while cracking down on illicit activities. Guidelines with basic anti-laundering measures and consumer protections could satisfy both political groups.

Second, a balanced regulatory framework that includes both basic consumer protections and provides room for startups and large corporations to innovate flexibly could draw bipartisan support. For Democrats, green investment and socially responsible growth have become a top issue in recent years. Digital asset innovation could reveal new paths to environmental solvency and the growth of green tech. The appeal to Republicans is evident as the party has long supported economic freedom and policies that prioritize innovation. By balancing two sides of the spectrum, policymakers can develop equitable solutions that not only are favored by a variety of stakeholders but also reach a bipartisan consensus. 

Policy Options

Considering the polarizing nature of digital asset regulation, final options for policy implementation must carefully balance innovative freedom and consumer protections. A potential option is a federal license system, similar to New York’s BitLicense system but with less restriction on startup activity to maintain innovation while providing some level of legitimacy.

In addition to an across-the-board licensing system, policymakers could consider policies that further clarify the role of financial authorities in cryptocurrency regulatory enforcement. Bills such as the FIT21 and Digital Commodities Consumer Protection Act aim to address this issue. The FIT21 in particular, gained momentum in the House with bipartisan support, proving its potential as a nonpartisan policy option. The FIT21’s popularity in the House is derived from its attempt at regulatory clarity without impairing innovation and market growth.

Conclusions

The imperative for a federal digital currency regulatory framework is evidenced by cases of fraud, laundering, and exchange failures costing consumers billions of dollars. However, the fear of governmental overreach and an unwillingness to hinder industry growth prevents much regulatory development in the field. 

Therefore, much of the regulatory burden has fallen to the state level, with states like New York and California implementing strict licensing regulations while states such as Alaska and Colorado currently lack any cryptocurrency regulation. This disconnect causes inconsistency and a lack of clarity for both consumers and firms. This inconsistency coupled with fears of fraud leaves the future of digital asset regulation uncertain and fragmented, creating a pressing need for a coherent federal framework to foster both consumer protection and industry stability.

Thus, the most straightforward path to solvency is likely a non-intrusive, federal legislative framework for digital asset regulation. This framework would be a considerable step up from the current incohesive and unclear state of digital asset regulation. The non-intrusive nature of the framework ensures that consumer protections and clarity are addressed without governmental overreach in the industry. By carefully balancing innovation and security, policymakers can develop a bipartisan and common-sense solution to the pervasive issues of digital asset regulation.

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Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Gwen Singer, Mason Carlisle, Lilly Kurtz, Paul Kramer. and other contributors for developing and maintaining the Fellowship Program within the Institute.

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