Should the U.S. Regulate Bitcoin, and How?

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Created in 2008 by a pseudonymous person or group known as Satoshi Nakamoto, Bitcoin introduced a radical concept to the world: a form of digital money that allows for peer-to-peer transactions over the internet without the need for a traditional financial intermediary like a bank.

This innovation has since exploded into a multi-trillion-dollar global market, sparking one of the more significant and complex policy debates of the 21st century. A question facing policymakers in the United States and around the globe: Is this new technology a threat to be contained or an innovation to be nurtured?

The dramatic collapse of major players like the FTX cryptocurrency exchange intensified this discussion, highlighting that the existing regulatory apparatus may be ill-equipped for this new financial frontier.

Washington D.C. is wrestling with whether to write an entirely new rulebook for digital assets, or as some argue, to leave the industry alone, believing that regulation would only confer a legitimacy it does not deserve.

Understanding the Technology

To grasp the intricacies of the regulatory debate, you need to first understand the fundamental technology that makes Bitcoin possible. The concepts of decentralization, public ledgers, and cryptographic security are not merely technical details—they are the very features that create both the profound opportunities and the significant challenges that governments are now forced to address.

What is Bitcoin?

At its core, Bitcoin is a form of digital currency that operates on a decentralized network, meaning it is not controlled by any single entity like a government or a central bank. Unlike the U.S. dollar, whose value and supply are managed by the Federal Reserve, Bitcoin’s rules are governed by its underlying software protocol.

One of its most defining characteristics is its finite supply. The Bitcoin protocol dictates that only 21 million bitcoins will ever be created. This scarcity is a deliberate design choice intended to make the currency resistant to inflation, which occurs when central banks print more money and devalue the existing supply.

This feature has led many proponents to refer to Bitcoin as “digital gold,” viewing it as a potential long-term store of value that can act as a hedge against the devaluation of traditional currencies.

To use Bitcoin, a person needs a digital “wallet,” which is a software program that stores the cryptographic keys necessary to access and send funds. Each wallet has a public key, which functions like a bank account number that can be shared with others to receive Bitcoin, and a private key, which is a secret password used to authorize transactions.

When a user wants to send Bitcoin, they use their private key to create a digital signature, proving they own the funds. This transaction is then broadcast to the entire Bitcoin network for validation.

How Blockchain Technology Works

The technology that powers Bitcoin and makes its decentralized nature possible is called the blockchain. It is the core innovation that allows for secure transactions without a trusted third party.

A blockchain is best understood as a distributed public ledger. Imagine a digital accounting book that, instead of being held by a single bank, is copied and shared across a global network of thousands of computers, known as “nodes.”

Because countless identical copies of this ledger exist, no single person or organization can alter it without the consensus of the network. This distributed structure is the essence of decentralization—control is held collectively by all users, not by a central authority.

Transactions on the network are bundled together into data files called “blocks.” Once a block is filled with transactions, it is cryptographically sealed and linked to the block that came before it, forming a chronological “chain.”

This cryptographic link makes the ledger immutable, or unchangeable. Once a transaction is recorded and added to the blockchain, it is permanent and can be viewed by anyone with access to the network. This transparency ensures that the history of all transactions is secure and verifiable.

Mining and Proof of Work

To add a new block of transactions to the chain, a process called “mining” must occur. This is where the network’s security mechanism, known as “Proof-of-Work” (PoW), comes into play.

Miners use powerful, specialized computers to compete against each other to solve an incredibly difficult mathematical puzzle. The first miner to find the solution earns the right to add the next block to the blockchain.

This intense computational effort “proves” that the miner has done the necessary “work” to validate the transactions and secure the network, making it prohibitively expensive and difficult for a bad actor to tamper with the ledger.

As a reward for their effort and the significant amount of electricity their computers consume, successful miners receive a payment consisting of newly created Bitcoins and the fees from the transactions included in the block. This reward system is how miners are compensated and how new Bitcoins are introduced into circulation.

Bitcoin vs. Traditional Money

The structure of Bitcoin presents a fundamental departure from the traditional financial system in several key ways.

First is the distinction between centralization and decentralization. Government-issued currencies, known as “fiat” currencies, are centralized. The U.S. Federal Reserve, for example, has the authority to control the money supply, set interest rates, and oversee the banking system.

Bitcoin, by contrast, is decentralized. Its supply is predetermined by its code, and its operations are maintained by a distributed network of participants around the world, making it resistant to control or censorship by any single entity.

This leads to a different model of trust. The traditional financial system is built on trusting intermediaries. People trust banks to hold their money, credit card companies to process their payments, and governments to manage the currency.

Bitcoin proposes a “trustless” system, where trust is placed not in institutions but in the integrity of the open-source code and the cryptographic proofs that secure the network. Transactions are verified by mathematical consensus rather than by a corporate or government entity.

The Privacy Paradox

A critical operational difference is irreversibility. If a fraudulent charge appears on a credit card statement, the consumer can dispute it and request a “chargeback.” Bitcoin transactions, however, are typically irreversible.

Once a payment is sent and confirmed on the blockchain, it cannot be undone unless the recipient voluntarily sends it back. This feature can be beneficial for merchants, as it eliminates the risk of chargeback fraud, but it poses a significant risk for consumers.

If a person is tricked into sending Bitcoin to a scammer, there is often no institutional recourse to recover the funds.

The public nature of the blockchain ledger creates a crucial and often misunderstood dynamic regarding privacy. While Bitcoin transactions do not require users to submit personal information like names or addresses, they are not truly anonymous. Instead, they are pseudonymous.

Every transaction, including the sender’s wallet address, the recipient’s wallet address, and the amount, is permanently recorded on the public blockchain for anyone to see.

While a wallet address is just a string of letters and numbers, forensic analysis can sometimes link these addresses to real-world identities, especially when a user converts Bitcoin to traditional currency through an exchange that requires identity verification.

This inherent tension between pseudonymity and transparency is central to the regulatory debate. The public ledger provides a trail that law enforcement can follow to track illicit funds, which is a key argument for those who believe the system can be managed.

At the same time, the ability to transact without immediate personal identification is a feature that appeals to privacy advocates as well as to criminals seeking to evade oversight, which is a primary reason why regulation is deemed necessary.

The Case for Regulation

The rapid growth of Bitcoin and the broader cryptocurrency market has been accompanied by a series of high-profile collapses, scams, and illicit activities, prompting loud calls for comprehensive federal regulation. Proponents argue that it is essential to protect individual Americans, safeguard the stability of the U.S. financial system, combat crime, and address significant environmental harms.

Protecting Consumers from Fraud

A primary driver for regulation is the stark lack of consumer protection in the crypto ecosystem. Unlike traditional payment methods, cryptocurrency transactions do not come with the legal safeguards that Americans have come to expect.

If a purchase goes wrong or a consumer is defrauded, there is no equivalent to a credit card company’s dispute process to help recover the money. Furthermore, crypto accounts are not insured by the government in the way that bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC), meaning that if a crypto exchange collapses, customers’ funds can be lost permanently.

This unregulated environment has become a fertile ground for fraud. The Federal Trade Commission (FTC) has warned of a wide array of scams targeting crypto users. These include sophisticated investment scams that promise guaranteed, high returns with no risk—a claim that is always false.

In 2023, investment-related fraud was the most common type of scam reported to the FTC, with cryptocurrency being one of the top payment methods used by criminals, leading to losses of approximately $4.6 billion.

Scammers often impersonate celebrities, legitimate businesses, or even government agencies to trick victims into sending them crypto. Online romance scams, where a supposed love interest persuades a victim to “invest” in crypto, are also rampant.

The IRS has had to issue public alerts about phishing scams specifically designed to steal cryptocurrency from users’ wallets.

Beyond overt fraud, the inherent volatility of the asset itself poses a major risk. The price of Bitcoin is determined purely by market forces of supply and demand, and it can fluctuate dramatically in a matter of hours.

This exposes investors, particularly retail participants who may not fully understand the risks, to the possibility of rapid and devastating financial losses.

Ensuring Financial Stability

For years, many central bankers argued that the crypto market was too small and disconnected from the traditional financial system to pose a systemic risk. However, that view is rapidly changing.

The collapse of the FTX exchange in 2022 and the failure of the Terra/Luna “stablecoin” ecosystem revealed deep interconnectedness within the crypto world, triggering a cascade of failures and a crisis of confidence akin to a traditional bank run.

These events served as a stark warning that instability in crypto markets could, if left unchecked, spill over into the broader economy.

The Bank for International Settlements (BIS), known as the central bank for central banks, now asserts that the crypto market has “reached critical mass”.

The links between crypto and traditional finance (TradFi) are growing stronger, creating new pathways for risk. The approval of spot Bitcoin Exchange-Traded Funds (ETFs) in the U.S. in January 2024, for instance, has made it easier for mainstream investors and institutions to gain exposure to Bitcoin, deepening the entanglement between the two systems.

Four Transmission Channels

The BIS has identified four key “transmission channels” through which crypto-related risks could infect the traditional financial system:

TradFi Exposures: Direct losses incurred by traditional banks and investment firms that hold crypto assets or have exposure to crypto-related companies.

Confidence Effects: A major crash or scandal in the crypto market could erode confidence in the financial system more broadly.

Wealth Effects: Sharp declines in crypto prices could wipe out household wealth, leading to reduced consumer spending and economic contraction.

Payments System Disruption: The increasing use of cryptocurrencies, particularly stablecoins, in payment and settlement systems means that a failure in one of these systems could have widespread economic consequences.

Furthermore, analysis by both the BIS and the European Central Bank has pointed to a troubling dynamic of wealth transfer. During periods of market crisis, data suggests that smaller, less-informed retail investors tend to buy into crypto, hoping for a rebound, while wealthier, more sophisticated early investors sell their holdings and take profits.

This pattern can result in a significant redistribution of wealth from poorer households to wealthier ones.

Combating Crime and National Security Threats

While proponents often highlight Bitcoin’s potential for legitimate use, its pseudonymous nature has undeniably made it an attractive tool for criminals and rogue states.

Although illicit activity represented a relatively small fraction of all cryptocurrency transaction volume in 2023—just 0.34%—the absolute dollar amounts are substantial and the national security implications are severe.

U.S. government agencies have tracked the use of cryptocurrencies to facilitate a range of illegal activities, including money laundering, ransomware attacks, narcotics trafficking, and terrorism financing.

The U.S. Treasury has explicitly noted the use of crypto by terrorist groups like Hamas and Palestinian Islamic Jihad, as well as by sanctioned nations like North Korea to evade international economic pressure and fund weapons programs.

To further obscure their activities, criminals often employ “mixers” or “tumblers,” which are services designed to pool and mix cryptocurrencies from many different users to break the transaction trail on the blockchain.

In response, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has taken aggressive action. FinCEN has designated international crypto mixing as a “class of transactions of primary money laundering concern” and has used its authority to sanction mixing services like Blender.io and Tornado Cash, which were used by North Korean hackers to launder hundreds of millions of dollars in stolen funds.

Government Holdings Create Complexity

The push for regulation is not just about mitigating external threats—it also involves managing the government’s own evolving role in the crypto market.

Through asset forfeiture in criminal cases, the U.S. government has become a significant holder of Bitcoin. This has led to policy discussions and even proposed legislation, such as the BITCOIN Act, which contemplates the creation of a “Strategic Bitcoin Reserve.”

This dual position as both regulator and major asset holder introduces a complex dynamic. While agencies like the FTC and FinCEN focus on risk mitigation, other parts of the government have a vested interest in the stability and appreciation of the asset.

A well-regulated, stable market would not only protect consumers but also enhance the value and manageability of the government’s own substantial crypto holdings, adding a layer of strategic self-interest to the regulatory push.

Environmental Impact

The “proof-of-work” mechanism that secures the Bitcoin network is, by design, an energy-intensive process. This has raised serious concerns about its environmental impact.

A 2023 study by United Nations University scientists provided a stark assessment of this impact. During the 2020–2021 period, the global Bitcoin mining network consumed an estimated 173.42 terawatt-hours of electricity.

To put this in perspective, if Bitcoin were a country, its energy consumption would rank 27th in the world, ahead of nations like Pakistan with its population of over 230 million people.

Crucially, this energy is largely derived from fossil fuels. The UN study found that coal was the single largest power source for Bitcoin mining, accounting for 45% of the energy mix. Natural gas followed at 21%. In contrast, renewable sources like solar and wind power contributed only 2% and 5%, respectively.

The consequences for the climate are significant. The carbon footprint from this energy consumption was equivalent to burning 84 billion pounds of coal or running 190 natural-gas-fired power plants.

The study concluded that the greenhouse gas emissions from Bitcoin mining alone could be enough to push global warming beyond the 2°C target set by the Paris Agreement.

A separate peer-reviewed study focused on the United States found that the electricity consumption of just 34 large-scale Bitcoin mines contributed to increased fine particulate matter (PM2.5) air pollution.

This pollution was associated with adverse health outcomes in communities that were often located hundreds of miles away from the mines themselves, demonstrating that the environmental and public health costs are widely distributed.

Beyond the carbon footprint, the UN study also highlighted other “hidden” environmental costs. The global water footprint of Bitcoin mining in 2020–2021 was estimated at 1.65 cubic kilometers, while its land footprint exceeded 1,870 square kilometers—an area 1.4 times the size of the city of Los Angeles.

The Case for a Cautious Approach

While the risks associated with Bitcoin are significant, a powerful coalition of innovators, investors, and policymakers argues that heavy-handed or premature regulation could stifle one of the most important technological advancements of the 21st century.

They advocate for a more cautious and calibrated approach, one that balances risk mitigation with the need to foster innovation, maintain American competitiveness, and realize the potential benefits of a decentralized financial future.

The Risk of Stifling Innovation

The central argument against aggressive regulation is the potential for it to have a chilling effect on a nascent and dynamic industry.

Proponents of this view argue that over-regulation, especially if it is not “technology-neutral” and simply tries to fit a new paradigm into old boxes, could crush innovation before it has a chance to mature.

Cryptocurrency and its underlying blockchain technology have enabled new models for capital formation. Initial Coin Offerings (ICOs) and other token-based fundraising methods have allowed small, cash-strapped startups to raise funds from a global pool of investors, bypassing traditional venture capital gatekeepers.

Excessive regulation, it is argued, could close off this important avenue for innovation and entrepreneurship, making it harder for new ideas to get off the ground.

Many in the industry call for a regulatory framework that is clear and predictable but also flexible enough to accommodate the rapid pace of technological change, as reflected in the policy goals of recent executive orders.

Defining Innovation

The debate over “innovation” itself lies at the heart of the regulatory conflict, as the term holds vastly different meanings for supporters and critics.

For advocates, the innovation of crypto lies in the creation of new, open financial protocols, decentralized applications (dApps), and alternative economic models that challenge the centralized control of traditional finance and big tech.

From this perspective, innovation is a positive force for competition, efficiency, and individual empowerment, and regulation poses a direct threat to its development.

Conversely, critics view the primary “innovations” of cryptocurrency as being in the realm of financial engineering for purely speculative assets, creating novel methods for evading laws, and enabling sophisticated forms of crime and fraud.

In this light, crypto’s innovation is seen as a net negative for society—a force that generates harmful externalities without producing tangible economic value.

The policy debate is not merely about the degree of regulation but is fundamentally a value judgment about the technology itself. When policymakers speak of fostering “responsible innovation,” the public must critically assess what kind of innovation is being encouraged and for whose ultimate benefit.

Maintaining U.S. Competitiveness

The regulatory debate in the United States is not happening in a vacuum. Other major economic blocs are moving forward with their own comprehensive crypto regulations, creating a competitive pressure for the U.S. to act decisively or risk falling behind.

The fear is that continued regulatory uncertainty will lead to “regulatory arbitrage,” where innovative companies, skilled talent, and investment capital flee the U.S. for jurisdictions with clearer and more favorable rules.

The European Union’s Markets in Crypto-Assets (MiCA) regulation is a prime example. Fully applicable since December 2024, MiCA provides a harmonized, pan-EU legal framework for crypto-asset issuers and service providers, offering the legal certainty that businesses crave.

Similarly, the United Kingdom is undertaking a phased and deliberate approach to bring crypto-assets within its existing financial services regulatory perimeter, aiming to position itself as a global hub for the technology.

This global competition is a major motivator for recent legislative efforts in the U.S. Congress. Bills like the CLARITY Act and the GENIUS Act are explicitly framed by their sponsors as necessary measures to ensure America remains the world leader in digital assets and financial innovation.

The underlying belief is that establishing a clear, pro-innovation regulatory framework will not only protect consumers but also attract businesses, encourage investment, and ensure that the future of blockchain technology is developed in the United States.

The Promise of DeFi

Beyond Bitcoin as a simple store of value, its underlying blockchain technology has given rise to a burgeoning ecosystem known as Decentralized Finance, or DeFi.

DeFi aims to rebuild traditional financial services—such as lending, borrowing, and trading—on open, decentralized blockchain networks, without relying on centralized intermediaries like banks or exchanges.

The potential benefits of this new paradigm are compelling:

Permissionless Access and Financial Inclusion: DeFi protocols are generally open to anyone with an internet connection and a crypto wallet, regardless of their location or financial status. This could provide access to financial services for billions of people worldwide who are currently unbanked or underbanked.

Transparency: Because transactions are recorded on a public blockchain, DeFi offers a high degree of transparency. Anyone can audit the code of a protocol or verify the history of transactions.

Efficiency and Lower Costs: By removing layers of intermediaries, DeFi has the potential to reduce the administrative costs and fees associated with traditional financial services.

User Control and Custody: In DeFi, users typically maintain control of their own assets in their personal wallets, rather than entrusting them to a third-party custodian. This reduces counterparty risk, such as the risk of an exchange going bankrupt and losing customer funds.

Proponents argue that applying traditional, entity-based regulations to these decentralized protocols is not only technically challenging but could also undermine their core benefits.

The challenge for regulators is to figure out how to manage risks in a system where there is no central company or CEO to hold accountable.

The Counter-Argument: Don’t Legitimize It

A more radical argument against regulation comes from those who believe the entire cryptocurrency project is fundamentally flawed. This camp challenges the very premise that crypto is a technology worth saving.

One perspective, articulated by figures like economist Stephen Cecchetti, posits a “legitimacy paradox.” According to this view, the greatest danger of regulation is that it would confer a government seal of approval on an inherently unstable and speculative asset class.

Regulating crypto, they argue, would signal to the public that it is a safe and legitimate investment, potentially drawing in more unsophisticated investors who could be harmed when the next bubble bursts.

From this standpoint, the best policy is to let the market run its course without government intervention, keeping it at arm’s length from the traditional financial system to contain the damage from its inevitable collapse.

The Fundamental Critique

A deeper critique attacks the technology and economics of cryptocurrency at their foundation. These critics argue that Bitcoin fails as a currency because its extreme price volatility makes it unusable for everyday transactions, and its value is completely untethered from any productive economic activity.

They describe the crypto market as a massive, unregulated casino—a negative-sum game where, for every dollar of profit a winner takes out, a “greater fool” must have put that dollar in. After accounting for the fees paid to miners and exchanges, the system as a whole necessarily loses money.

Furthermore, they argue that many of the technology’s supposed strengths are actually weaknesses in practice. The immutability of the blockchain, for instance, becomes a critical flaw when mistakes or fraud occur, as there is no way to reverse transactions.

The promise of decentralization is also questioned, as power tends to concentrate in the hands of a few large mining pools, exchanges, and venture capital firms, recreating the very centralized structures the technology was meant to replace.

The U.S. Government’s Response

The U.S. government’s approach to regulating Bitcoin and other digital assets has been characterized by fragmentation, jurisdictional disputes between agencies, and dramatic shifts in policy driven by changes in presidential administrations.

This complexity has created a challenging and uncertain environment for both innovators and consumers.

Executive Branch: A Tale of Two Orders

The executive branch has set the overarching tone for crypto regulation, and recent years have seen a significant policy reversal.

In March 2022, the Biden administration issued Executive Order 14067, “Ensuring Responsible Development of Digital Assets.” This order established a cautious, “whole-of-government” strategy focused on studying the potential impacts of cryptocurrencies.

It directed federal agencies to produce reports on six key priorities: consumer and investor protection, financial stability, mitigating illicit finance, promoting U.S. leadership in the global financial system, ensuring equitable access to financial services, and supporting responsible technological innovation.

The order also notably called for research into the potential development of a U.S. Central Bank Digital Currency (CBDC).

In a stark pivot, the Trump administration in January 2025 issued Executive Order 14178, “Strengthening American Leadership in Digital Financial Technology,” which explicitly revoked the previous order.

This new directive established a much more pro-growth policy. Its stated goals include protecting the right of citizens to use public blockchains and maintain self-custody of their assets, promoting the growth of dollar-backed stablecoins, and providing clear, technology-neutral regulations.

Critically, it reversed the previous administration’s stance on a CBDC, explicitly prohibiting federal agencies from taking any action to establish or promote one. The order also created a new “President’s Working Group on Digital Asset Markets” tasked with proposing a comprehensive federal regulatory framework.

Regulatory Whiplash

This dramatic reversal from a risk-focused, exploratory approach to a growth-focused, directive one creates what can be described as “regulatory whiplash.”

Such sharp pivots in top-level policy, driven by the political cycle, introduce profound uncertainty for the industry. Businesses attempting to make long-term investments and develop compliance strategies are left navigating a landscape where the fundamental rules of the road can change overnight, making it difficult to plan for the future and potentially hindering the very innovation the new policy aims to support.

Who’s in Charge?

A central challenge in the U.S. is that there is no single, dedicated crypto regulator. Instead, a patchwork of existing federal agencies has asserted jurisdiction, often with overlapping and conflicting interpretations of how digital assets fit into legacy legal frameworks.

This has created a confusing and inefficient “regulation by enforcement” environment.

The SEC: Is It a Security?

The Securities and Exchange Commission (SEC) has been one of the most active regulators in the crypto space. Its position is that many digital assets, particularly those sold to the public in an Initial Coin Offering (ICO), are “securities” under U.S. law.

To make this determination, the SEC applies the Howey Test, a legal standard derived from a 1946 Supreme Court case. Under this test, a transaction is considered an “investment contract” (and therefore a security) if it involves: 1) an investment of money, 2) in a common enterprise, 3) with a reasonable expectation of profits, 4) to be derived from the entrepreneurial or managerial efforts of others.

Under the leadership of former Chair Gary Gensler, the SEC pursued a vigorous “enforcement-driven” strategy, bringing numerous lawsuits against crypto firms for allegedly issuing or trading unregistered securities.

Between April 2021 and December 2024, the agency initiated 125 crypto-related enforcement actions, resulting in over $6 billion in penalties. Landmark cases, such as the action against Terraform Labs that resulted in a $4.5 billion penalty, underscored the SEC’s intent to assert its authority over the market.

However, this approach has been criticized for creating uncertainty rather than clear rules. More recently, under new leadership, there have been signs of a potential shift.

The SEC rescinded Staff Accounting Bulletin 121, a rule that had made it difficult for banks to offer crypto custody services, and established a Crypto Task Force to help develop clearer policies, signaling a possible move toward more proactive rulemaking rather than reactive enforcement.

The CFTC: Is It a Commodity?

The Commodity Futures Trading Commission (CFTC) takes a different view, classifying virtual currencies like Bitcoin as “commodities,” similar to gold or oil.

Under the Commodity Exchange Act (CEA), the CFTC’s primary jurisdiction is over the derivatives markets—futures and options contracts based on these commodities. However, the agency also possesses general anti-fraud and anti-manipulation enforcement authority over the underlying spot (or cash) markets.

The CFTC has also been an active enforcer, bringing high-profile cases against major industry players. It secured a massive $12.7 billion judgment against the collapsed exchange FTX and imposed over $1.5 billion in penalties and disgorgement against Binance and its founder for operating an illegal digital asset derivatives exchange and willfully evading U.S. law.

These actions demonstrate the CFTC’s significant power and its claim as a primary regulator of the digital asset space.

This fundamental disagreement between the SEC (which sees many tokens as securities) and the CFTC (which sees them as commodities) has created a “turf war” that lies at the heart of the regulatory confusion in the U.S.

For a crypto company, whether its token is deemed a security or a commodity determines which agency regulates it and which set of complex rules it must follow. This ambiguity is a major driver behind the congressional push for new legislation to draw clearer jurisdictional lines.

Treasury and FinCEN: Following the Money

The Department of the Treasury, through its Financial Crimes Enforcement Network (FinCEN), is the lead U.S. agency for combating money laundering and terrorist financing.

FinCEN applies the rules of the Bank Secrecy Act (BSA) to the crypto world. Under its guidance, businesses that accept and transmit convertible virtual currency (CVC), such as exchanges, are typically considered Money Services Businesses (MSBs).

This requires them to register with FinCEN, implement comprehensive AML/CFT compliance programs, conduct customer due diligence, and file Suspicious Activity Reports (SARs) on potentially illicit transactions.

FinCEN also enforces the “Travel Rule,” which requires these businesses to collect, retain, and transmit information about the parties involved in transfers over $3,000.

In a significant move in 2023, FinCEN proposed a rule identifying international CVC mixing as a primary money laundering concern, marking the first time it has used its powerful Section 311 authority to target an entire class of transactions in the crypto space.

The IRS: Taxing Digital Property

The Internal Revenue Service (IRS) established its core position on cryptocurrency in 2014 with the issuance of Notice 2014-21. For federal tax purposes, the IRS treats virtual currency as property, not as currency.

This classification has significant implications for taxpayers.

Any time a taxpayer sells, exchanges, or disposes of a digital asset, it is a taxable event. This includes selling crypto for U.S. dollars, exchanging one cryptocurrency for another (e.g., trading Bitcoin for Ethereum), or using crypto to pay for goods or services.

Taxpayers must calculate their capital gain or loss on each transaction—the difference between the fair market value of the asset when they disposed of it and their “basis” (typically what they paid for it). These gains and losses must be reported on tax forms such as Form 8949 and Schedule D.

If crypto is received as payment for services, it is treated as ordinary income and must be reported as such.

To ensure compliance, the IRS now includes a mandatory question on the front of the Form 1040 asking all taxpayers whether they engaged in any digital asset transactions during the year.

Congress Enters the Fray

In response to the regulatory chaos, high-profile industry failures, and the intense lobbying efforts from the crypto sector, the U.S. Congress has begun to take significant steps toward creating a dedicated legislative framework for digital assets.

Several major bills have been introduced, each aiming to bring order and predictability to the market:

FIT21 Act

The Financial Innovation and Technology for the 21st Century Act (FIT21): Passed by the House of Representatives, FIT21 is a comprehensive market structure bill designed to end the SEC-CFTC turf war.

It would establish a clear process for classifying digital assets as either securities or commodities and would grant the CFTC primary regulatory authority over digital commodities, while leaving digital securities under the SEC’s purview.

CLARITY Act

This bill, with bipartisan support, also seeks to provide a clear legal framework by assigning specific oversight responsibilities to federal agencies and establishing formal legal definitions for digital assets.

Its proponents argue that this clarity is essential to encourage responsible innovation and protect consumers from arbitrary enforcement actions.

GENIUS Act

In a milestone for the industry, the Senate passed this bill to create the first-ever federal regulatory regime for “stablecoins”—cryptocurrencies pegged to a stable asset like the U.S. dollar.

The act would require stablecoin issuers to back their tokens with highly liquid reserves, such as cash and short-term government debt, and to publicly disclose the composition of those reserves on a monthly basis.

The bill has generated some controversy, however, as a provision banning members of Congress and their families from profiting from stablecoins does not extend to the president and his family.

BITCOIN Act

A more ambitious and currently less advanced proposal, this bill reflects a growing view of Bitcoin as a strategic national asset. It would direct the Treasury Department to establish a “Strategic Bitcoin Reserve” and purchase one million BTC over a five-year period to be held in trust for the United States.

The Feedback Loop

The complex interplay between these different branches of government reveals a dynamic and often reactive policy-making process.

The aggressive “regulation by enforcement” strategy pursued by agencies like the SEC created significant market uncertainty and political pressure. This pressure, in turn, fueled the momentum in Congress to pass comprehensive legislation like FIT21 and the GENIUS Act, which are designed to provide the clarity that agency actions did not and to rein in what some see as regulatory overreach.

At the same time, a change in the White House brought a new executive order that established a top-down, pro-growth policy agenda. This new executive policy is now directly influencing the priorities of the enforcement agencies, with the Department of Justice and the CFTC signaling a shift away from pursuing purely technical registration violations to focusing on cases of overt fraud and criminal activity, in alignment with the administration’s stated goals.

This demonstrates a clear feedback loop where agency action prompts legislative reaction, while a new executive vision reshapes both the legislative agenda and future enforcement strategies.

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