Bitcoin and Cryptocurrency Regulation in the United States

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Today, Bitcoin exists in a complex web of federal and state oversight that would challenge even the most seasoned compliance officer.

The Securities and Exchange Commission sees some cryptocurrencies as securities. The Commodity Futures Trading Commission calls Bitcoin a commodity. The Treasury Department treats it as a potential money laundering tool. The IRS wants to tax it as property. State governments have their own ideas entirely.

Government agencies want to protect consumers, ensure financial stability, and combat crime. The technology sector wants innovation and clear rules. What everyone has gotten, for now, is a system where regulations are often established through lawsuits rather than comprehensive rulemaking.

Federal Agencies: Too Many Cooks

The fragmented nature of U.S. cryptocurrency regulation means the legal status of any digital asset depends on its specific characteristics and how it’s used or sold. This has led to what critics call “regulation by enforcement”—rules established through litigation against specific companies rather than proactive, comprehensive policies.

The situation is made worse by regulators trying to apply financial laws from the 1930s and 1940s to 21st-century technology. A legal test designed to identify investments in citrus groves now determines whether digital assets are securities. The inevitable result is legal chaos and philosophical clashes about what Bitcoin actually is.

The primary battle at the federal level pits the SEC against the CFTC over whether most digital assets should be classified as securities or commodities. This jurisdictional fight shapes nearly every aspect of cryptocurrency regulation and drives much of the push for new legislation.

The SEC: Securities Cops on the Beat

The Securities and Exchange Commission regulates U.S. securities markets with a mission to protect investors, maintain fair markets, and facilitate capital formation. Its approach to cryptocurrency is arguably the most consequential and controversial aspect of American crypto regulation.

The Howey Test: 1946 Meets 2025

At the heart of SEC strategy sits the Howey Test, a legal standard from the 1946 Supreme Court case SEC v. W.J. Howey Co. This test determines whether a transaction qualifies as an “investment contract” subject to securities laws.

The Howey Test creates an investment contract when there is:

• An investment of money
• In a common enterprise
• With reasonable expectation of profits
• To be derived from the efforts of others

The SEC’s analysis focuses on the circumstances surrounding a digital asset’s offer and sale, not just the asset itself. The crucial factor is whether purchasers reasonably expect to profit from the essential managerial or entrepreneurial efforts of a central group—such as a promoter, sponsor, or development team.

The SEC maintains that Bitcoin itself doesn’t meet Howey criteria. Because Bitcoin is sufficiently decentralized and doesn’t rely on a central third party for success, it’s not considered a security. However, the agency makes clear this view doesn’t extend to most other crypto assets, particularly those launched through Initial Coin Offerings or sold by centralized companies that promote tokens and lead their development.

Regulation by Enforcement: The Gensler Era

Under Chair Gary Gensler, who took office in April 2021, the SEC adopted an aggressive enforcement-driven strategy. Rather than issuing broad new rules, the agency primarily used enforcement actions to assert jurisdiction and clarify its interpretation of securities laws.

Between April 2021 and December 2024, the Gensler-led SEC initiated 125 crypto-related enforcement actions—a sharp increase from 70 actions under the prior administration. Monetary penalties reached a record $6.05 billion. The primary allegations were fraud (66% of actions) and offering unregistered securities (63% of actions).

The agency’s targets were diverse, spanning crypto exchanges, lending and staking programs, decentralized finance operators, and creators of non-fungible tokens.

Case Study: The Terra Collapse

A prime example of SEC focus on large-scale fraud is its case against Terraform Labs and founder Do Kwon. Terraform developed the algorithmic stablecoin TerraUSD (UST) and related governance token LUNA. In May 2022, UST lost its one-to-one peg to the U.S. dollar, triggering a catastrophic collapse that erased an estimated $40 billion in market value within days.

The SEC charged Terraform and Kwon with orchestrating massive securities fraud. After a nine-day trial, a jury found them liable, resulting in a landmark judgment of over $4.5 billion in penalties and disgorgement—the largest such remedy in a crypto-related enforcement action.

Case Study: The Ripple Ruling

The ongoing lawsuit against Ripple Labs highlights the legal complexities of applying Howey to digital assets. In a pivotal 2023 ruling, a federal judge found that Ripple’s sales of XRP tokens to institutional investors did constitute unregistered securities offerings. However, the judge also ruled that Ripple’s “programmatic” sales of XRP to the public on crypto exchanges did not qualify as securities transactions, because retail buyers didn’t have the same expectation of profiting from Ripple’s efforts.

This split decision created significant legal precedent and fueled the crypto industry’s argument that Howey is an outdated standard for assets that trade on secondary markets in a decentralized manner.

Market Impact and Consequences

The SEC’s enforcement-heavy strategy cuts both ways. It holds bad actors accountable for large-scale fraud, directly aligning with the agency’s mission to protect investors. But it also creates significant collateral damage through retroactive classification of assets as securities via lawsuits rather than clear advance frameworks.

Academic research has quantified the market impact. An unexpected SEC announcement classifying a specific crypto asset as a security triggers an average price drop of 5.2% in the first three days, deepening to 17.2% over 30 days. These sell-offs harm all asset holders, not just those who participated in initial offerings.

This regulatory uncertainty creates a “chilling effect” where cautious investors retreat, liquidity dries up, and legitimate businesses hesitate to innovate. Some analysts argue this drives capital and talent offshore to jurisdictions with clearer rules.

Beyond financial metrics, unpredictability takes a human toll. Investors on forums like Reddit report significant stress, anxiety, and mental health challenges during severe market downturns triggered by sudden SEC actions. While enforcement actions can function as surgical strikes against fraud, their unpredictable nature can impact markets like cluster bombs, with widespread unintended consequences for the very investors the agency seeks to protect.

The CFTC: Commodity Regulators

The Commodity Futures Trading Commission regulates U.S. derivatives markets, including futures, swaps, and options. Its view of Bitcoin as a commodity has created a parallel and sometimes conflicting regulatory track to the SEC’s approach.

Bitcoin as Digital Commodity

The CFTC’s position has been clear and consistent since 2015: Bitcoin and other virtual currencies are commodities under the Commodity Exchange Act. This classification forms the foundation of CFTC jurisdiction in the crypto space.

The agency’s primary role is overseeing derivatives markets based on these commodities, including regulating exchanges that list Bitcoin futures and options contracts. From a market participant’s perspective, these regulated products serve important economic purposes. A Bitcoin mining company or large institutional holder can use futures contracts to hedge against the asset’s notorious price volatility, locking in future prices to protect against potential losses.

These derivatives are typically “cash-settled,” meaning at contract expiration, parties exchange the dollar equivalent of Bitcoin’s value rather than the underlying crypto itself.

Powers, Limitations, and Regulatory Gaps

While the CFTC’s main focus is derivatives, its authority isn’t strictly limited to them. The agency also possesses general anti-fraud and anti-manipulation enforcement powers over underlying spot or cash commodity markets. This means the CFTC can bring enforcement actions against fraudulent schemes in the spot crypto market, such as “pump-and-dump” manipulations, especially if they could distort regulated derivatives contract prices.

A prominent example was the CFTC’s 2020 case against crypto derivatives exchange BitMEX, resulting in a $100 million settlement for operating an unregistered platform and failing to implement adequate Anti-Money Laundering controls.

However, there’s a critical regulatory gap in CFTC authority. While it can police fraud in spot markets, the agency lacks broad statutory power to comprehensively regulate spot crypto exchanges like Coinbase or Kraken the way the SEC regulates stock exchanges. This means no federal requirements for these platforms to register with the CFTC, maintain certain capital levels, or implement robust market surveillance common in traditional finance.

This gap is a central point of Congressional debate and primary motivation for proposed legislation aimed at expanding CFTC powers.

The structure creates a fundamental contradiction in the U.S. regulatory system. CFTC classification of Bitcoin as a commodity and oversight of futures markets has been crucial in legitimizing the asset for institutional investors, providing a regulated on-ramp into the crypto world. This effectively built a bridge for traditional finance to access digital assets.

However, this bridge is anchored on one side to the highly regulated world of derivatives and on the other to the largely unregulated spot market. Prices on regulated derivatives markets derive directly from trading activity on these under-regulated spot platforms, which may lack critical safeguards and be vulnerable to manipulation or flash crashes.

This structural weakness—a regulated superstructure built upon an unregulated foundation—is a key risk in the current system and the primary driver behind legislative proposals to grant the CFTC more authority.

Treasury Department and FinCEN: Following the Money

The U.S. Department of Treasury, specifically its Financial Crimes Enforcement Network (FinCEN), plays a crucial role in regulating Bitcoin by focusing on its potential use in money laundering, terrorism financing, and other illicit activities. FinCEN’s mission is safeguarding the financial system from illegal use and combating money laundering through collecting, analyzing, and disseminating financial intelligence.

Bank Secrecy Act Meets Crypto

The cornerstone of U.S. anti-money laundering and countering terrorism financing efforts is the Bank Secrecy Act, originally passed in 1970. The BSA requires financial institutions to assist government agencies in detecting and preventing money laundering by keeping records and filing reports on certain transactions.

FinCEN administers and primarily enforces the BSA. Through guidance documents issued since 2013, FinCEN has made clear that even though Bitcoin and other virtual currencies are new technology, the financial activities they enable are subject to these long-standing rules. FinCEN’s official view is that convertible virtual currencies like Bitcoin are a “value that substitutes for currency,” making businesses dealing in them potentially subject to BSA regulations.

Money Services Business Designation

A critical concept in FinCEN’s regulatory framework is designating companies as Money Services Businesses (MSBs). Whether a crypto company is an MSB depends on its activity, not its self-proclaimed label or technology used. FinCEN’s guidance makes a key distinction:

User: A person or business that obtains virtual currency to purchase goods or services for their own use. This includes individuals buying items with Bitcoin or miners who mine crypto for their own account. Users are not considered MSBs.

Money Transmitter: A person or business that accepts and transmits currency, funds, or other value that substitutes for currency from one person and sends it to another person or location. This definition broadly captures cryptocurrency exchanges, payment processors, and operators of crypto ATMs or kiosks. These entities are considered MSBs.

The consequences of MSB classification are significant. Any business meeting this definition must register with FinCEN, develop and implement a formal written AML program, and comply with all BSA reporting and record-keeping requirements. Failure can result in severe penalties, including large fines and potential criminal prosecution.

Key Compliance Obligations

Crypto businesses classified as MSBs have several core compliance obligations under the BSA:

Anti-Money Laundering Program: MSBs must establish comprehensive, risk-based AML programs in writing. Programs must be approved by senior management and include internal policies and controls, designated compliance officers, ongoing training for relevant personnel, and independent audit functions to test program effectiveness.

Reporting Requirements:

• Suspicious Activity Reports (SARs): MSBs must file SARs with FinCEN for any transaction they know, suspect, or have reason to suspect involves funds from illegal activity, is designed to evade BSA regulations, or has no apparent lawful purpose. FinCEN has issued advisories with specific “red flags” for virtual currency transactions, such as those initiated from darknet marketplace addresses, use of anonymizing services like “mixers” or “tumblers,” or transactions structured to fall just below reporting thresholds.
• Currency Transaction Reports (CTRs): This requires reporting cash transactions (or series of related cash transactions) exceeding $10,000 in a single business day.

The “Travel Rule”: Applied to virtual currency transactions, this requires financial institutions, including crypto MSBs, to obtain, record, and transmit certain information about parties involved in funds transfers of $3,000 or more. This includes names and addresses of both senders and recipients. The rule promotes transparency and prevents illicit funds from moving anonymously between financial institutions.

Foreign Bank and Financial Accounts (FBAR) Reporting: While current regulations don’t explicitly define foreign accounts holding virtual currency as reportable accounts, FinCEN has issued a notice of intent to amend FBAR regulations to include virtual currency. Once finalized, this would require U.S. persons with financial interests in foreign financial accounts holding virtual currency above certain thresholds to report those accounts to FinCEN annually.

The IRS: Taxing Digital Property

The Internal Revenue Service administers and enforces U.S. federal tax laws. Its classification of Bitcoin has profound implications for every individual and business that interacts with the asset.

Bitcoin as Property, Not Currency

The foundational guidance for U.S. tax treatment of virtual currencies is IRS Notice 2014-21. This notice established a core principle that has shaped the crypto landscape: for federal tax purposes, virtual currency like Bitcoin is treated as property, not currency. The IRS has reaffirmed this position, clarifying that cryptocurrency is treated as property even if a foreign country has adopted it as legal tender.

The implications of this “property” classification are critical. It means general tax principles applicable to property transactions, such as those for stocks or real estate, apply to Bitcoin. The most significant consequence is that nearly every transaction involving Bitcoin is a taxable event.

When you sell Bitcoin for cash, exchange it for another cryptocurrency, or use it to pay for goods or services, you’re effectively “disposing” of property. This disposal may result in capital gain or loss that must be reported to the IRS.

This regulatory choice has profoundly affected how Bitcoin is used in the U.S. While the classification provides a logical framework for taxing Bitcoin as an investment, it inadvertently creates significant compliance burden that discourages its use as a medium of exchange. The requirement to perform complex tax calculations for every single purchase—from a car to a cup of coffee—makes it impractical for everyday commerce.

This tax friction has strongly incentivized individuals and businesses to treat Bitcoin primarily as a speculative investment rather than transactional currency, fundamentally shaping its dominant use case in the American economy.

Calculating and Reporting Taxes

Because Bitcoin is property, taxpayers must calculate and report any gains or losses from its sale or exchange. To underscore compliance importance, the IRS added a question to the front page of Form 1040 asking every taxpayer whether they engaged in any virtual currency transactions during the year.

Capital Gains and Losses

The gain or loss on a Bitcoin transaction is the difference between its sale price (fair market value in U.S. dollars at transaction time) and its cost basis. The basis is generally the amount spent to acquire the asset, including any fees. Tax treatment of the gain or loss depends on how long you held the Bitcoin:

Short-Term Capital Gain/Loss: If you held Bitcoin for one year or less before selling or exchanging, the gain or loss is short-term. Short-term capital gains are taxed at ordinary income tax rates, which can be significantly higher than long-term rates.

Long-Term Capital Gain/Loss: If you held Bitcoin for more than one year, the gain or loss is long-term. Long-term capital gains are taxed at preferential rates lower than ordinary income rates.

Special Tax Situations

The IRS has provided guidance on several common crypto scenarios:

Receiving Bitcoin as Income:

• For Employees: If an employer pays wages in Bitcoin, the fair market value in USD at receipt time is considered wages. It’s subject to federal income tax withholding, Social Security and Medicare taxes, and federal unemployment taxes, and must be reported on Form W-2.
• For Independent Contractors: Bitcoin received as payment for services is self-employment income. Fair market value at receipt time is subject to self-employment tax.

Mining: When a taxpayer successfully mines Bitcoin, the fair market value of mined coins as of receipt date is includible in gross income. If mining is conducted as a trade or business, it’s also subject to self-employment tax.

Hard Forks and Airdrops: The IRS has clarified that if a “hard fork” in a cryptocurrency’s protocol results in a taxpayer receiving new cryptocurrency units, that taxpayer has taxable income. Similarly, an “airdrop” of new tokens distributed to a taxpayer’s digital wallet results in taxable income equal to the fair market value of tokens when the taxpayer gains control over them.

Despite this guidance, many complex tax questions remain unanswered, particularly concerning activities in the rapidly evolving world of decentralized finance, such as staking, lending, and providing liquidity.

White House and Congress: Building a National Framework

For years, cryptocurrency regulation in the U.S. was primarily driven by individual federal agencies applying old laws to new technology. However, growing recognition of digital assets’ economic and national security implications has spurred both the White House and Congress to pursue a more coordinated and comprehensive national framework.

Executive Branch: Whole-of-Government Strategy

A pivotal moment in U.S. crypto policy came on March 9, 2022, when President Joe Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets. This was the first time the executive branch mandated a “whole-of-government” strategy to address challenges and opportunities presented by the burgeoning crypto ecosystem.

The executive order didn’t create new regulations but directed federal agencies to study the issue and produce reports to inform future policymaking. It laid out six key policy objectives:

• Protect Consumers, Investors, and Businesses: Address financial risks and ensure adequate safeguards
• Protect Financial Stability: Identify and mitigate systemic risks digital assets could pose to the broader financial system
• Mitigate Illicit Finance: Combat use of digital assets for money laundering, sanctions evasion, and other national security threats
• Promote U.S. Leadership and Competitiveness: Ensure the U.S. remains at the forefront of financial technology and global standard-setting
• Promote Financial Inclusion: Explore how digital assets can provide safe and affordable financial services to more Americans
• Support Responsible Innovation: Study and support technological advances while prioritizing privacy, security, and reducing negative climate impacts

One of the most significant directives called for federal agencies to urgently explore the potential creation of a U.S. Central Bank Digital Currency (CBDC), or “digital dollar.” This signaled the government was seriously considering the future of money itself in the digital age.

Congressional Action: From Gridlock to Bipartisan Bills

Parallel with White House efforts, there’s growing Congressional momentum to pass legislation creating a clear, national regulatory framework for digital assets, moving beyond the current agency-led patchwork. This push has been fueled by high-profile industry collapses like the FTX exchange and the growing political influence of the crypto industry, which has become a major source of campaign spending and lobbying in Washington.

Several landmark bills have advanced with bipartisan support:

The GENIUS Act (Stablecoin Regulation): Passed by the Senate in June 2025, the Guiding and Establishing National Innovation for U.S. Stablecoins Act represents a major legislative achievement. It aims to create federal guardrails for stablecoins—cryptocurrencies pegged to asset values like the U.S. dollar.

Key provisions require stablecoin issuers to maintain one-to-one reserves with high-quality liquid assets, mandate public disclosures of holdings for members of Congress and executive branch officials, and direct Treasury to issue rules for monitoring suspicious transactions. The bill’s difficult path through the Senate, involving tense negotiations over concerns about industry influence and potential corruption, illustrates complex political dynamics surrounding crypto regulation.

The CLARITY Act (Market Structure): Advanced in the House of Representatives, the Financial Innovation and Technology for the 21st Century Act (often called the CLARITY Act) attempts to resolve the core jurisdictional dispute between the SEC and CFTC. It proposes granting the CFTC explicit authority over spot markets for digital commodities like Bitcoin and Ethereum, while clarifying that tokens functioning as securities remain under SEC purview. This aims to close the regulatory gap in spot markets and provide clearer rules for exchanges.

The Anti-CBDC Surveillance State Act: Reflecting strong political counter-current, this bill advanced in the House would prohibit the Federal Reserve from issuing a CBDC directly to individuals. Proponents argue this is necessary to protect financial privacy and prevent potential government surveillance of citizens’ transactions.

These legislative efforts signal clear intent from lawmakers to take control of crypto policy, establish industry rules, and assert U.S. leadership in the future of digital finance.

State-Level Patchwork: Fifty Different Experiments

While federal agencies and Congress grapple with creating a national framework, the 50 states have forged ahead with their own approaches to cryptocurrency regulation. This has resulted in a complex and fragmented legal landscape where rules for operating a crypto business can vary dramatically from one state border to the next.

This state-level activity is creating a dynamic laboratory for crypto policy, with different models competing for dominance. The divergence creates powerful incentives for “regulatory arbitrage,” where businesses strategically locate operations in jurisdictions with the most favorable rules.

The stark contrast between states like New York and Wyoming provides a clear example. This state-level competition is more than just a compliance headache for businesses—it’s a real-time policy experiment. As states compete to become the “Delaware of crypto,” they’re generating invaluable data and real-world case studies on what regulatory models work, what fails, and what the potential trade-offs are between innovation and protection.

The successes and failures of these state-level laboratories are actively shaping the national debate and providing concrete models for the federal framework Congress is attempting to build.

New York: The Stringent Approach

New York stands out for having the most comprehensive and stringent state-level licensing regime in the country. In 2015, the New York State Department of Financial Services introduced the “BitLicense,” a bespoke regulatory framework for virtual currency businesses operating in the state or serving New York residents.

The BitLicense framework covers a broad range of activities, including transmitting, storing, holding, buying, selling, or issuing virtual currency. Obtaining a license is a demanding and costly process. Applicants must pay a $5,000 non-refundable application fee and undergo rigorous review of their business model, financial strength, and the backgrounds of their officers and shareholders.

Once licensed, companies must adhere to strict ongoing requirements:

• Capital Requirements: Maintaining minimum capital levels as determined by NYSDFS
• Cybersecurity Program: Establishing and maintaining robust programs to protect systems and data
• AML Program: Implementing comprehensive Anti-Money Laundering programs compliant with the Bank Secrecy Act
• Consumer Protection: Ensuring transparency and maintaining adequate records of all transactions

The introduction of the BitLicense had dramatic industry impact. High compliance costs and regulatory burden led to what was dubbed the “Great Bitcoin Exodus,” with at least ten crypto companies announcing they would cease all business in New York State shortly after regulations came into effect. This makes New York a prime case study in how stringent, permission-based regulation can create high barriers to entry and potentially stifle innovation.

Wyoming: The Welcoming Haven

In direct contrast to New York’s model, Wyoming has positioned itself as the most crypto-friendly state in the nation. Since 2018, the state legislature has passed a comprehensive suite of laws designed to attract blockchain businesses, foster innovation, and provide legal clarity for digital assets.

Wyoming’s pioneering legislation includes several key initiatives:

Money Transmitter Exemption: Wyoming exempted most crypto-to-crypto transactions from state money transmitter laws, removing a major regulatory hurdle and compliance cost for exchanges and wallet services.

Legal Status for Digital Assets: The state legally recognized digital assets as a form of property, classifying them into three categories—digital consumer assets, digital securities, and virtual currencies—and integrating them into the Uniform Commercial Code. This provides clear, legally protected property rights to owners.

Special Purpose Depository Institutions (SPDIs): Wyoming created a new type of state-chartered bank specifically for digital asset companies. SPDIs can provide custody and other banking services for crypto but, unlike traditional banks, cannot make loans and must maintain 100% reserves of their deposits. This “full-reserve” model is designed to offer a secure banking solution for the crypto industry.

Legal Recognition of DAOs: In a first-of-its-kind law globally, Wyoming became the first jurisdiction to grant legal status to Decentralized Autonomous Organizations, allowing them to register as a new type of limited liability company.

Crypto Bankruptcy Protections: In 2024, Wyoming enacted another groundbreaking law providing explicit bankruptcy protections for customer assets held in “covered accounts” by Wyoming-chartered trust companies and SPDIs. The law clarifies that these customer assets are not part of the financial institution’s estate in bankruptcy events, aiming to prevent the kind of customer losses seen in major crypto bankruptcies like Celsius and FTX.

California: The Cautious Middle Path

As the nation’s largest state economy and a global hub for technology, California is taking a more measured and recent approach to crypto regulation. Its actions reflect an attempt to balance innovation with consumer protection without creating New York’s high barriers or Wyoming’s wide-open framework.

A key piece of recent legislation is Assembly Bill 1052. This bill enables but doesn’t require state and local government agencies to begin accepting cryptocurrency as payment for goods and services, with provisions set to take effect no earlier than July 1, 2026. This permissive, optional approach provides a legal on-ramp for crypto adoption in public finance while avoiding political pushback that a mandate might create.

However, AB 1052 also contains a more controversial provision that has drawn criticism from privacy and self-custody advocates. The bill allows the state to take temporary custody of digital assets held on custodial platforms if a user’s wallet has been inactive for three years, classifying the assets as “unclaimed property.” While the state wouldn’t liquidate the assets and owners could reclaim them, critics argue this intervention undermines the principle of digital sovereignty.

The examples of New York, Wyoming, and California illustrate the broader reality of the U.S. regulatory landscape. A crypto business seeking to operate nationwide must navigate a dizzying patchwork of 50 different sets of rules for core financial activities like money transmission, creating immense legal, technical, and financial compliance burdens.

This state-by-state fragmentation is one of the biggest challenges facing the digital asset industry and a primary reason for the intense push for a preemptive and uniform federal framework. The regulatory maze that began with Bitcoin’s creation continues to evolve, with each new development adding another layer of complexity to an already intricate system that governs the future of digital money in America.

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