A Primer on Cryptocurrency and Policy Frameworks

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What is Cryptocurrency?

The Internal Revenue Service (IRS) does not define cryptocurrency directly. It states, “The tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology.” This definition can also be found in the 2021 Infrastructure Investment and Jobs Act.

Merriam Webster defines “currency” as something that is in circulation as a medium of exchange and defines a “medium of exchange” as something commonly accepted in exchange for goods and services and recognized as representing a standard of value.

For the purposes of this memorandum, cryptocurrency is something that can be exchanged for a good or service that is stored digitally on a cryptographically-secured blockchain. Examples include Bitcoin, Ethereum, Tether, Solana, and USD Coin (USDC).

How Does Cryptocurrency Work?

Cryptocurrencies can be produced and exchanged using blockchain technology. At a high level, a blockchain is a network of computer users certifying the legitimacy of each cryptocurrency transaction through a public ledger. The ledger shows the location of each cryptocurrency unit, the unit’s prior owner, and the unit’s related transactions.

Example

Using Bitcoin as an example, a user installs a Bitcoin wallet on their computer or mobile device. That wallet contains a specific Bitcoin address that can be shared with another party to facilitate a transaction. The wallet contains a private key used to sign the transaction, providing proof the Bitcoin came from the wallet’s owner. While the key is public, the wallet’s owner remains private.

Once the transaction is posted between parties, it is broadcast to the cryptocurrency’s network for validation. Once confirmed through a Proof-of-Work or Proof-of-Stake process (for more details, see Coinbase’s overview), the transaction is assigned to a block on the blockchain as a permanent, public record and is considered completed. The cryptocurrency is then sent between parties usually with a small transaction fee given to the validator and the recipient retains control over the cryptocurrency sent.

Privacy

A key feature of cryptocurrency is the public nature of the transactions on the network. Each transacting party must provide their wallet address to transfer cryptocurrency, allowing users to see who owns which cryptocurrency unit. This prevents complete anonymity, but users can be pseudonymous since only their wallet address is listed publicly and not their name or other identifying information.

It is possible to determine users by tracing multiple transactions tied to the same address; however, new tools are being developed to mitigate this type of tracking. Additionally, exchanges that are required to follow “Know Your Customer[JK2] ” rules and regulations tie a wallet user’s identity to the wallet, minimizing the value of those tools. There is a subset of cryptocurrency called privacy coins that make transaction parties completely anonymous, but these cryptocurrencies tend to have lower adoption and usage rates and face more regulatory scrutiny.

What is Cryptocurrency Used For?

Cryptocurrencies are typically used as an investment asset or as transactional currency.

Investment Asset

Initially created as a digital currency for online transactions, Bitcoin started gaining popularity in the mid-2010s as an investment alternative. However, Bitcoin and other cryptocurrencies’ volatile pricing make them a risky investment and a poor option to transact with since the value underlying one unit can fluctuate by as much as 10 percent on a given day. Over the past decade, Bitcoin’s price volatility is 4.8 times higher than the S&P 500 and 5.3 times higher than gold.

To illustrate the volatility, in late 2022, Bitcoin lost 75 percent of its value compared to its price a year earlier as a result of one of the largest cryptocurrency exchanges going bankrupt, among other factors. Since that low, Bitcoin gained over 600 percent in value by the end of 2025.

Exchanges

Most cryptocurrency users use a cryptocurrency exchange to convert their assets into cryptocurrency, transfer one cryptocurrency for another, and transfer from cryptocurrency back to a fiat currency, such as the U.S. Dollar (USD). Exchanges like Coinbase and Binance match buyers and sellers of cryptocurrency and charge a fee to facilitate the transfer. Additionally, these exchanges may also act like stock brokerage accounts where users can store and trade their cryptocurrency.

Transactional Currency

Most cryptocurrencies do not require intermediaries or government backing. Stablecoins are a unique subset of cryptocurrency. Unlike Bitcoin and other similar cryptocurrencies, stablecoins attempt to maintain a fixed, or “pegged,” exchange rate, in which their value is fixed against the value of another currency or asset with the aim of maintaining stability in value.

There are four main ways in which the value of a stablecoin may be pegged to another asset:

  • Fiat currency-backed: A stablecoin can be pegged to fiat currency, like the USD, when that fiat currency is held in reserve against the coin’s value at a depository institution. As the stablecoin price fluctuates, reserves are bought or sold to maintain stablecoin pegging to the reserve asset. In an effort to maintain their stability in value, large issuers sometimes overcollateralize their stablecoins by holding more fiat currency in reserve than the value of the stablecoins issued;
  • Commodity-backed: A stablecoin can be pegged to the value of a specific commodity, where the stablecoin issuer holds the commodity and buys or sells the commodity as needed to adjust the stablecoin price;
  • Cryptocurrency-backed: Some stablecoins peg their value to other cryptocurrencies. As the stablecoin price fluctuates, the issuer buys or sells the reserve cryptocurrency as needed to restore the stablecoin’s peg. These stablecoins may be overcollateralized to account for the pegged cryptocurrency’s volatility; and
  • Algorithmic-backed: These stablecoins do not hold reserve assets. Instead, an algorithm on the stablecoin’s blockchain dynamically adjusts its supply to create or destroy stablecoins depending on the change in the stablecoin’s value. In practice, this mechanism typically fails to maintain a stable pegged value because adjustments made by the algorithm cannot keep pace with real-time changes in market conditions.

Unlike other cryptocurrencies whose current usage is mainly as an investment vehicle, stablecoins tend to be focused on facilitating transactions between parties. Currently, there are two major uses for stablecoins:

  • International transfers: Stablecoin users do not need multiple bank accounts in two countries to transfer money from one country to another; they just need one cryptocurrency wallet that allows the transfer of their stablecoin to another user’s wallet; and
  • Peer-to-peer digital transfers: Stablecoins allow users to complete digital transfers without the need for third parties to facilitate the transaction.

While stablecoin usage continues to rise, this cryptocurrency subset still presents risk to users and the finance sector.

Benefits and Risks

Coinbase, a major cryptocurrency exchange, lists the following benefits of the cryptocurrency process:

  • Independence — Cryptocurrencies are issued independent of any government or financial institution and provide an alternative to “dysfunctional fiat currencies”;
  • Transferability — Cryptocurrency makes global transfers cheaper and easier by reducing the intermediaries required to transfer money across borders;
  • Privacy — Cryptocurrency transactions do not require a party to provide unnecessary personal information to the other party;
  • Security — Almost all cryptocurrencies use a blockchain which is constantly checked and verified by a decentralized network of validators;
  • Portability — Cryptocurrency holdings are not tied to a financial institution or government and are available to the owner no matter their location or the state of the global financial system; and
  • Irreversibility — Cryptocurrency transactions cannot be reversed which can reduce fraud and processing fees.

However, the process also poses substantial risks to users and the general public. According to the U.S. Government Accountability Office, these risks include:

  • Resources — It can be costly to operate a blockchain. Some cryptocurrencies require large amounts of computing power and energy to generate new currency units;
  • Collusion — Network security relies on consensus protocol to maintain the ledger. Users who collude could gain enough influence to manipulate the ledger to their benefit;
  • Security — Cryptocurrency holders can have their digital wallets hacked and cryptocurrency stolen; and
  • Opaqueness — Since cryptocurrency can be exchanged without a central authority, governments may be hesitant to allow cryptocurrencies to be used as a method of exchange or contracting since they cannot easily be tracked and could be used to facilitate illicit activity like tax evasion or money laundering.

Stablecoin Risks

Stablecoins present several risks to users, some of which include:

  • False claims that a stablecoin is fully backed by reserves. In 2021, the Commodity Futures Trading Commission (CFTC) fined Tether $41 million for making untrue or misleading statements and omissions of material fact related to the amount of reserves held backing their stablecoin. The CFTC found during a 26-month period that Tether only held 100 percent of reserves for 27.6 percent of those days;
  • False claims that reserves are fully backed by a specific asset. In the 2021 Tether finding, the CFTC found that Tether was also using non-fiat financial products as part of their reserves;
  • Unauthorized use of consumer funds. When consumers purchase a stablecoin, the USD given to the issuer in exchange for the stablecoin should go into the reserves. As seen in the FTX collapse in 2022, issuers can take the USD and use it for personal use instead;
  • Volatility in the reserve asset’s price. In March 2023, the stablecoin DAI temporarily de-pegged due to a substantial portion of its reserves being tied to another cryptocurrency. While DAI tried to maintain a one-to-one peg with the USD, about 40 percent of its reserves were in another stablecoin. As cryptocurrency pricing fell, the reserve stablecoin’s price fell and DAI temporarily de-pegged;
  • A digital “bank run” on algorithm-backed stablecoins. For stablecoins that rely on an algorithm to create or destroy stablecoins to maintain a pegged value, the algorithm must process its orders faster than the market. In some instances, algorithmic stablecoins have been subject to large selloffs in which the algorithm could not keep up with price volatility, ultimately resulting in failure of the stablecoin to maintain its pegged value. This type of run is what led to Terra’s collapse in 2022;
  • A run on the bank holding a stablecoin’s reserves. According to Reuters, the run on Silicon Valley Bank (SVB) led several stablecoins, including the second largest stablecoin in the world, USD Coin (USDC), to temporarily de-peg out of fear the stablecoins’ reserves held at SVB would not be accessible due to the run on the bank. Eventually, USDC and other affected stablecoins were able to re-peg after the Federal Deposit Insurance Corporation (FDIC) backed up insured deposits and issuers used corporate funds to fill any remaining gaps in their reserves;
  • Inability to convert reserves into liquid assets to maintain the peg. In 2024, reports surfaced that the U.S. Treasury was considering sanctions against Tether for its stablecoin’s widespread use by sanctioned entities. This possible sanction against Tether could prohibit Americans from transacting with Tether and significantly impair or wholly prevent its ability to convert its reserve of U.S. Treasury bills into liquid assets to maintain the stablecoin’s value; and
  • Use of stablecoins for illicit activities. With stablecoin values relatively consistent compared to other cryptocurrencies like Bitcoin, criminals and scammers tend to rely on stablecoins to transfer money for illicit activities. Chainalysis’ 2024 report on cryptocurrency crime trends shows that illicit transaction volume involving stablecoin payments continues to rise. In 2023, stablecoin payments made up around 60 percent of all illicit cryptocurrency payments. About 80 percent of all illicit transactions conducted by sanctioned entities and jurisdictions used stablecoins.

Cryptocurrency Kiosks

Cryptocurrency kiosks or automatic teller machines (ATMs) are machines where users can buy and sometimes sell cryptocurrencies using cash or debit cards. Users can typically send the acquired cryptocurrency to a digital wallet by scanning a QR code or entering the wallet’s address. There are two types of kiosks: unidirectional (buy-only or sell-only) and bidirectional (both buy and sell). While convenient for users to turn cash into cryptocurrency, these kiosks pose a significant risk to consumers.

According to the Federal Trade Commission, kiosks contributed to $65 million in fraud for the first half of 2024, with a reported median loss of $10,000. Scammers typically target senior citizens who are more than three times as likely as younger adults to report a loss using a kiosk. After a bogus claim, scammers inform victims that depositing cash into the kiosk will fix the purported problem. Victims then withdraw cash from their bank, deposit it into the kiosk, and use the scammer’s cryptocurrency wallet QR code that is texted to the victim.

In 2026, Kansas enacted legislation implementing required disclaimers and transaction limits for cryptocurrency kiosks operating in the state.

Policy Frameworks

With the rise of cryptocurrency exchanges, scams involving cryptocurrency kiosks, continued use of cryptocurrency, and systemic risk posed by stablecoins, federal and state governments have started to establish statutory and regulatory frameworks to manage the risks of cryptocurrency and instill more confidence in the industry as rules are created for businesses and consumers alike.

Federal Regulation

GENIUS Act of 2025

In July 2025, the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act was enacted, creating a regulatory framework for stablecoins. The bill allows permitted issuers to issue a stablecoin for use by U.S. persons, and those issuers must be regulated by the appropriate federal or state regulator.

The GENIUS Act allows states to regulate only those issuers who issue $10 billion or less in stablecoins. State regulators would “have supervisory, examination, and enforcement authority over all” of these smaller state issuers. State regulators may delegate or relinquish these authorities to the Federal Reserve (Fed).

Among other provisions, the GENIUS Act requires issuers to:

  • Maintain reserves backing the stablecoin on a one-to-one basis using U.S. currency or other similarly liquid assets;
  • Publicly disclose their redemption policy; and
  • Publish the details of their reserves on a monthly basis.

The GENIUS Act does not consider payment stablecoins as securities under securities law, but permitted issuers are still subject to the Bank Secrecy Act (BSA) for anti-money laundering and related purposes.

While the rulemaking process is ongoing, the Act officially takes effect on January 18, 2027, or 120 days after final rules are issued, whichever is earlier.

CLARITY Act of 2025

The Digital Asset Market Clarity Act of 2025 (CLARITY Act) passed the House floor and out of the Senate Committee on Banking, Housing, and Urban Affairs. It is currently on the Senate floor. The bill would create a regulatory framework for cryptocurrency and clarify the Securities and Exchange Commission’s (SEC) and Commodity Futures Trading Commission’s (CFTC) regulatory roles.

According to a Congressional Research Service memorandum, Potential Effects on SEC Jurisdiction, the SEC is the primary regulator overseeing security offerings, trading, and investment activities. The CLARITY Act would provide an exemption for investment contracts involving certain digital commodities on mature blockchains from the Securities Act of 1933 registration requirement. The bill would also allow SEC-registered market participants to engage in secondary market trading of digital assets like cryptocurrency.

The CLARITY Act would give the CFTC exclusive regulatory jurisdiction over digital commodity transactions by any entity registered or required to be registered with the CFTC. The bill would require centralized platforms that currently make up the cryptocurrency trading market, as well as digital commodity brokers and dealers, to register with the CFTC. The bill would require such platforms and brokers/dealers to:

  • Monitor trading;
  • Keep records and report out;
  • Address antitrust considerations;
  • Minimize conflicts of interest;
  • Prohibit exchanges from commingling assets in most circumstances;
  • Prohibit exchanges from trading for their own accounts in most circumstances; and
  • Offer only blockchain cryptocurrencies that are certified as mature.

State Policy

Uniform Commercial Code Revisions

The Uniform Commercial Code (UCC) is a uniform state law applied to voluntary, commercial transactions between private parties. Being state commercial law, these amendments do not address federal or state regulations, taxation, money transmitter, or money laundering laws.

In 2022, the Uniform Law Commission (ULC) made several recommendations to amend the UCC creating a new article concerning controllable electronic records (CERs) and to amend various other articles of the UCC to update language governing commercial transactions with respect to certain digital assets, including cryptocurrency. The ULC states these amendments:

  • Address emerging technologies;
  • Provide updated rules for commercial transactions involving virtual currencies, distributed ledger technologies (including blockchain), artificial intelligence, and other technological developments;
  • Span almost every article of the UCC and add a new Article 12 addressing certain types of digital assets defined as CERs;
  • Provide new default rules to govern transactions involving these new technologies; and
  • Clarify the UCC’s applicability to mixed transactions involving both goods and services.

In 2026, the ULC listed Kansas as one of ten states yet to introduce legislation implementing the 2022 amendments, while thirty-six states have enacted the amendments.

Kansas

Currently, Kansas has several areas it could implement its own cryptocurrency policy framework, including:

  • Regulating small stablecoin issuers in the state under the GENIUS Act’s provisions;
  • Implementing the UCC 2022 revisions; and
  • Including digital currency into its abandoned property laws.

New York

New York has been regulating cryptocurrencies since 2015. New York’s cryptocurrency regulatory and statutory policy framework, among the most comprehensive in the U.S., is designed primarily to ensure market integrity and consumer protection. The state’s Department of Financial Services (DFS) is the main regulator and was established in 2011. In 2015, the BitLicense framework in 23 NYCRR Part 200 under the New York Financial Services Law was established.

DFS requires virtual currency businesses to obtain a license to operate legally and subjects them to scrutiny regarding capital requirements, cybersecurity, anti-money laundering (AML) programs, corporate governance, and disclosure requirements. Additionally, DFS approves cryptocurrencies that can be listed or custodied under the framework. DFS also provides ongoing cryptocurrency guidance and industry letters.

In 2022, the state’s Department of Financial Services (Department) issued guidance indicating it would apply certain requirements to stablecoins backed by the USD and issued under the Department’s authorization. These stablecoin-specific regulations did not replace any other regulations related to the issuer or Department.

Key regulations from the guidance include the following:

  • A stablecoin must be fully backed by a reserve of assets (one-to-one backing) as of the end of each business day;
  • Stablecoin reserves must be held with a U.S. state or federally chartered depository institution insured by the FDIC or with pre-approved custodians;
  • Stablecoin reserves can only be:
  • U.S. treasury bills with maturity dates of three months or fewer;
  • Reverse repurchase agreements fully collateralized by U.S. treasury bills, notes, or bonds; or
  • Other Department-approved assets;
  • Reserves must be subject to an examination at least once per month by an independent Certified Public Accountant licensed in the United States who attests to certain reporting requirements; and
  • Stablecoin issuers must adopt clear redemption policies approved in advance by the Department allowing the user to redeem the stablecoin from the issuer at a one-to-one exchange rate for the U.S. dollar net of any fees.

California

Enacted in October 2023, the Digital Financial Assets Law (DFAL) created a regulatory framework, including licensure and enforcement authority, for certain cryptocurrency activities (including stablecoin issuance). The law requires the state’s Department of Financial Protection & Innovation (DFPI) to license and supervise many cryptocurrency asset-related companies, including stablecoin issuers, that serve California residents and provides consumer protections for users. The DFPI is currently developing its regulations.

Illinois

In 2025, Illinois passed the Digital Assets and Consumer Protection Act (Digital Assets Act) as well as the Virtual Currency Kiosk Consumer Protection Act (Kiosk Act). The Digital Assets Act establishes consumer protections like those in place for traditional financial services. The Digital Asset Act authorizes the Department of Financial and Professional Regulation to register and supervise digital asset exchanges and businesses. The Digital Assets Act defines “digital asset” to mean a digital representation of value used as a medium of exchange, unit of account, or store of value, and is not fiat currency, even if the asset is denominated in fiat currency. There are certain exceptions to the definition for specific digital assets like rewards programs and online games’ currencies.

The Kiosk Act requires kiosk operators to provide full refunds to new customers who are victims of scams at kiosks, along with other registration and reporting requirements. The Kiosk Act also places limits on transaction fees and daily transactions for new customers. The Kiosk Act defines a “digital asset exchange” as an exchange that facilitates the buying, selling, or exchanging of digital assets for fiat currency or other digital assets that is licensed to conduct business in New York as a Virtual Currency Business Activity licensee, or in California under the Digital Financial Assets Law[MD6] .

Nebraska

Enacted in 2021, and updated in 2024, Nebraska’s Financial Innovation Act (FI[LT7]  Act) defines a “stablecoin” as a controllable electronic record designed to have a stable value that is backed by a reserve asset.

The FI Act authorizes digital asset depositories to issue stablecoins and hold deposits that serve as reserves at an FDIC-insured financial institution chartered in the state or has a branch in the state. The Act also authorizes such depositories to use stablecoins for payment activities.

Such depositories would be subject to certain licensing requirements. Nebraska’s Department of Banking and Finance issued guidance indicating the following will be among those requirements:

  • Issuer-provided daily reports of key general ledger and distributed ledger numbers and a quarterly call report;
  • Periodic examination of an issuer’s general ledger balance sheet, external audits, and compliance;
  • Review of policies and procedures to prevent money laundering;
  • Compliance with “Know Your Customer” regulatory requirements;
  • Appropriate federal transaction reporting and other standard banking practices;
  • Examiner-issued confidential report to be shared with the issuer and potentially other regulators;
  • Requiring certain disclosures from issuers to consumers and investors to inform them of risks, conflicts of interest, and fees; and
  • Requiring issuers to provide at least 10 hours of live customer phone support on weekdays to serve state residents.

Texas

Enacted in 2023, the Money Services Modernization Act (MSM Act) updates the state’s money services statutes. The MSM Act defined “money” or “monetary value” to include stablecoins.

The MSM Act defines money as any stablecoin that:

  • Is pegged to a sovereign currency;
  • Is fully backed by assets held in reserve; and
  • Grants the holder the right to redeem the stablecoin for sovereign currency from the issuer.

      The MSM Act also authorizes the Texas Department of Banking to enforce its provisions.

Unlike California and Nebraska which have specific regulations related to stablecoin issuers, Texas’ MSM Act applies to all money service providers but allows those providers to participate in stablecoin activities. The only stablecoin-specific provision in the MSM Act permits providers to invest in stablecoins so long as those investments are in the same kind of stablecoin as those issued to consumers by the provider.

Wyoming

Wyoming’s cryptocurrency regulatory and statutory policy framework is considered the most pro-innovation in the U.S. The framework strives to provide legal clarity for digital assets and attract blockchain businesses while maintaining consumer protection. Areas of statutory policy related to cryptocurrency include:

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