Ads By Google

This memorandum provides an overview of the functions of cryptocurrency and
blockchain technology and describes relevant federal and state regulation. The appendix
provides a detailed list of state action with regard to cryptocurrency and blockchain technology.
Table of Contents
Cryptocurrency and the Exchange of Digital Money…………………..2
Blockchain Technology…………………………………………………………….2
Shifts in Technological Structure
Functions of Cryptocurrency…………………………………………………….3
Federal Regulation
State Regulation
State Actions
Appendix: State Cry ptocurrency and Blockchain Legislation…

Cryptocurrency and the Exchange of Digital Money

consistent with the internal revenue provider, virtual currency, or cryptocurrency, is “a
virtual representation of cost that functions as a medium of exchange, a unit of account, and/or
a shop of fee.”1
as opposed to using conventional intermediaries to facilitate forex transfers or
transactions, owners rely on a cryptographic procedure for change and production of the
digital money. This technique, known as blockchain era, makes use of a decentralized public ledger
to report the motion and ownership of cryptocurrency units. owners of cryptocurrency will
often have private passcodes to apply, alternate, and store their currency tokens. normally,
passcodes are acknowledged simplest to the holder of the cryptocurrency account, however the ledger of
transactions is seen to the whole community of account holders of a selected cryptocurrency.

Blockchain Technology

most cryptocurrencies are exchanged and produced using blockchain era.2 On a blockchain, a network of laptop customers certifies the legitimacy of each cryptocurrency
transaction thru a public ledger. The ledger shows the place of, and any transactions
regarding, each unit of cryptocurrency. Transactions should involve securities and commodities
other than cryptocurrencies, which includes non-fungible tokens (NFTs), that are particular belongings
recorded and exchanged on blockchains and usually imply ownership of a virtual product,
together with a video or photo. precise virtual signatures identify each birthday celebration in the transaction.
Proponents of cryptocurrency factor to the ledger’s transparency and decentralization because the
number one blessings of cryptocurrency.3
due to the fact all transactions are public to the blockchain community and each unit of forex
requires personal credentials to access, the cryptographic protocols serve the equal function as a
bank in facilitating the electronic transfer of price range among parties. as a consequence, in step with supporters,
cryptocurrencies are extra efficient and less prone to manipulation than conventional banking
practices and establishments. however, the anonymity of blockchain transactions has popularized
the era amongst criminals. In 2020, victims of ransomware attacks paid hackers an
amount of cryptocurrency equal to $350 million.
recently, the cybercriminal group
DarkSide obtained seventy five bitcoin (equal to approximately $ million at the time) as ransom after its
hack of Colonial Pipeline Co. in may also 2021. quickly after the ransom charge, U.S. federal regulation
enforcement officers traced and recovered nearly ninety percent of the bitcoin used inside the ransom
change with DarkSide, elevating hopes that the transparency of blockchain transactions ought to
useful resource governments of their try and recoup destiny ransom payments and deter criminal use of
cryptocurrencies. however, since the a hit recuperation of the bitcoin ransom, hackers have
1 kingdom statute and federal regulation use numerous phrases to consult cryptocurrency, which includes “digital
currency” and “virtual tokens.” in this memorandum, “cryptocurrency” is used to distinguish among
forex that relies on cryptographic techniques and proprietary tokens, such as virtual casino credits,
that private agencies may additionally be given but whose value is generally now not reducible to fiat foreign money, that is
a central authority-issued foreign money not sponsored by way of a commodity.
2 Blockchain generation isn’t always used just for cryptocurrency accounting. virtual, decentralized ledgers
are tremendously new technologies, but diverse industries, from agriculture to health care, are trying out the
capability utility of the ledgers. See appendix for data on nation action authorizing using
blockchain generation. For more at the makes use of of blockchain, see the arena financial institution, “Blockchain and
dispensed Ledger technology (DLT),” April 12, 2018. For an example of a blockchain ledger, see
discern A.
three customers might still be identified by pseudonyms only.
4 The actual amount might be a great deal better, considering many cyberattacks cross unreported.

started to prefer so-called “privacy coins,” which do not leave digital “trails” of visible
transactions. According to Europol, the European Union’s law enforcement agency, the criminal
use of such coins has “rendered cryptocurrency investigations more challenging.”

Shifts in Technological Structure

Blockchain generation continues to conform, and changes within the technical shape of
cryptocurrency exchanges have the capacity to alter fundamentally the cost and use of each
foreign money. for example, Bitcoin and Ethereum, the two maximum extensively used cryptocurrencies, depend
upon “evidence-of-paintings” systems, wherein users verify the cash’ blockchains via strength-
extensive computer use. Analysts speculate Ethereum will soon shift to a “proof-of-stake”
system, in which owners validate blockchain transactions if they can provide their very own
cryptocurrency as collateral and have set up the sort of “stake” longer than those of other
blockchain customers. such a alternate would sign a chief technological shift in how the
cryptocurrency is produced, exchanged, and valued through its proprietors. this alteration, and different
modifications in blockchain era, have the capability to unsettle markets and
cryptocurrency trade fees.
Blockchain era additionally may want to offer the digital architecture for a brand new, extra
decentralized net, generally called Web3. Web3 is an emergent technology, and
little consensus exists about what it might appear to be or how it might differ from the contemporary
structure of the platform- and alertness-primarily based internet. in step with the Congressional
studies carrier, in a “Web3 architecture, NFTs or cryptocurrencies can be used to purchase
gadgets on line, constitute digital ownership, pay royalties, or get right of entry to positive packages and
offerings,” without the need for middleman entities along with net-website hosting businesses.

Functions of Cryptocurrency

the two primary features of cryptocurrency are as gadgets of alternate and as shops of
fee. no matter the rapid boom in cryptocurrency utilization over the past decade, fantastically few
entities very own or use cryptocurrency. Few companies accept any cryptocurrencies as payment.
most effective in El Salvador is a cryptocurrency legit legal soft.5
commonly, cryptocurrency values
are unbiased of those of fiat forex. “Stablecoins,” that are designed to mirror sure fiat
foreign money values, are an exception to this. Cryptocurrency utilization amongst clients continues to be rare.
In 2020, the 30-day common of Bitcoin transactions per day peaked at about 330,000,
representing a fragment of the billions of economic transactions made daily around the arena.
Surveys estimate 16 percent of adult people have invested in, traded, or owned
during the last decade, greater organizations have all started to invest in, exchange, and be given
consequently, platforms for buying and selling, replacing, and storing cyptocurrencies have
turn out to be extra extensively available. In April 2021, Coinbase have become the primary most important cryptocurrency
exchange platform to become a publicly traded enterprise within the america. In April 2022,
five In June 2021, El Salvador enacted regulation recognizing Bitcoin as prison gentle within the united states of america and requiring
private corporations to simply accept the cryptocurrency as charge. It have become the first government inside the
world to do so.
6 the various foremost corporations now accepting Bitcoin are Microsoft, home Depot, and entire ingredients.
the electrical car employer Tesla started out accepting Bitcoin for vehicle purchases in early 2021 however
ended the coverage weeks later. J.P. Morgan is considering launching an actively controlled Bitcoin fund.

Fidelity, the largest provider of 401(k) retirement plans in the U.S., announced it will allow plan
enrollees to invest in Bitcoin with their employer’s permission. Still, according to the consulting
group Deloitte, only 2,300 out of 31 million American businesses accept any type of


Created in 2008 by using a pseudonymous laptop programmer, Bitcoin was the first, and is
nevertheless the maximum broadly used, cryptocurrency. As of may additionally 2021, Bitcoin accounted for approximately 39
percent of total cryptocurrency cost, although that proportion can differ notably over short
periods of time.7
Bitcoin, like different currencies, continues to be regularly traded in and measured in U.S.
Bitcoin, like other cryptocurrencies, is scarce. In assessment, governments can commonly
create more units of fiat currencies. The simplest way to collect extra bitcoin is to both buy
present units or “mine” for more. Cryptocurrency “mining” requires solving complex
mathematical problems using big computing energy. Miners are awarded extra bitcoin
thru their verification of other transactions at the blockchain community. often, miners will
set up large complexes of supercomputers to acquire extra bitcoin. total bitcoin supply,
but, is restricted—only approximately 21 million bitcoin are in the end to be had to be mined.
additionally, every next harvest of bitcoin yields less than the previous one, that means an
boom in demand can’t produce an identical growth in deliver.
in comparison to the production of other cryptocurrencies, Bitcoin mining expends large
amounts of energy. because the expenses of strolling supercomputers are rather high,
purchasing an current bitcoin is less complicated than securing a brand new one. different cryptocurrencies do no longer
commonly require as many resources to mine and might have many extra tokens in movement than
Bitcoin. however, Bitcoin can be traded fractionally, and the price of 1 entire bitcoin currently
far exceeds that of every other cryptocurrency. The price of cryptocurrency production, specifically
Bitcoin mining, has drawn international interest from regulators and businesses. The
Cambridge middle for opportunity Finance estimates Bitcoin mining and utilization requires 108.four
terawatt hours of power annually.8


Because cryptocurrencies do not require intermediaries or government backing, some
proponents state the digital assets fall outside the traditional scope of government regulation.
Others argue the instability of cryptocurrency valuations and the assets’ increasing integration
into the global financial system necessitate regulation. With the growing acceptance of
cryptocurrencies at major corporations and financial institutions, industry and government
experts have begun to consider in more detail how to protect consumers and financial
institutions from the volatility and uncertainties of the novel technology.9
7 Market value calculation accessed via CoinMarketCap on May 18, 2021.
8 For context, the Netherlands consumed about the same amount of electricity in 2019.
9 International governments have begun to regulate the financial as well as the environmental
consequences of cryptocurrencies. As of May 2021, China has issued a regional ban and Iran a
national ban on cryptocurrency mining. Both countries cited the extreme energy costs of mining as the
primary reason.

Federal Regulation

The federal authorities has extended a number of its authority to modify traditional
monetary hobby to cryptocurrencies, which include:
● The U.S. department of the Treasury’s economic Crimes Enforcement network
(FinCEN) has introduced that positive cryptocurrency activities qualify as “cash
offerings agencies” and consequently parties to certain transactions should record
suspicious sports. additionally, those parties need to function anti-cash-
laundering compliance programs;
● The inner revenue provider treats digital currencies as belongings, so customers have to
pay taxes on any realized gains from the sale of cryptocurrency; and
● The customer financial protection Bureau and the Securities and alternate
fee (SEC) have issued indicators about the excessive danger for economic scams
regarding cryptocurrency investments and transactions.
Federal law remains initial, however. officials preserve to observe
cryptocurrencies, which includes ability risks. Regulatory authority is dispersed throughout numerous
entities, along with the Federal Reserve, the SEC, the Commodity Futures buying and selling commission,
and the Treasury branch. The SEC, for one, has taken action to adjust cryptocurrency
exchanges. In February 2022, the company reached a settlement with the cryptocurrency
agency BlockFi after the SEC accused it of selling billions of bucks in unlicensed funding
merchandise. included amongst its cryptocurrency investment products, BlockFi offered “yield farms,”
which allow buyers to lend their cryptocurrencies to different traders in exchange for a go back,
both in different cryptocurrencies or U.S. bucks. As a part of the agreement, the SEC required
BlockFi to sign up the “yield farm” product as BlockFi Yield, which allowed current investors to
preserve their debts with the company. professionals within the finance enterprise taken into consideration the agreement
a considerable federal recognition of cryptocurrency hobby.
In may 2021, U.S. senators Cynthia Lummis and Kyrsten Sinema introduced the
introduction of the financial Innovation Caucus, in an effort to study “accountable innovation” in financial
technologies, which includes cryptocurrencies. The identical month, after the charge of Bitcoin dropped
over 50.0 percent in every week, the U.S. department of the Treasury briefed White residence officers
on potential “gaps” in cryptocurrency market regulation, which includes the threat of turmoil and
devaluation in the broader economic device.
On March 9 2022, President Biden signed an executive Order that outlined the first
“whole-of-government” plan to address the dangers posed by using virtual property, together with
cryptocurrency. amongst other things, the executive Order:
● Directed the branch of the Treasury to assess and broaden coverage
pointers to address the consequences of the growing digital asset zone;
● encouraged the monetary stability Oversight Council to become aware of and mitigate
economy-extensive economic dangers posed by using virtual belongings;

Directed coordinated action across all relevant U.S. Government agencies to
mitigate the illicit finance and national security risks posed by the illicit use of
digital assets;
● Direct the Department of Commerce to establish a framework to drive national
competitiveness and leadership in, and leveraging of, digital asset technologies;
● Affirmed the critical need for safe, affordable, and accessible financial services as
a U.S. national interest;
● Directed the U.S. government to support technological advances and ensure
responsible development and use of digital assets; and
● Directed the U.S. government to assess the technological infrastructure and
capacity needs for a potential U.S. Central Bank Digital Currency.
State Regulation
State action concerning cryptocurrencies varies widely. For example, some states have:
● Defined virtual currencies as “money” or “property”;
● Applied existing money transmitter law to cryptocurrencies; and
● Debated the applicability of consumer protection laws.
Wyoming has enacted the most legislation related to cryptocurrency. As of June 2021,
Wyoming is the only state to create an entirely new category of assets (“utility tokens”) for
cryptocurrencies. When the cryptocurrency exchange Coinbase tried to operate in the state,
Wyoming restricted the company’s business activities because the State’s Money Transmitter
Act of 2003 did not define “virtual currency.” As a result, the State required Coinbase to hold
equal amounts of fiat currency for all cryptocurrencies traded in the state. Coinbase suspended
activities in Wyoming rather than comply with the regulations. In 2018, the Governor approved
legislation allowing transactions involving “smart contracts,” including blockchain transactions. In
2019, the Legislature created a new category of banks, the Special Purpose Depository
Institution, that can perform custodial and management services for owners of cryptocurrencies,
among other digital assets. In 2021, the State legalized Decentralized Autonomous
Organizations. These limited liability corporations are managed according to a set of “smart
contracts” established on a blockchain.
On May 18, 2021, the Office of the State Bank Commissioner (OSBC) updated a
guidance document concerning the regulation of virtual currencies under the Kansas Money
Transmitter Act (Act). The guidance applies to money transmission involving “decentralized
cryptocurrencies,” such as Bitcoin, which have no primary administrator. While the Act does not
address two-party currency exchange, the involvement of a third party would likely qualify the exchange as “money transmission” under the Act.10 Because “money” is not defined in Kansas statute, and no governmental entity in the United States has adopted a cryptocurrency as fiat money, the OSBC does not consider cryptocurrency “money” under the Act. Therefore, the Act does not currently apply to cryptocurrencies.11 The OSBC clarified the Act’s applicability to select uses of cryptocurrency, including: ● The exchange of cryptocurrency for sovereign currency between two parties is similar to a sale of goods and therefore does not qualify as money transmission; ● Since Kansas statute does not consider cryptocurrency money, the exchange of one cryptocurrency for another does not count as money transmission; and ● If an entity that expects to regularly handle cryptocurrencies seeks a money transmitter license, the OSBC requires the applicant to submit a third-party security audit of its information systems due to the increased risk to consumers posed by a cryptocurrency exchange. State Actions The types of legislation state legislatures have passed with respect to cryptocurrency, virtual exchanges, and blockchain technology are reviewed below. The appendix contains a detailed table of enacted legislation through 2020, as well as pending and enacted 2021 legislation. Blockchain Technology Arizona (2018 HB 2602, 2017 HB 2417, and 2017 HB 2216), Delaware (2017 SB 69), Illinois (2019 HB 2540 and HB 3575), and Maryland (2019 SB 136) have passed laws related to the use of blockchain technology. Crimes Several new laws in Michigan in 2019 amended definitions in the Michigan Penal Code to add virtual currency. Other state legislatures, including those of Nevada (2019 AB 15), Texas (2019 SB 207), and Florida (2017 HB 1379), passed laws adding virtual currency to definitions related to certain crimes, including money laundering. 10 KSA 9-508(h) defines “money transmission” as engaging “in the business of the sale or issuance of payment instruments or of receiving money or monetary value for transmission to a location within or outside the United States by wire, facsimile, electronic means or any other means, except that money transmission does not include currency exchange where no transmission of money occurs.” 11 KSA 9-508(f) defines “monetary value” as “a medium of exchange, whether or not redeemable in money.” Because cryptocurrencies are generally not accepted as means of payment, the OSBC does not define cryptocurrencies as having “monetary value.”

Exemption from positive Securities legal guidelines
Montana (2019 HB 584) and Wyoming (2018 HB 70) have exempted virtual currencies
from sure securities laws. Wyoming (2019 HB 62) made “open blockchain tokens” no longer concern
to securities exemptions.
cash Transmission
Alabama (2017 HB 215), Arkansas (2021 SB 150), Connecticut (2017 HB 7141),
Georgia (2016 HB 811), Vermont (2017 B 182), and Washington (2017 SB 5031) have all
approved law of digital forex transmitters. New Hampshire (2017 HB 436) and
Wyoming (2018 HB 19) exempted humans the use of virtual forex from being certified as cash
transmitters, and Utah (2019 SB 213) exempted a person who enables the introduction,
trade, or sale of certain blockchain generation-related products from money transmission
project Forces and examine Committees
Arizona (2021 HB 2544), California (2018 AB 2658), Colorado (2021 HB 1247),
Connecticut (2018 SB 443), Indiana (2019 SR 9), Kentucky (2020 SB 55), Maryland (2018 HB
1634), new york (2020 SB 7508), North Dakota (2019 HB 1048), Vermont (2018 SB 269), and
Wyoming (2020 HB 27) have asked or directed their legislatures to establish committees
devoted to analyzing digital currencies and associated issues.
digital currency as property
Wisconsin (2019 HB sixty two) and Wyoming (2019 SF 125) categorized digital forex as
belongings. Delaware (2021 SB 103), Illinois (2017 SB 868), Indiana (2021 SB 188), Kentucky
(2018 HB 394), Nevada (2019 SB forty four), New Hampshire (2021 SB 71), North Dakota (2021 SB
2048), South Dakota (2021 SB 2048), Tennessee (2017 HB 420), Utah (2017 SB one hundred seventy five), and
Vermont (2019 HB 550) brought virtual currencies to their unclaimed property statutes.
Ryan Browne, Colonial Pipeline Hackers received $ninety million in Bitcoin before Shutting
Down,” CNBC, can also 18, 2021
● internal revenue provider, note 2014-21
● Kansas office of the nation bank Commissioner, “Regulatory treatment of virtual
Currencies under the Kansas cash Transmitter Act,” might also 18, 2021
● Jemima Kelly, “Oh No, Now Deloitte with the Crypto Nonsense,” monetary instances,
may additionally 7, 2021
● Lionel Laurent, “Bitcoin’s real Social price is impossible to disregard,” Bloomberg,
can also 25, 2021

Hannah Murphy, “The Rise of Crypto Laundries: How Criminals Cash Out of
Bitcoin,” Financial Times, May 27, 2021
● Nicole Perlroth, et al., “Pipeline Investigation Upends Idea that Bitcoin is
Untraceable,” New York Times, June 9, 2021
● Laura Shin, “Crypto Industry Frustrated by Haphazard Regulations,” New York
Times, June 27, 2018
● Mackenzie Sigalos, “Bitcoin’s Wild Price Moves Stem From its Design: You’ll
Need Strong Nerves to Trade It,” CNBC, May 19, 2021.
● U.S. Energy Information Administration, International Electricity Consumption
● U.S. Senate Committee on Banking, Housing, and Urban Affairs,
“Cryptocurrencies: What are They Good For?” July 27, 2021
● Janet Yellen, “Finance Committee Questions for the Record,” U.S. Senate
Committee on Finance, January 21, 2021

Leave a Reply

Your email address will not be published. Required fields are marked *

%d bloggers like this: