§ Legislative Act Sector Specific
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Digital Assets Market Structure and Consumer Protection
Current Status
Existing Law: Two key regulatory bodies – the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) – have been tasked with overseeing different aspects of the crypto space. In 2016, the CFTC cemented its position stating that "bitcoin and other virtual currencies are encompassed in the definition [of commodity] and properly defined as commodities." The SEC classifies digital assets as securities under the Howey Test, which provides criteria for assets to qualify as "investment contracts." The Bank Secrecy Act (31 U.S.C. §§ 5311-5332) governs AML requirements via FinCEN. IRC §§ 6045, 6045A establish broker reporting requirements for digital assets per the Infrastructure Investment and Jobs Act (P.L. 117-58).
Current Authority: The CFTC primarily regulates commodities and their derivatives, such as futures contracts, swaps, and options under the Commodity Exchange Act (CEA). Even though the CFTC has determined that virtual currencies are commodities, the CFTC's jurisdiction over virtual currency markets is limited to policing fraudulent and manipulative activities in interstate commerce. Beyond this type of enforcement authority, the CFTC does not generally oversee virtual currency transactions or exchanges that do not involve margin, leverage, or financing. The CFTC does not currently exercise supervisory authority over non-security spot crypto asset contracts.
Existing Limitations: While both agencies have distinct roles, their jurisdictions often overlap, creating regulatory ambiguity. Currently, the SEC and the CFTC have competing definitions of cryptocurrencies. Additional clarity is needed to understand whether a digital asset should be considered a commodity or a security. A related question persists on whether the SEC and CFTC collectively have sufficient regulatory authority to properly regulate crypto markets, or if congressional action is needed.
Problem
Specific Harm
Consumer Fraud Losses: The Federal Bureau of Investigation has revealed that Americans lost approximately $9.3 billion to cryptocurrency fraud in 2024. The figure marks a 66% increase compared to the previous year. The IC3 received more than 140,000 complaints referencing cryptocurrency in 2024. The bureau reported that individuals over the age of 60 had been the most affected by crypto-related fraud, with roughly 33,000 complaints and $2.8 billion in losses.
Hacking and Theft: Crypto frauds and hacks in 2024 totaled $2.3 billion, a 40% rise from 2023. This figure spans 165 incidents. Access control vulnerabilities stood out as a primary driver of losses, responsible for 81% of the total stolen funds.
Exchange Failures: The collapse of FTX, caused by a spike in customer withdrawals that exposed an $8 billion hole in FTX's accounts, served as the impetus for its bankruptcy. Prior to its collapse, FTX was the third-largest cryptocurrency exchange by volume and had over one million users. The collapse of FTX was described by federal prosecutors as "one of the biggest financial frauds in American history."
Stablecoin Market Risks: In 2024, the total stablecoin supply increased by over 59%, reaching a new all-time high and surpassing $200 billion. USDT and USDC together account for over 90% of the $227 billion stablecoin market as of March 2025. The reported composition of collateral backing stablecoins has evolved noticeably since 2022. Nevertheless, as of December 2024, Tether, the largest stablecoin issuer, still reportedly holds 18 percent of its reserves in less liquid and riskier assets, such as other non-stablecoin crypto assets and loans.
Who is Affected
21% of respondents to surveys own crypto. This tracks with a separate survey conducted by the National Cryptocurrency Association and Harris Poll finding that 21% of U.S. adults (55 million people) own crypto. 28% of Americans now own cryptocurrencies.
North America remains the largest cryptocurrency market globally, with an estimated $1.3 trillion in on-chain value received between July 2023 and June 2024, representing about 22.5% of global activity.
Elderly Americans aged 60 and older were most vulnerable to such fraud trends, having reported losses of over $2.83 billion. Nearly 30% of total crypto fraud losses came from individuals over 60.
Gaps in Current Law
Jurisdictional Ambiguity: A turf war has been brewing between the CFTC and SEC over which agency should regulate cryptocurrencies. This turf war has many moving components, but the focus always comes back to one question: which cryptocurrencies are commodities, and which cryptocurrencies are securities?
No Spot Market Authority: The CFTC cannot require a spot crypto exchange to register with the CFTC. As a result, the CFTC is said to have "enforcement jurisdiction" over cryptocurrency and digital assets, but not "registration jurisdiction."
Stablecoin Regulation Gap: While the CFTC has claimed that stablecoins may fall under its jurisdiction as commodities, the SEC has argued that certain stablecoin issuers could be offering investment contracts. This uncertainty has led to ongoing debates about whether stablecoins are commodities, securities, or something else entirely.
Customer Asset Protection: Instances of loss involving crypto firms expose a structural deficiency in custody practices—specifically a lack of basic investor protections such as segregation of client assets, separation of activities, proper control over assets, clear avenues for recourse, and sufficient capital to absorb losses.
Accountability Failures
Alameda Research suffered losses in May and June 2022, which resulted in FTX lending the trading firm more than half of its customer funds. This was explicitly forbidden by FTX's terms of service. FTX used software to conceal the misuse of customer funds.
FinCEN and federal regulators issued over three dozen enforcement actions in 2024 for BSA/AML compliance failures. In 2024, FinCEN and the federal bank regulators announced more than three dozen enforcement actions against banks and individuals arising from alleged BSA/AML compliance failures.
Proposed Reform
Primary Policy Change
Establish comprehensive federal regulatory framework for digital assets that:
- Provides clear SEC/CFTC jurisdictional boundaries based on decentralization criteria
- Creates federal licensing and oversight for stablecoin issuers with reserve requirements
- Mandates customer asset segregation and capital requirements for exchanges/custodians
- Modernizes Bank Secrecy Act compliance for digital asset service providers
- Pre-empts conflicting state laws for interstate digital asset commerce
New Requirements
1. Jurisdictional Clarity Framework
The CFTC must regulate a digital asset as a commodity if the blockchain on which it runs is functional and decentralized. The bill classifies a blockchain as decentralized if, among other requirements, no person has unilateral authority to control the blockchain or its usage, and no issuer or affiliated person has control of 20% or more of the digital asset or the voting power of the digital asset.
The SEC must regulate a digital asset as a security if its associated blockchain is functional but not decentralized. However, certain exceptions to SEC regulation for digital assets limit annual sales, restrict nonaccredited investor access, and satisfy disclosure and compliance requirements.
2. Stablecoin Issuer Requirements (Building on GENIUS Act framework)
This legislation creates a federal regulatory system for stablecoins, ensuring their stability and trust through strong reserve requirements. The Act requires 100% reserve backing with liquid assets like U.S. dollars or short-term Treasuries and requires issuers to make monthly, public disclosures of the composition of reserves.
The Act explicitly subjects stablecoin issuers to the Bank Secrecy Act, thereby clearly obligating them to establish effective anti-money laundering and sanctions compliance programs with risk assessments, sanctions list verification, and customer identification.
In the event of insolvency of a stablecoin issuer, the Act prioritizes stablecoin holders' claims over all other creditors.
3. Exchange and Custodian Requirements
The CLARITY Act addresses digital asset custody by expanding the definition of "qualified custodian" to include CFTC-registered entities, thereby allowing both banks and non-bank institutions to serve as custodians. Section 105 directs the SEC and CFTC to jointly establish rules governing custody, including requirements for the segregation of customer assets, operational risk controls and disclosure standards.
Requirements include segregation of customer assets, prohibition on undisclosed use of customer assets for staking or other "blockchain services," and that such services may be offered only with a customer's express, written consent.
Financial institutions must separately account for and segregate customer virtual currency from the corporate assets of the institution itself and maintain clear records to identify customer assets and trace customer transactions.
4. Tax Reporting Modernization
Brokers are required to report gross proceeds on the sale of digital assets beginning in 2026 for all sales in 2025. Brokers will be required to also report information on the tax basis for certain digital assets beginning in 2027 for sales in 2026.
Beginning January 1, 2025, brokers like Coinbase are required to report the gross proceeds from crypto sales and exchanges on a new tax form called the 1099-DA.
5. DeFi Oversight Framework
The bill would create a safe harbor for "decentralized finance activities," which would largely exempt certain users from compliance who participate in or provide services for the operations and maintenance of blockchain networks.
Require DeFi protocols exceeding $100 million TVL to:
- Designate a U.S.-based compliance contact
- Implement smart contract audit requirements
- Provide risk disclosures to users
6. Self-Regulatory Organization Framework
The CFTC works in tandem with the National Futures Association (NFA), a self-regulatory organization that registers and regulates market intermediaries.
Authorize SEC and CFTC to approve digital asset SROs modeled on FINRA/NFA with:
- Examination and enforcement authority delegated from primary regulators
- Mandatory membership for registered digital asset intermediaries
- Rulemaking subject to SEC/CFTC approval
- GAO audit authority every three years
New Prohibitions
Commingling Ban: Prohibition on any digital asset exchange or custodian commingling customer assets with proprietary funds or using customer assets without explicit written consent
Unauthorized Stablecoin Issuance: Prohibition on any person other than a permitted payment stablecoin issuer from issuing a payment stablecoin in the U.S.
Misleading Representations: Stablecoin issuers must comply with strict marketing rules to protect consumers from deceptive practices. They are forbidden from making misleading claims that their stablecoins are backed by the U.S. government, federally insured, or legal tender.
Algorithmic Stablecoin Restrictions: Two-year moratorium on new algorithmic/endogenously collateralized stablecoins pending Treasury study
Unregistered Operation: Prohibition on operating a digital asset exchange, custody service, or broker-dealer function without appropriate SEC, CFTC, or state registration
Enforcement (The "Teeth")
Civil Penalties:
- First-tier violations: Up to $250,000 per violation
- Second-tier violations (reckless conduct): Up to $500,000 per violation
- Third-tier violations (willful fraud): Up to $1,000,000 per violation or three times gains
Criminal Penalties:
- Willful violations: Up to 20 years imprisonment
- Fraud causing substantial loss: Up to 25 years imprisonment
Enhanced Oversight:
- GAO required to conduct biennial audit of SEC/CFTC digital asset programs
- Inspectors General of Treasury, SEC, and CFTC granted concurrent jurisdiction
- Judicial Conference to establish specialized digital asset case management procedures
Whistleblower Program:
- Awards of 10-30% of sanctions exceeding $1 million
- Anti-retaliation protections matching Dodd-Frank standards
What Changes
Before
| Issue | Status Quo |
|---|---|
| Jurisdiction | Competing SEC/CFTC claims; case-by-case enforcement |
| Spot Markets | No federal registration or oversight authority |
| Stablecoins | Unregulated; varying reserve quality and transparency |
| Customer Assets | No segregation mandate; commingling permitted |
| Tax Reporting | Limited broker reporting; cost basis uncertainty |
| DeFi | Regulatory vacuum; unclear compliance obligations |
| State Laws | Patchwork of 50+ state regimes |
After
| Issue | Reformed State |
|---|---|
| Jurisdiction | Clear decentralization test determines SEC vs CFTC |
| Spot Markets | CFTC registration authority over digital commodity spot markets |
| Stablecoins | 1:1 reserve backing; OCC/Federal Reserve oversight; monthly attestations |
| Customer Assets | Mandatory segregation; qualified custodian requirements |
| Tax Reporting | Form 1099-DA; broker reporting of proceeds and basis |
| DeFi | Safe harbor with disclosure requirements for qualifying protocols |
| State Laws | Federal pre-emption for interstate commerce; state authority preserved for intrastate |
ROI
Federal Budget Impact (10-Year, CBO-Scoreable)
Costs:
| Item | 10-Year |
|---|---|
| SEC Digital Asset Division staffing (200 FTEs) | $0.8B |
| CFTC Spot Market oversight expansion (150 FTEs) | $0.6B |
| FinCEN digital asset compliance unit | $0.3B |
| OCC stablecoin examination program | $0.2B |
| GAO oversight and audit capacity | $0.1B |
| Technology/infrastructure modernization | $0.4B |
| Contingency (15%) | $0.4B |
| Total Costs | $2.8B |
Savings:
| Item | Gross | Capture | Net |
|---|---|---|---|
| Reduced fraud losses (federal enforcement)¹ | $20.0B | 5% | $1.0B |
| Registration/examination fee revenue² | $2.5B | 90% | $2.3B |
| Enhanced tax compliance revenue³ | $15.0B | 60% | $9.0B |
| Civil penalty collections | $1.5B | 50% | $0.8B |
| Total Savings | $39.0B | $13.1B |
¹ Based on FBI reported $9.3 billion in cryptocurrency fraud losses in 2024, projected over 10 years with modest federal intervention impact ² Exchange and custodian registration fees modeled on existing SEC/CFTC fee structures ³ The regulations implement digital asset reporting requirements by the Infrastructure Investment and Jobs Act; Treasury estimates enhanced compliance
Result: Net +$10.3B · ROI 4.7:1
Societal Benefits
| Benefit | Annual | NPV (3%) | NPV (7%) |
|---|---|---|---|
| Reduced consumer fraud losses¹ | $4.5B | $38.4B | $31.6B |
| Market efficiency gains² | $1.2B | $10.2B | $8.4B |
| Regulatory certainty (investment)³ | $2.0B | $17.1B | $14.0B |
| International competitiveness⁴ | $0.8B | $6.8B | $5.6B |
| Total | $8.5B | $72.5B | $59.6B |
¹ Assumes 50% reduction from FBI IC3 reported $9.3 billion in losses through enhanced oversight ² Reduced transaction costs and market fragmentation from unified regulation ³ The strong bipartisan vote demonstrates significant support in Congress for digital asset legislation; industry investment expected to increase ⁴ Industry signatories warned that "American innovators will continue to migrate offshore" in the absence of congressional efforts to develop a regulatory framework
Summary
| Category | 10-Year | Notes |
|---|---|---|
| Federal Budget | +$10.3B (4.7:1) | CBO-scoreable; conservative capture rates |
| Societal | $59.6B - $72.5B | NPV at 7-3%; includes fraud reduction |
Confidence: MEDIUM — Strong data on fraud losses and market size; uncertainty in behavioral response to regulation; tax compliance gains depend on IRS implementation capacity
References
- FBI Internet Crime Complaint Center, 2024 IC3 Annual Report (April 2025)
- Chainalysis, Crypto Hacking Report 2024 (December 2024)
- CoinGecko, State of Stablecoins 2024 (September 2024)
- Federal Reserve Bank of New York, Stablecoins and Crypto Shocks: An Update (April 2025)
- Cyvers, Annual Crypto Security Report 2024 (December 2024)
- U.S. House of Representatives, H.R. 4763, Financial Innovation and Technology for the 21st Century Act (May 2024)
- U.S. Senate, S. 1582, GENIUS Act of 2025 (July 2025)
- FinCEN, Guidance on Application of BSA to Virtual Currency Business Models, FIN-2019-G001 (May 2019)
- IRS, Final Regulations on Digital Asset Broker Reporting, T.D. 9972 (June 2024)
- SEC, Statement on Financial Innovation and Technology for the 21st Century Act (May 2024)
- Motley Fool, 2025 Cryptocurrency Investor Trends Survey (January 2025)
- National Cryptocurrency Association/Harris Poll, 2025 State of the Crypto Holders Report (2025)
- Security.org, 2025 Cryptocurrency Adoption and Consumer Sentiment Report (December 2024)
- Bank for International Settlements, Working Paper No. 1270: Stablecoins and Safe Asset Prices (2025)
- New York Department of Financial Services, Guidance on Virtual Currency Custody (September 2025)
- Latham & Watkins, U.S. Crypto Policy Tracker (August 2025)
Change Log
- 2025-12-09 - Created: Initial draft. Key sources: FBI IC3 2024 Annual Report, GENIUS Act (P.L. 119-XX), FIT21 (H.R. 4763), FinCEN BSA guidance, IRS digital asset reporting regulations, Chainalysis/Cyvers security reports, Federal Reserve stablecoin research.