U.S. Department of the Treasury 

Crypto-Assets: 

Implications for Consumers, Investors, 

and Businesses 

September 2022 

TABLE OF CONTENTS 

I. EXECUTIVE SUMMARY............................................................................................. 1 

Listening to the Public............................................................................................................................... 4 

II. OVERVIEW OF CRYPTO-ASSET MARKETS ECOSYSTEM................................................. 4 

Descriptions of Key Terminology........................................................................................................... 4 

Crypto-assets....................................................................................................................................... 4 

Wallets, Keys, and Custody ................................................................................................................ 6 

Entities Providing Services or Products in Crypto-asset Markets .............................................. 7 

Crypto-asset Platforms ....................................................................................................................... 7 

Miners and Validators ......................................................................................................................... 11 

Data Aggregators ................................................................................................................................ 12 

Traditional Financial Institutions ....................................................................................................... 12 

III. CRYPTO-ASSET MARKET TRENDS, USES, AND OPPORTUNITIES ................................. 13 

Market Size .............................................................................................................................. 13 

Current Uses and Opportunities in Crypto-assets for Consumers, Investors, and Businesses ... 15 

Native Crypto-asset Financial Markets, Products, and Services ...................................................... 15 

Financial Market and Payment System Infrastructures .................................................................. 19 

Other Commercial Activities ............................................................................................................... 22 

IV. RISKS AND EXPOSURES FOR CONSUMERS, INVESTORS, AND BUSINESSES ................... 25 

Conduct Risks .......................................................................................................................... 26 

Fraud, Thef, and Mismanagement.................................................................................................... 26 

Information Asymmetry: Lack of Transparency ................................................................................ 29 

Operational Risks ................................................................................................................... 33 

General Features and Decentralized Governance ............................................................................ 34 

Security and Scalability Tradeofs and De-anonymization .............................................................. 35 

Peer-to-Peer Verification, Mining Pools, and Validation Incentives.................................................. 35 

Risks in Crypto-asset Intermediation ...................................................................................... 37 

Resources and Capabilities Risks ....................................................................................................... 37 

Custody Risks....................................................................................................................................... 37 

Risk Exposures: Regulatory Non-Compliance and Evolving Market Oversight .......................... 38 

Efects of Legal and Regulatory Non-Compliance ............................................................................ 40 

Efects of Changes in the Scope and Application of Laws and Regulations..................................... 40 

V. OPPORTUNITIES AND RISKS FOR POPULATIONS VULNERABLE 

TO DISPARATE IMPACTS ......................................................................................... 41 

Potential Opportunities for Populations Vulnerable to Disparate Impacts................................ 42 

Expanded Access to Financial Services ............................................................................................. 42 

Reduced Transaction Costs................................................................................................................. 44 

Potential Opportunities to Build Wealth............................................................................................45 

Potential Risks to Populations Vulnerable to Disparate Impacts............................................... 46 

Market Volatility and Inadequate Disclosures................................................................................... 46 

Targeting ............................................................................................................................................. 47 

Privacy and Surveillance Risks ........................................................................................................... 49 

VI. RECOMMENDATIONS .................................................................................... 50 

1 

1 

CRYPTO-ASSETS: 

IMPLICATIONS FOR CONSUMERS, INVESTORS, AND BUSINESSES 

Executive Order 14067 on Ensuring Responsible Development of Digital Assets; Section 5(b)(i)—the 

implications of developments and adoption of digital assets and changes in financial market and 

payment system infrastructures for U.S. consumers, investors, businesses, and for equitable 

economic growth. 

I. EXECUTIVE SUMMARY 

Digital asset markets have changed and grown dramatically over the past decade based on estimates 

of market capitalization, transaction volumes, and the number and types of assets. Millions of people 

globally have some exposure to crypto-assets, including at least 12% of Americans. President Biden’s 

Executive Order on Ensuring Responsible Development of Digital Assets (Executive Order) observes 

that continued expansion of crypto-based technology could have profound implications for the users 

of crypto-assets—namely, consumers, investors, and businesses. 

Pursuant to the Executive Order, this report reviews the current crypto-asset markets and trends that 

inform the potential opportunities and risks associated with their use. This report focuses on cryptoassets rather than digital assets more broadly as crypto-assets are currently at the center of the 

consumer and investor experience.1

 This report also discusses the implications of these opportunities 

and risks for consumers, investors, and businesses, with an eye towards those aspects afecting 

populations vulnerable to disparate impacts. 

Despite the recent expansion in the number and type of crypto-assets and activities, crypto-asset 

products are primarily used to trade, lend, and borrow other crypto-assets. Their use in performing 

other activities is currently limited and the potential for blockchain technology to transform the 

provision of financial services, as espoused by developers and proponents, has yet to materialize. 

Nevertheless, it is possible that new products and use cases could emerge. 

Ensuring Responsible Development of Digital Assets, 87 Fed. Reg. 14143 Section 9(d) (Mar. 9, 2022). The term “digital assets” is defined 

by the Executive Order to include cryptocurrencies, stablecoins, and Central Bank Digital Currencies (CBDCs). This report uses the term 

“crypto-assets” to refer to all digital assets that are not CBDCs. The terms used in this report also generally reflect the meanings commonly 

used by the industry and market participants, with modifications and clarifications as appropriate. While labels may vary, the terms are 

also meant to be consistent with the meanings used in other reports mandated by the Executive Order. These are not legal definitions, 

unless otherwise noted, and their use in this report does not suggest the instruments, entities, concepts, or activities are subject to 

diferent legal or regulatory frameworks than their analogues in traditional financial markets. The objective behind the use of certain 

terminology is to emphasize the functions and activities associated with crypto-assets to facilitate an understanding of crypto-asset 

markets and the attendant opportunities and risks. The context in which crypto-assets are ofered, sold, transferred, and otherwise used 

distinguishes whether a user has the characteristics of a consumer, investor, or business, or some combination of those characteristics. 

For example, a person engaging in self-directed trading, holding, or staking of crypto-assets with the expectation of realizing price 

appreciation or earning a return would be characterized as an investor. A person using crypto-assets to pay for goods and services might 

be characterized, at least in part, as a consumer, and a seller of those goods or services might be characterized as a business. These 

characterizations are meant to provide readers with a functional understanding of the ways in which the public interact with cryptoassets—they are not meant to convey any conclusions regarding the legal classification of the products, activities, or entities involved. 

In all cases, users may interact with diferent intermediaries and may experience varying degrees of exposure to crypto-asset products, 

services, and technology. 
2 

In addition, both the existing use cases, and potential opportunities, come with risks, including 

conduct and market integrity risks, operational risks, and intermediation risks (i.e., traditional financial 

risks that have the potential to manifest in particular ways in the crypto-asset markets). Some risks 

are unique to the crypto-asset ecosystem, while others are versions of those experienced in traditional 

financial markets that may be heightened when experienced in the crypto-asset ecosystem. 

Consumers and investors are exposed to improper conduct in the crypto-asset ecosystem for a variety 

of reasons, including a lack of transparency as well as the fact that crypto-assets have relatively novel 

and rapidly developing applications. This leads to frequent instances of operational failures, market 

manipulation, frauds, thefs, and scams. While the data for populations vulnerable to disparate 

impacts remains limited, available evidence suggests that crypto-asset products may present 

heightened risks to these groups, and the potential financial inclusion benefits of crypto-assets largely 

have yet to materialize. 

Consistent with the objective of protecting consumers, investors, and businesses, as well as promoting 

responsible development of payment innovations and digital assets, this report recommends that 

relevant agencies adopt a multi-part approach to address relevant risks associated with the cryptoasset sector using their existing authorities. This approach prioritizes the need for urgent action to 

protect consumers, investors, and businesses, even as stakeholders continue to debate legislative 

proposals on the subject of crypto-asset market regulation. It builds on and complements actions 

recommended in other reports pursuant to the Executive Order, including the report under Section 

4(b) on the future of money and payments, the report under Section 6(b) on financial stability risks and 

regulatory gaps, and the report under Section 7(b) on illicit finance risks. 

Recommendation 1: U.S. regulatory and law enforcement agencies should, as appropriate, 

vigilantly monitor the crypto-asset sector for unlawful activity, aggressively pursue 

investigations, and continue to bring civil and criminal actions to enforce applicable laws with 

a particular focus on consumer, investor, and market protection. 

Frauds, thefs, and scams have emerged as an especially grave area of concern in cryptoassets, with estimates of claimed losses reaching billions of dollars and causing material harm 

to U.S. consumers, investors, and businesses. 

Recommendation 2: U.S. regulatory agencies should continue using their existing authorities 

to issue supervisory guidance and rules, as needed, to address current and emerging risks in 

crypto-asset products and services for consumers, investors, and businesses. Agencies should 

work collaboratively to promote consistent and comprehensive oversight that addresses the 

risks identified in this report. 

Many U.S. regulatory agencies have already issued guidance or statements related to market 

participants within their respective jurisdictions. Such actions benefit consumers and 

investors of crypto-assets and entities ofering crypto-asset products and services by reducing 

uncertainty for business operations and raising conduct standards to facilitate responsible 

innovation. 
3 

The regulators should also review existing regulations and take appropriate steps to address: 

(i) consumer and investor confusion regarding the regulation of crypto-asset products and 

services and (ii) gaps in disclosures by market participants promoting crypto-asset products or 

services and operational and technical obligations of crypto-asset intermediaries. 

Crypto-assets are a new and rapidly developing financial product and activity that can 

implicate the jurisdictions and interests of multiple federal and state regulatory and law 

enforcement authorities. As such, active collaboration and coordination is necessary to ensure 

that crypto-asset products, services, activities, and data are subject to, and in compliance 

with, appropriate supervision, oversight, regulation, collection, and disclosure requirements. 

In addition to financial risks, the use of public, also known as “permissionless,” blockchains 

exposes users to novel forms of operational risks. It is critical that regulators work to 

address these risks, including through the expanded application of existing operational risk 

management standards, when possible, and enhanced use of supervisory guidance, as well as 

alerts to consumers, investors, and businesses to adopt improved diligence tactics. 

Recommendation 3: U.S. authorities should work individually and through the Financial 

Literacy and Education Commission (FLEC), as appropriate, to ensure that U.S. consumers, 

investors, and businesses have access to trustworthy information on crypto-assets. 

To help address the extensive risks associated with engagement in crypto-asset markets, as 

well as the prevalence of frauds, thefs, scams, and other undesirable practices in the sector, 

the FLEC should coordinate and promote consumer and investor education eforts for cryptoassets, ensuring that consumer- and investor-friendly, trustworthy, and consistent educational 

materials are accessible and inclusive. 

In light of the lack of data and information on the use of crypto-assets by populations 

vulnerable to disparate impacts, FLEC member agencies should also explore using existing 

surveys to collect new or additional data that can help facilitate better understanding of the 

opportunities and risks facing these populations. 

Finally, the FLEC should, where appropriate, engage with industry leaders, academics, and 

other relevant parties to promote and coordinate public and private strategies for financial 

education outreach to consumers. 
4

 

 

 Listening to the Public 

In drafing this report, Treasury benefitted from the wide-ranging insights of members of the 

public by issuing a request for comment (RFC). The RFC ofered an opportunity for interested 

parties to provide input, data, and recommendations pertaining to the implications of the 

development and adoption of digital assets for U.S. consumers, investors, and businesses. 

Through the RFC, Treasury received valuable and diverse input from members of the public 

across the country that reflected a strong desire for engagement. Treasury received over 260 

unique responses with over 280 signatories, including over 90 organizations. The submissions 

were made on behalf of over 10,000 member firms and hundreds of thousands of supporters and 

individuals. These organizations represent a broad range of stakeholders, including communities 

impacted by digital asset mining, technology developers, industry stakeholders, financial 

institutions, consumer advocates, and academics. 

The data and insights shared through the RFC demonstrated a variety of views among 

commenters on the responsible development of digital assets, as well as on the implications 

for U.S. consumers, investors, and businesses. Commenters generally expressed their desire 

for action with respect to digital assets and supported the coordinated government approach 

pursued by the Administration. 

Comments submitted in response to the RFC are available at: 

www.regulations.gov/document/TREAS-DO-2022-0014-0001 

II. OVERVIEW OF CRYPTO-ASSET MARKETS ECOSYSTEM 

As directed by the Executive Order, this report discusses the implications of developments and 

adoption of crypto-assets and changes in financial market and payment system infrastructures for U.S. 

consumers, investors, businesses, as well as implications for equitable economic growth. The cryptoasset ecosystem is complex, incorporating a number of concepts, entities, and terminology, much of 

which may not be entirely uniform. To facilitate and frame the subsequent discussion, this part of the 

report describes key terms and concepts and provides an overview of the crypto-asset markets. 

Descriptions of Key Terminology 

Crypto-assets 

The central term in this report is “crypto-assets.” Throughout this report, “crypto-assets” refer broadly 

and generically to all types of representations of value or claims in digital form that rely on the use of a 

method of distributed ledger technology (DLT),2

 excluding central bank digital currencies (CBDCs).3 

2 The foundation of the crypto-asset ecosystem is DLT and blockchains. See Section 9(a) of the Executive Order for the relevant definition, 

which will be used interchangeably, unless the specific context requires a more precise distinction. Technically, a blockchain is a type of 

DLT, while a digital ledger may or may not be a blockchain. See, e.g., MohaMMad Jabed Morshed Chowdhury, alan ColMan, MuhaMMad ashad Kabir, 

Jun han & Paul sarda, bloCKChain Versus database: a CritiCal analysis (institute of eleCtriCal and eleCtroniCs engineers, 2018), https://ieeexplore.ieee. 

org/abstract/document/8456055. 

3 Section 9(b) of the Executive Order defines CBDCs as “a form of digital money or monetary value, denominated in the national unit of 

account, that is a direct liability of the central bank.” CBDCs are not grouped with other crypto-assets for purposes of this report, and will 

be addressed by other reports mandated by the Executive Order. The United States currently does not have a CBDC. 
5 

 

 

 

 

 

 

 

Crypto-assets may be original and integral creations of an underlying distributed ledger or blockchain— 

sometimes referred to as being “native” to a given network. Alternatively, they may be “tokenized” 

representations of assets, including other crypto-assets or assets issued by traditional financial institutions 

or entities—such as stocks or bonds—with no initial reliance on DLT. Digital or tokenized representations 

of assets are also included in the term “crypto-assets.” Industry and market participants may use multiple 

other terms interchangeably with the term crypto-assets, including “coins” and “tokens.”4

 References in 

this report to coins and tokens should be taken to refer generically to crypto-assets. 

Each type of crypto-asset may have diferent convertibility, fungibility, and other attributes.5

 While there 

is no universally accepted industry nomenclature, there are some common terms for various categories 

of crypto-assets, including what are referred to as “utility tokens” and “governance tokens.” Utility 

tokens purport to allow users to access products or services on a decentralized platform, discussed more 

below, while governance tokens claim to confer certain voting rights to holders regarding decisions to 

influence the operation of a decentralized autonomous organization (DAO) or to govern proposed code 

changes to other decentralized protocols.6

 Other tokens may seek to tokenize traditional financial assets. 

Market participants ofen distinguish between “fungible” or “non-fungible” tokens, with each 

type being created according to a diferent token standard.7

 For fungible tokens, each token unit 

must be equal in character and value to other token units, and therefore indistinguishable and 

interchangeable. Stablecoins are an example of one type of fungible token. Stablecoins are designed 

with the goal of maintaining a stable value, usually in relation to a fiat currency or other assets.8 

Non-fungible tokens (NFTs) are crypto-assets that are created using sofware code that is not fungible 

with other sofware code. NFTs purport to represent a claim or receipt on an asset or object that 

has inherently unique characteristics or that difers from similar assets in some distinguishable way. 

Although NFTs are tradeable, they are not interchangeable. Proponents of NFTs claim they have many 

potential applications, such as representations of collectible items (for example, art or music), digital 

goods, individual identification credentials, access keys, property deeds or titles, or tickets for travel or 

events. However, the legal rights aforded by NFTs are unclear and have been subject to litigation.9 

4 Another common term is “cryptocurrency.” Section 9(c) of the Executive Order defines cryptocurrencies as referring to “a digital asset, 

which may be a medium of exchange, for which generation or ownership records are supported through a distributed ledger technology 

that relies on cryptography, such as a blockchain.” Though the term is in general use by the public, a “cryptocurrency” does not have all 

the attributes of “real” currency, as defined in 31 C.F.R. § 1010.100(m), including legal tender status. 

5 An additional attribute of crypto-assets may be their status as legal tender. A CBDC issued by a central bank would by definition be legal 

tender. See the report required by Section 4(b) of the Executive Order (Section 4 Report) for additional discussion of CBDCs. 

6 A DAO can be described as a system of administration that aspires to operate according to a set of encoded and transparent rules or smart 

contracts. A DAO governance token allows holders to vote on decisions pertaining to the underlying decentralized finance protocol. See 

Part IV for a discussion of the risks associated with crypto-asset investments and their governance. 

7 On the Ethereum blockchain, for example, fungible tokens can be created according to the ERC-20 Token Standard. See ethereuM, ERC20 Token Standard, (May 22, 2022), https://ethereum.org/en/developers/docs/standards/tokens/erc-20. Non-fungible tokens, however, 

can be created according to the ERC-721 Token Standard. See ethereuM, ERC-721 Non-Fungible Token Standard, (Jun. 23, 2022), https:// 

ethereum.org/en/developers/docs/standards/tokens/erc-721. 

8 Section 9(e) of the Executive Order defines stablecoins as “a category of cryptocurrencies with mechanisms that are aimed at maintaining 

a stable value, such as by pegging the value of the coin to a specific currency, asset, or pool of assets or by algorithmically controlling 

supply in response to changes in demand in order to stabilize value.” For more information on stablecoins, see, e.g., President’s worKing 

grouP on finanCial MarKets, the federal dePosit insuranCe CorPoration & the offiCe of the CoMPtroller of the CurrenCy, rePort on stableCoins (2021), 

https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf. 

9 Juliet M. Moringiello & Christopher K. Odinet, The Property Law of Tokens, florida law reView (Vol. 74, 2022), at 647, https://papers.ssrn.com/ 

sol3/papers.cfm?abstract_id=3928901. 
6 

 

 

 

Wallets, Keys, and Custody 

Another important concept in the crypto-asset ecosystem is the storage of crypto-assets in a digital 

wallet. A digital wallet is a sofware application, piece of hardware, or other device or service that 

stores a user’s public and private cryptographic keys, which allow users to interact with one or more 

blockchains and, inter alia, to send and receive crypto-assets. A public key is the cryptographic 

address that a user shares with others on a blockchain to conduct crypto-asset transactions and must 

be paired with a user’s private key to prove ownership of crypto-assets and to authorize transactions. 

A private key is the cryptographic password necessary to access the crypto-assets associated with a 

wallet address, and therefore must be kept secure.10 

A user’s holdings of crypto-assets are not stored in a wallet, but instead are recorded on the 

blockchain, and can only be controlled with the user’s private key. A wallet may be compatible with 

one specific blockchain (a single-chain wallet), or it may support information from multiple diferent 

blockchains (a multi-chain wallet). 

Wallets are central to the concept of crypto-asset custody. Custodial wallets, sometimes referred to 

as “hosted” wallets, are provided and maintained by an intermediary or third-party service provider. 

Custodial wallets generally can be used to facilitate buying, selling, or transferring of crypto-assets, 

and are provided by many centralized trading platforms. In contrast, with non-custodial wallets, 

sometimes referred to as “un-hosted” wallets, users are responsible for their own wallets and private 

keys.11 With either type of wallet, if a user’s private key is lost, forgotten, or destroyed, for example, 

there is typically no way to recover access to their crypto-assets. 

Digital wallets generally require the use of Internet-connected hardware to receive and transmit the 

underlying information. While the accessibility of wallets that are directly connected to the Internet 

(sometimes referred to as “hot wallets”) makes them more user-friendly,12 they can also be more 

vulnerable to thef and fraud and therefore pose more risks to users. In contrast, “cold wallets” 

allow users to store their private keys in a physical storage device or other piece of hardware that 

is maintained ofline, making it remote from hacking attempts, but that can be brought online to 

conduct transactions. Depending on how it is physically stored, a cold-storage wallet can also be 

vulnerable to loss, thef, damage, or destruction. Just like physical wallets can be lost or stolen, 

crypto-asset wallets can be hacked, or private keys can be lost or compromised, leading to a loss of 

funds or credentials. 

A crypto-asset custodian could be a bank, broker-dealer, or other traditional financial institution, or it 

could be a financial technology (fintech) company. Custody involves holding the customer’s private 

key that controls access to their crypto-asset holdings. Custodians might safekeep crypto-asset 

owners’ keys by encrypting them or using a cold storage system (generating and keeping keys ofline) 

10 A private key is used as part of an asymmetric cryptographic algorithm such that it, when paired with another unique element of 

cryptographic data, is necessary to decrypt data or authorize a transaction. See, e.g., Dylan yaga, Peter Mell, niK roby & Karen sCarfone, 

bloCKChain teChnology oVerView 11 (national institute of standards and teChnology, Internal Report-8202, 2018), https://nvlpubs.nist.gov/ 

nistpubs/ir/2018/NIST.IR.8202.pdf. 

11 See Vishal Chawla, Slope wallet provider saved user seed phrases in plain text, Solana security researchers find, the bloCK (Aug. 4, 2022), 

https://www.theblock.co/post/161425/slope-wallet-provider-saved-user-seed-phrases-in-plain-text-solana-security-researchers-find. 

12 Many hot wallets are free, tend to be easier for consumers and investors to use, and because they are ofen connected to a platform or 

“exchange,” they may support a large number of tokens and coins. 
7 

 

 

 

 

 

and may provide direct custody (i.e., manage customers’ crypto-assets themselves) or use a subcustodian.  As discussed more below, there are questions as to which party (the owner or custodian 

or sub-custodian) has ownership or control over crypto-assets held in hosted wallets, which has 

important implications in the event of the bankruptcy or receivership of the custodial or sub-custodial 

provider.13 

Entities Providing Services or Products in Crypto-asset Markets 

Many types of entities in the crypto-asset ecosystem provide a variety of services or products to 

consumers, investors, and businesses. Many of the early movers in the space are native to the digital 

ecosystem and attempt to facilitate the use of services or products that rely on the operation of the 

underlying blockchain or distributed ledger technology. Recent entrants include more traditional 

financial intermediaries seeking to facilitate their customers’ participation in crypto-asset markets. 

Some relevant crypto-asset entities are described below. 

Crypto-asset Platforms 

Crypto-asset platforms or “exchanges” facilitate an array of activities in various types of crypto-assets, 

including coins, tokens, stablecoins, and NFTs.14 These platforms may be, for example, facilities or 

systems that bring together multiple buyers and sellers of crypto-assets to trade.15 The number and 

prevalence of crypto-asset platforms has grown along with the proliferation of coins and tokens and as 

more consumers and investors have entered the space. 

Some registered futures or securities exchanges are ofering certain types of registered and regulated 

crypto-asset-based products, such as futures contracts or exchange-traded funds, alongside their more 

traditional product oferings. Most crypto-asset platforms, however, are relatively new or recently 

created facilities and systems formed by technology firms focusing exclusively on crypto-assets. Such 

platforms may take the position that they operate outside of existing regimes of market regulation, 

which may not be accurate and may create risk for investors and consumers.16 

Crypto-asset platforms take two forms, “centralized” and “decentralized,” each of which implicates 

distinct opportunities and risks for consumers, investors, and businesses.17 

13 See Part IV, Risks and Exposures for Consumers, Investors, and Businesses, for discussions of bankruptcy, safekeeping, and custody of 

crypto-assets. 

14 Crypto-asset platforms are commonly referred to in the media and by the industry as “exchanges.” In the context of U.S. market 

regulation, however, the term “exchange” is generally reserved for certain entities such as national securities exchanges (i.e., stock 

exchanges) or designated contract markets (i.e., futures exchanges) that are registered (or exempt from registration by rule or order) 

with either or both the Securities and Exchange Commission or the Commodity Futures Trading Commission. Unless explicitly noted 

otherwise—for example, through use of the phrase “registered exchange”—use of the term exchange in this report does not imply 

registration with or regulation by any regulatory authority and, for this reason, use of the more generic term “platform” is preferred. It 

should be noted that because an entity is referred to as a “platform” does not mean that it does not have a legal obligation to register as 

an exchange with the proper agency or agencies. 

15 iosCo, issues, risKs and regulatory Considerations relating to CryPto-asset trading PlatforMs 4 (2020), https://www.iosco.org/library/pubdocs/ 

pdf/IOSCOPD649.pdf. 

16 See, e.g., seC, order instituting Cease-and-desist ProCeedings in the Matter of bloCKfi lending, llC (2022), https://www.sec.gov/litigation/ 

admin/2022/33-11029.pdf. 

17 “Centralized” and “decentralized” are the terms most commonly used by the industry and market participants to distinguish types of 

platforms, and therefore are used in this report. However, because the true degree of a platform’s claimed decentralization is ofen low 

or unclear, others have suggested distinguishing platforms as either “permissioned” or “permissionless” systems, respectively. See, e.g., 

David Rosenthal, Regulating “Digital Assets,” dshr’s blog (Jul. 27, 2022), https://blog.dshr.org/2022/07/regulating-digital-assets.html. 
8 

 

 

 

 

 

Centralized Platforms (Traditional Venues and Crypto-asset Trading Platforms) 

Registered exchanges and other traditional venues in the United States have begun to ofer indirect 

exposure to crypto-asset products. Contract markets designated by the Commodity Futures Trading 

Commission (CFTC) (DCMs) ofer crypto-asset futures and options contracts to enable investors 

to hedge positions in, or gain indirect exposure to, crypto-assets.18 Similarly, national securities 

exchanges registered with the Securities and Exchange Commission (SEC) ofer investors indirect 

exposure to crypto-assets by trading securities such as stocks of public companies whose businesses 

are related to crypto-assets. Other types of products trade on over-the-counter venues.19 

Registered exchanges and other traditional venues carry fewer of the risks seen in other crypto-asset 

trading platforms and decentralized finance because they, and their members and intermediaries, 

are registered, regulated, overseen by relevant federal agencies, and subject to numerous regulatory 

requirements. The requirements for exchanges, their members and other intermediaries include, 

among other things: 

(I) Conducting customer identification and verification, recordkeeping and reporting obligations, 

and obligations to comply with requirements regarding anti-money laundering countering the 

financing of terrorism (AML/CFT) and the Bank Secrecy Act (BSA); 

(II) Providing secure custody of customer assets; 

(III) Ensuring trade execution and settlement; 

(IV) Maintaining and complying with rulebooks; 

(V) Reporting to regulators and the public; and 

(VI) Complying with disclosure obligations and business conduct standards. 

Registered exchanges are also self-regulatory organizations (SROs) and as such have certain 

responsibilities for promoting market integrity by setting and enforcing industry and membership 

rules and standards.20 

Centralized crypto-asset platforms (CEXs) facilitate, as a primary service, direct (or spot) trading of 

crypto-assets by users.21 Some CEXs also facilitate trading in crypto-asset based derivatives, such as 

futures and options. CEXs may require users to undergo customer verification. They also are the only 

part of the crypto-asset ecosystem that allows users to deposit U.S. dollars. CEXs require users to 

deposit crypto-assets or fiat currency into an account on the platform before being eligible to trade, 

and they provide a means for consumers and investors to cash out their crypto-asset holdings back 

18 In December 2017, the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) launched futures contracts 

on bitcoin (though CBOE stopped ofering bitcoin futures contracts in 2019) and later other exchanges (e.g., ICE Futures US, and FTX US 

Derivatives) began ofering crypto-assets futures contracts. 

19 There are exchange-traded funds (ETFs), registered with the SEC, that trade in CME’s bitcoin futures contracts, but to date, the SEC has not 

approved any of the many applications it has received for a spot crypto-asset exchange traded product. 

20 Apart from the exchanges, there are industry-wide SROs, including the Financial Industry Regulatory Authority (FINRA) and the National 

Futures Association (NFA). Exchange members are generally subject to FINRA or NFA rules. 

21 Other sources or authorities may use diferent labels to refer to entities that this report refers to as CEXs. For example, the iosCo uses 

the term “centralized crypto-asset trading platforms.” See, e.g., iosCo, iosCo deCentralized finanCe rePort (2022), https://www.iosco.org/ 

library/pubdocs/pdf/IOSCOPD699.pdf. 
9 

 

into fiat currency. As a result, CEXs are sometimes referred to as the “on-ramps” and “of-ramps” in the 

crypto-asset ecosystem. 

Currently, U.S.-based CEXs that facilitate trading in spot crypto-asset transactions generally operate as 

money services businesses (MSBs) under the regulations of Treasury’s Financial Crimes Enforcement 

Network (FinCEN) and are therefore subject to AML/CFT obligations.22 CEXs may also hold state 

money transmission licenses and may be subject to, among other requirements and depending on the 

states in which they operate, permissible investment requirements, reporting requirements, bonding 

requirements, and inspection by state regulatory agencies. However, the consumer and investor 

protections ofered by these state-based jurisdictions vary and are typically fewer and less extensive 

than federal laws applicable to securities and derivatives markets and products or consumer financial 

products and services. 

Simply registering with FinCEN or states as an MSB or money transmitter does not absolve a CEX of 

its other relevant legal obligations. Any activity with U.S. residents involving crypto-assets that are 

derivatives or securities falls under the jurisdiction of the CFTC or SEC. For example, if a CEX ofers 

trading of crypto-assets that are securities and operates as an exchange, as defined under federal 

securities laws, then the platform must either register with the SEC as a national securities exchange 

or qualify for an exemption from registration.23 Similarly, a CEX that ofers a trading facility for U.S. 

customers to trade futures, options, or swaps referencing crypto-assets that are commodities must 

register with the CFTC as a designated contract market or swap execution facility. 

Unlike registered exchanges, CEXs generally have no exchange member firms or other intermediaries 

and have no self-regulatory functions. A CEX itself is ofen the intermediary between buyers and sellers 

of crypto-assets and typically provides many, or all, of the services necessary to trade crypto-assets 

(e.g., trading, custody,24 and transfers) for both crypto-assets and fiat currencies.25 As discussed in Part 

IV, the risks associated with CEXs that are not in compliance with U.S. laws and regulations, or that 

may not be regulated, are significant. Whether a CEX is properly registered, and the associated risks 

of transacting with CEXs compared to registered exchanges, therefore carries important implications 

for customers using CEXs to trade crypto-assets, many of whom may be confused or misled by a CEX’s 

marketing and promotional materials. 

22 FinCEN published interpretive guidance in March 2013 stating an administrator or exchanger of “convertible virtual currency” is an MSB 

under FinCEN’s regulations, specifically a money transmitter, with limited exceptions. See finCen, Application of FinCEN’s Regulations 

to Persons Administering, Exchanging, or Using Virtual Currencies, (Mar. 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN2013-G001.pdf. CEXs are also subject to sanctions imposed by Treasury’s Ofice of Foreign Assets Control and other U.S. government 

agencies, as well as other types of government-imposed restrictions that apply to U.S. persons, such as export controls. 

23 See seC, Statement on Potentially Unlawful Online Platforms for Trading Crypto-assets, (Mar. 7, 2018), https://www.sec.gov/news/publicstatement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading. An SEC-registered trading platform would be 

exempt from FinCEN’s MSB regulations, pursuant to 31 CFR 1010.100(f)(8)(ii). However, to date, no CEX or other crypto-asset platform 

has registered with the SEC as a national securities exchange, and some CEXs operating today might indeed be unregistered exchanges 

under the federal securities laws. Many CEXs claim there is “legal uncertainty” as to the registration and regulatory status of CEXs under 

U.S. securities and derivatives laws and are not currently registered, while relying on MSB and state money transmission licenses in order 

to operate in the United States. 

24 Such custodial arrangements, however, do not involve the same types of customer protection rules—such as segregation and 

permissible investment requirements, or any type of insurance—that apply to traditional financial intermediaries. 

25 For example, a CEX may ofer the following services to facilitate user access and trading: trading spot and derivatives on multiple coins 

and tokens, including stablecoins; custody services for crypto-assets; payment, exchange, and other agent services; loan origination and 

trading; insurance; and access to decentralized crypto-asset platforms. In addition, some CEXs have expanded their services to include 

other related activities, such as crypto-asset mining. 
10 

 

 

 

Decentralized Platforms (DeFi Protocols) 

Decentralized crypto-asset platforms or protocols are a prominent part of the crypto-asset 

ecosystem. The term “decentralized” commonly refers to the provision of financial products, services, 

arrangements, and activities that use DLT in an efort to disintermediate and decentralize legacy 

ecosystems by eliminating the need for certain traditional financial intermediaries and centralized 

institutions.26 Decentralized platforms include what are referred to as decentralized exchanges (DEXs) 

and other types of platforms referred to as decentralized finance (DeFi) protocols. 27 

Like centralized platforms (both traditional exchanges, with respect to crypto-asset derivatives and 

securities, and CEXs), decentralized platforms ofer users the ability to trade crypto-assets and to 

engage in a variety of other crypto-asset-based activities, such as lending and borrowing cryptoassets. Decentralized platforms typically do not conduct customer verification on their users, nor do 

they implement other AML/CFT measures. Like many centralized platforms for crypto-assets, or CEXs, 

DeFi platforms or protocols—which are designed to enable peer-to-peer market transactions, without 

a centralized intermediary controlling users’ funds or access—also are not currently registered with the 

SEC or CFTC and therefore may be operating in non-compliance with U.S. law and regulation. 

Proponents of DeFi protocols see the purported absence of intermediation as a benefit that allows 

users to make trades and move their assets wherever and whenever they want, without having to wait 

for bank transfers or pay bank fees. However, as others have observed, the miners and validators that 

are critical to the execution of any transaction on DeFi trading or lending platforms play an important 

intermediation role.28 Further, a lack of industry-recognized operational control frameworks, conduct 

standards, or other self-policing mechanisms ofen leaves users exposed to a number of risks specific 

to DeFi protocols,29 as well as some of the same risks as with unregistered or unregulated CEXs. As 

a result, it is important for investors, consumers, and other market participants to be made aware 

of the fact that they are exposed to greater risks when engaging with DEXs.30 See Part IV for further 

discussion of risks in DeFi. 

Many DeFi protocols claim not to rely on a formal centralized governance structure. Specifically, 

organizers of DeFi protocols aspire to operate autonomously, with little or no governance structure. 

In practice, many DeFi protocols adopt governance elements. For instance, the organizers of a DeFi 

protocol may employ a DAO in which (i) participants may have the ability to maintain direct real-time 

control of contributed funds and (ii) governance rules may be formalized, automated, and enforced 

26 See IOSCO, supra note 21. 

27 Currently, there is no generally accepted definition of “DeFi,” or what makes a product, service, arrangement, or activity “decentralized.” 

Further, as noted with respect to CEXs, other sources or authorities may use diferent labels for entities referred to in this report as DEXs 

or DeFi protocols. For example, because DeFi protocols use smart contracts in some part of the application, DeFi participants sometimes 

refer to such protocols as “decentralized applications” or “dApps.” 

28 raPhael auer, Jon frost & Jose Maria Vidal Pastor, Miners as interMediaries: extraCtable Value and MarKet ManiPulation in CryPto and defi (banK for 

international settleMents (bis), BIS Bulletin No. 58, 2022), https://www.bis.org/publ/bisbull58.pdf. 

29 The term “decentralized finance” should be viewed critically as it may not represent accurately the reality in decentralized markets today. 

See Sirio Aramonte, Wenqian Huang & Andreas Schrimpf, DeFi Risks and the Decentralisation Illusion, bis (BIS Quarterly Review, Dec. 

2021), https://www.bis.org/publ/qtrpdf/r_qt2112b.pdf. Although most activities in the decentralized crypto-assets space have corollaries 

in traditional finance, these activities are—for the most part—currently limited to facilitating yield-enhancing, speculative, and leveraged 

activities in crypto-assets. See iosCo, supra note 21. 

30 See Caroline Crenshaw, DeFi Risks, Regulations, and Opportunities, international Journal of bloCKChain law (Vol. 1, 2021), at 4, 7, 

https://gbbcouncil.org/wp-content/uploads/2021/11/IJBL-1.pdf. 
11 

 

 

 

 

using smart contracts or other sofware.31 For example, in exchange for depositing a crypto-asset, a 

protocol smart contract may create new tokens that are assigned to the wallet address of the person 

who sent the asset. The number of tokens created may be proportional to the amount of cryptoasset transferred. The new tokens representing the initial crypto-asset deposit can then be efectively 

rehypothecated—lent out or used as collateral on other platforms. The protocol may separately issue 

reward tokens on occasion for being a user of the platform, and those reward tokens in turn may be 

governance tokens that grant its holder certain voting and ownership rights. Holders of a suficient 

number of governance tokens may be able to raise governance or procedural topics (e.g., certain 

changes to the code) that may be implemented if a suficient number of users vote for the proposal. 

Within this framework, decentralization does not necessarily equate to wide distribution, and the 

ownership of voting rights and tokens many governance tokens can be highly concentrated.32 

There are possibly thousands of DeFi protocols, though only a small number experience significant 

user activity. One frequently cited data aggregator reportedly tracks more than 1,800 diferent DeFi 

protocols across 27 diferent categories with a combined “total value locked” (or “TVL”) of $86.0 billion 

as of August 19, 2022.33 The most prominent category of DeFi protocols includes those that facilitate 

the trading of crypto-assets (i.e., DEXs), reportedly with 516 separate platforms with a combined $26.3 

billion in TVL.34 

In contrast to the type of trade matching typically carried out on centralized platforms (such as central 

limit order books), some DEXs rely on liquidity pools and automated market-making enabled by smart 

contracts to facilitate trading and other types of services. Afer DEXs, lending and borrowing DeFi 

protocols reportedly have the greatest TVL at $17.3 billion across 164 separate platforms; there are 

also reportedly 338 protocols that pay users a reward for staking crypto-assets on the platform—socalled “yield” protocols—with over $8.4 billion TVL.35 

Miners and Validators 

Mining is the process of using a consensus mechanism to verify and add transactions to a distributed 

ledger in exchange for newly minted crypto-assets that compensate participants in the consensus 

mechanism.36 Miners or validators are a decentralized network of actors who compete to add 

new entries, or “blocks,” to a public ledger or blockchain. These actors typically use a consensus 

31 See seC, rePort of inVestigation Pursuant to seCtion 21(a) of the seCurities exChange aCt of 1934: the dao (2017), https://www.sec.gov/litigation/ 

investreport/34-81207.pdf. 

32 One recent analysis found that among several major DAOs, less than 1% of token holders controlled 90% of the voting power. See 

Chainalysis, Dissecting the DAO: Web3 Ownership is Surprisingly Concentrated, (Jun. 27, 2022), https://blog.chainalysis.com/reports/web3-

daos-2022. Also, the amount of governance tokens a user must either own or be delegated to raise new proposals may be extremely 

high. 

33 defi llaMa, TVL Rankings, https://defillama.com. TVL, an industry reported metric, is the amount of user funds deposited or “locked” in 

a DeFi protocol, and is used as a measure to gauge the size of the DeFi market or the degree of adoption or acceptance by users.  TVL 

information is not audited or verified, may double-count funds, and therefore may not be a reliable metric. See iMf, global finanCial 

stability rePort: CoVid-19, CryPto, and CliMate 42 (2021), https://www.imf.org/en/Publications/GFSR/Issues/2021/10/12/global-financialstability-report-october-2021. 

34 defi llaMa, supra note 33. 

35 Id. 

36 While blockchains are foundational to the crypto-asset ecosystem, not every transaction in, activity relating to, or ownership of cryptoassets is reflected in a distributed ledger. Though transactions, activities, and balances may take place and be recorded on a blockchain 

(referred to as “on-chain”), many occur or are maintained “of-chain,” sometimes through third parties or intermediaries. 
12 

 

 

 

 

 

mechanism—such as proof-of-work (PoW) or proof-of-stake (PoS), depending on the design or 

architecture of the blockchain—to carry out the work of updating a blockchain. Miners typically are 

compensated for this work by receiving fees, called “gas fees” in the case of the Ethereum blockchain, 

and in some cases, “block rewards,” both of which are paid or issued in the blockchain’s native token.37 

As with DeFi ownership, mining activities may be concentrated, and indeed have become increasingly 

dominated in recent years by organizations with large-scale operations. 38 Some of the largest miners 

are public companies. 

Data Aggregators 

The crypto-asset ecosystem generates a vast amount of information. Accurate and reliable data is 

critical to maintaining market integrity, including identifying potential money launderers and terrorist 

financiers, market manipulators, fraudsters, and other actors attempting to conduct illicit financial 

activity or take advantage of consumers, investors, and businesses. Crypto-asset and DeFi markets 

operate globally on a 24/7 basis, producing a constant flow of data about transactions, coin and 

token prices, trading volumes, and other financial metrics and activities taking place on- and ofchains. Where assets or transactions occur on public blockchains, such as through DEXs or other DeFi 

protocols, the information is recorded on the underlying ledger and is in theory completely open and 

transparent to all market participants.39 

Data pertaining to of-chain activity is extremely limited and subject to voluntary disclosure by trading 

platforms and protocols. As a result, the quality of of-chain data is less verifiable, and coin and 

token prices (and other data) may difer markedly between platforms.40 Unlike traditional registered 

exchanges, CEXs and DeFi protocols operating today either are not complying with, or are not subject 

to, obligations to report accurate trade information periodically to regulators or to ensure the quality, 

consistency, and reliability of their public trade data. 

Traditional Financial Institutions 

Traditional financial institutions such as banking institutions, broker-dealers, investment advisers, 

futures commission merchants (FCMs), and clearinghouses are increasingly expressing interest to 

enter the crypto-asset ecosystem and seeking ways to provide crypto-asset services to consumers, 

investors, and businesses in response to growing demand. Traditional intermediaries are exploring 

a range of services relying on DLT, such as providing custody for crypto-assets, holding reserves for 

37 “Gas” is a term associated with the Ethereum blockchain that refers to a unit of payment for the computational efort of conducting 

transactions or smart contract functions. Gas is measured in small bits called “gwei,” with each gwei equaling 0.000000001 (one-billionth) 

ETH. The “gas price” on the network at any given moment is driven by demand, transaction congestion, and other factors. 

38 See, e.g., igor MaKaroV & antoinette sChoar, bloCKChain analysis of the bitCoin MarKet (national bureau of eConoMiC researCh (nber), Working Paper 

No. 29396, 2021), https://www.nber.org/papers/w29396. The report found that the top 10% of miners control 90% of the Bitcoin mining 

capacity, and the top 0.1%—about 50 miners—control 50% of mining capacity. 

39 While this transparency benefits the entire ecosystem, ordinary consumers and investors may themselves benefit less directly depending 

upon whether they are technically able to access, process, and comprehend raw blockchain data. 

40 As recently as 2021, researchers estimated that over 70% of all crypto-assets volumes were wash trades, with such “fabricated volumes” 

serving to improve exchange ranking and temporarily distorting prices. See, e.g., lin williaM Cong, xi li, Ke tang & yang yan, CryPto wash 

trading (soCial sCienCe researCh networK, 2021), http://dx.doi.org/10.2139/ssrn.3530220. 
13 

 

 

 

stablecoin issuers, facilitating payments,41 and expanding credit and investments in native cryptoasset companies.42 Some banking institutions are specializing in the crypto-assets space and 

ofering clients services such as lending (providing fiat loans collateralized by crypto-assets), staking 

(placement of coins and tokens in protocols or pools to earn interest), and governance services 

(allowing participation in on-chain governance from within the institution’s user interfaces). 

III. CRYPTO-ASSET MARKET TRENDS, USES, AND OPPORTUNITIES 

While features of crypto-asset projects and technologies vary significantly, a common feature 

attributed to the use of blockchain technology is a reduced reliance on intermediaries, including the 

possibility to facilitate the secure transfer of value between parties without the use of a mutually 

trusted third party.43 The distributed model of record keeping and computing also introduces the 

possibility of more direct peer-to-peer and fully automated transactions, which together may produce 

future benefits associated with: faster settlement of financial transactions; new financial products; and 

direct access to asset networks by individual consumers, investors, and businesses. To date, however, 

competing technologies, applications, and paradigms for adoption have produced a patchwork 

of systems that have yet to deliver, separately or collectively, on many of the promised benefits 

for consumers, investors, and businesses, including complete disintermediation or satisfactorily 

addressing some of the drawbacks of moving away from an intermediated model of finance.44 These 

and other rapidly evolving dynamics are likely to impact the degree to which these products and 

services are more widely adopted over time. 

Market Size 

On January 1, 2020, on the eve of the COVID-19 pandemic, the market capitalization of Bitcoin—the 

first and largest crypto-asset by price and market capitalization—was about $130.6 billion, down 

from the previous high of about $320.6 billion in December 2017.45 During the pandemic, the market 

41 The OCC has instructed that before engaging in these crypto-assets activities, a national bank or federal savings association should 

notify its supervisor of its intent and receive notification of its supervisor’s non-objection. See, e.g., oCC, Chief Counsel’s Interpretation 

Clarifying: (1) Authority of a Bank to Engage in Certain Cryptocurrency Activities; and (2) Authority of the OCC to Charter a National Trust 

Bank, (Interpretive Letter No. 1179, Nov. 18, 2021), https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2021/ 

int1179.pdf. The FDIC has requested all FDIC-supervised institutions that are considering engaging in crypto-related activities to notify 

the FDIC of their intent and to provide all necessary information that would allow the FDIC to engage with the institution regarding 

related risks. See FDIC, Notification of Engaging in Crypto-Related Activities, (Apr. 7, 2022), https://www.fdic.gov/news/financial-institutionletters/2022/fil22016.html#letter. 

42 See Carla Mozee, These 13 Banks Have Invested The Most In Crypto And Blockchain To Date, MarKets insider, (Aug. 15, 2021), https://markets. 

businessinsider.com/news/currencies/13-top-banks-investing-cryptocurrency-blockchain-technology-funding-blockdata-bitcoin-2021-8. 

43 See, e.g., MiChael Casey, Jonah Crane, gary gensler, siMon Johnson & neha narula, the iMPaCt of bloCKChain teChnology on finanCe: a Catalyst for 

Change, (international Center for Monetary and banKing studies, 2018). However, others note that “a review of blockchain research suggests 

that true disintermediation might be possible in some finance areas but not all,” and that “despite Bitcoin’s disintermediation from 

conventional financial infrastructure, it is still important to build up a new infrastructure with intermediation to allow the conversion 

between Bitcoin and fiat currencies to occur.” See Cynthia Weiyi Cai, Disruption of financial intermediation by FinTech: a review on 

crowdfunding and blockchain, aCCounting and finanCe (Vol. 58 Issue 4, Dec. 12, 2018), at 965-992, 

https://onlinelibrary.wiley.com/doi/full/10.1111/acfi.12405. 

44 Cynthia Weiyi Cai, supra note 43. See also Moxie Marlinspike, My first impressions of web3, Moxie (Jan. 7, 2022), 

https://moxie.org/2022/01/07/web3-first-impressions.html. 

45 A chief concern with these market measures is the accuracy and reliability of the data available given the lack of a standardized 

reporting regime. See, e.g., Javier Paz, More Than Half of All Bitcoin Trades Are Fake, forbes (Aug. 26, 2022), https://www.forbes.com/sites/ 

javierpaz/2022/08/26/more-than-half-of-all-bitcoin-trades-are-fake/?sh=fe4e626681f7. 
14 

 

capitalization of Bitcoin increased again, reaching its all-time high of nearly $1.3 trillion in November 

2021, before declining significantly thereafer.46 As of August 20, 2022, the market capitalization of 

Bitcoin is around $404.8 billion.47 Over the same period, there has been seemingly exponential growth 

in the number of coins and tokens, with an estimated handful of crypto-assets in 2013, to more than 

2,800 by the end of 2019, to nearly 10,400 as of early 2022, according to one source.48 The aggregate 

market capitalization of all crypto-assets also experienced expansive growth and volatility: from just 

under $200 billion in January 2020 to approximately $2.9 trillion in November 2021, before falling to 

less than $1.0 trillion in June 2022.49 The chart below illustrates this trend. 

At the same time, the number of centralized and decentralized platforms available to consumers, 

investors, and businesses has proliferated, ofering the possibility to engage in an ever-changing 

variety of financial, as well as non-financial, activities. Diferent types of crypto-assets, including 

cryptocurrencies and other native fungible coins and tokens, NFTs, and tokenized forms of traditional 

assets, have developed at diferent rates. 

46 CoinMarKetCaP, Bitcoin: Historical Data for Bitcoin, https://coinmarketcap.com/currencies/bitcoin/historical-data. 

47 Id. 

48 statista, Number of cryptocurrencies worldwide from 2013 to February 2022, (Mar. 22, 2022), https://www.statista.com/statistics/863917/ 

number-crypto-coins-tokens. Other sources identify many more coins and tokens. For example, Etherscan lists over 500,000 ERC-20 

tokens, though most may not trade and do not have meaningful market values. See ethersCan, Token Tracker, https://etherscan.io/tokens. 

Another source estimates that in DeFi there are over 1.7 million tokens, of which approximately 10% have been identified by the source to 

be scams. See toKensniffer, https://tokensnifer.com. 

49 CoinMarKetCaP, Global Cryptocurrency Charts: Total Cryptocurrency Market Cap, https://coinmarketcap.com/charts. See also Josh 

Zumbrun, Why Crypto’s Market Cap Never Booms, or Busts, as Much as You Think, the wall street Journal (Aug. 5, 2022), https://www.wsj. 

com/articles/why-cryptos-market-cap-never-booms-or-busts-as-much-as-you-think-11659691802. The article suggests that most 

market capitalization measures are overestimates because they include crypto-assets that are unrecoverable due to loss of keys and 

other factors. 
15 

 

Current Uses and Opportunities in Crypto-assets for Consumers, Investors, and Businesses 

The current uses of native crypto-assets and tokenized traditional assets are limited. These can be 

grouped into three broad categories, including: (i) crypto-asset-based alternatives to traditional 

financial products and services; (ii) financial market and payment system infrastructures; and (iii) 

potential cases for other consumer and commercial uses by individuals and businesses (e.g., NFTs, 

gaming, records, identity, supply chain management). Specific uses, which are in various stages of 

development or implementation, include: 

•	 Financial markets, products, and services that use native crypto-assets consist primarily of trading, 

lending, and collateral activities of other crypto-assets and are generally speculative in nature; 

•	 Limited instances of use as a medium of exchange for goods and services; 

•	 Market and payment system infrastructures for traditional assets using permissioned blockchains; 

and 

•	 Technological innovations to transform commercial activities to attract more significant adoption, 

most of which are at the pilot stage and face obstacles. 

The following discussion addresses relevant issues with both native and tokenized use cases, as well as 

potential opportunities, including the role of technological innovation. While the discussion contains 

examples of potential opportunities using blockchain technology, crypto-asset transactions using CEXs 

at present generally occur of-chain rather than on-chain.50 It should also be noted that technologists 

disagree about the value of certain use cases, and the potential utility of blockchains more generally.51 

Native Crypto-asset Financial Markets, Products, and Services 

Native crypto-asset activities take a variety of forms. As with other crypto-asset-related activities, 

the form of the activity may be less relevant than its underlying function.52 As noted above, the 

most predominant use cases to date consist of trading, lending, and investing, although there are 

eforts underway to increase the scale of other consumer use cases. Adoption by U.S. adults of 

cryptocurrency to-date—which has been growing—has primarily been for investing purposes, with 

the adoption for payments or remittances remaining limited. According to the Survey of Household 

Economics and Decisionmaking (SHED) conducted by the Federal Reserve in October and November 

2021, 12% of adults in the United States held or used cryptocurrencies in the prior year,53 substantially 

50 See Sirio Aramonte, Wenqian Huang & Andreas Schrimpf, supra note 29, at 26. 

51 See Letter in Support of Responsible Fintech Policy, dated Jun. 1, 2022, https://concerned.tech. 

52 See Jay Clayton, Chairman, SEC, Statement on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission 

and the U.S. Commodity Futures Trading Commission” at 5 (Feb. 6, 2018), https://www.banking.senate.gov/imo/media/doc/Clayton%20 

Testimony%202-6-18.pdf. Former Chairman Clayton noted that “simply calling something a ‘currency’ or a currency-based product does 

not mean that it is not a security.” 

53 board of goVernors of the federal reserVe systeM, eConoMiC well-being of u.s. households in 2021 45 (2022) https://www.federalreserve.gov/ 

publications/files/2021-report-economic-well-being-us-households-202205.pdf. 
16 

 

 

 

 

higher than results from 2015, when a private survey found that 1% of U.S. adults said they had ever 

collected, traded, or used the individual cryptocurrency Bitcoin.54 

Trading 

Trading is currently the most common activity in the crypto-asset ecosystem. For example, as with 

traditional trading markets, crypto-asset trading markets include short-term traders, arbitrageurs, and “buy 

and hold” investors hoping to profit from long-term price appreciation. A large share of trading volume is 

in stablecoins, which are used as collateral on crypto-asset platforms and protocols, and which facilitate 

trading and lending of other crypto-assets, borrowing, and other activities. Traders engage both in spot 

market trading of crypto-assets, as well as crypto-asset-based derivatives such as futures and options. 

Since 2020, the market for crypto-asset-based derivatives has grown significantly and now accounts for 69% 

of total crypto-asset volumes, outpacing the spot market.55 According to reports, institutional investors, 

rather than retail investors, comprise a majority of the trading activity in crypto-asset markets.56 

Both CEXs and DEXs generate revenues through trading fees, which can vary significantly among 

diferent platforms. Further, trading on DEXs generally includes gas fees to compensate miners 

and validators for contributing the computing and storage resources necessary to verify and write 

transactions to a blockchain. Gas fees add to the costs of transacting and can vary widely depending 

on the complexity of a transaction and the congestion on the blockchain. 

Participation in DEX and DeFi protocols’ liquidity pools, whereby users pool and lock their assets in the 

platform’s smart contract, relies on a profit-sharing model.57 The assessment of fees, the transparency 

of trading standards on platforms, liquidity pools’ operations, suficiency of cybersecurity protections, 

and adequacy of disclosures all subject users to significant risks. These risks are discussed in more 

detail in Part IV. 

Lending, Borrowing, Staking, and Collateral 

CEXs or DEXs may also ofer other yield-generating activities, including lending and borrowing 

and staking services, sometimes referred to by platforms and users as “yield farming.” Numerous 

54 Andrew Perrin, 16% of Americans say they have ever invested in, traded or used cryptocurrency, Pew researCh Center (Nov. 11, 2021), https:// 

www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency. This Pew 

Research Center survey, conducted in September 2021, found that 16% of U.S. adults say they personally have invested in, traded or 

otherwise used crypto-assets like Bitcoin or Ether. An updated survey carried out in July 2022 shows that this finding is unchanged from 

September 2021. See Michelle Faverio & Navid Massarat, 46% of Americans who have invested in cryptocurrency say it’s done worse than 

expected, Pew researCh Center (Aug. 23, 2022), https://www.pewresearch.org/fact-tank/2022/08/23/46-of-americans-who-have-investedin-cryptocurrency-say-its-done-worse-than-expected. 

55 See CryPtoCoMPare, exChange reView 13 (2022), https://www.cryptocompare.com/media/40485073/exchange_review_july_vf-1.pdf. Most 

of this activity currently is taking place on non-U.S. CEXs and DeFi protocols. Nevertheless, derivatives trading typically involves the use 

of leverage—i.e., the practice of placing outsize bets with only a small amount of money upfront, ofen involving margin or borrowed 

funds—to amplify returns. But leverage can also work against traders when prices decline, by leading to rapid liquidation of their 

positions and collateral. 

56 See George Steer, Did Institutional Investors Crash the Crypto Party?, finanCial tiMes (May 13, 2022), https://www.f.com/content/12b80e7f047d-4273-8766-226b5d91a1fc. 

57 Liquidity pools in turn rely on automated market-maker (AMM) protocols which use preset mathematical equations (e.g., x*y=k, where 

x and y represent the values of tokens in a liquidity pair and k is a constant) to ensure the ratio of assets in the liquidity pools remains 

balanced and determine prices based on trading volumes. For a discussion of AMMs, including certain features of AMMs that may expose 

liquidity-takers to market manipulation on DEXs, see Sirio Aramonte, Wenqian Huang & Andreas Schrimpf, supra note 29, at 34-35. 
17 

 

 

 

 

centralized crypto-asset lending platforms ofer products that are marketed as forms of high-yield 

savings or deposit-like products in diferent forms under which users can lend out their crypto-assets. 

In these scenarios, crypto-assets serve as the sole source of collateral used to facilitate transactions 

involving other crypto-assets.58 Platforms may attract users by promising to pay returns that are 

far greater than those ofered by traditional banks, and inappropriately use bank-like terms such as 

“savings account,” “deposit,” or annual percentage yield (APY) and other promotional tactics that can 

obscure the associated risks. 

The source of the high yields on these types of products is not entirely clear, but crypto-asset firms purport 

to generate them using some combination of (i) interest earned by the platforms on short-term loans 

of these crypto-assets; (ii) returns gained by investing customers’ crypto-assets in other crypto-assets, 

in traditional financial instruments, such as securities, or in other centralized or decentralized yieldgenerating projects; (iii) staking fees or rewards granted to those staking crypto-assets in order to be used 

toward validation in Proof-of-Stake consensus mechanisms used on certain blockchain protocols; or (iv) 

other income generated through holding certain crypto-assets (e.g., initial holders of new coins). 

Users may also borrow through centralized platforms, where loans of U.S. dollars or crypto-assets 

are available without credit checks and collateralized by users’ holdings of crypto-assets.59 Users are 

ofen borrowing to exploit pricing disparities among the various crypto-assets and trading platforms. 

Lending platforms generally limit the amount that users can borrow to some fraction—e.g., 50%—of 

the value of their collateral. While there is little transparency into the activity in the form of verifiable 

reporting on the number of borrowers, the sizes of loans, and the frequency of margin calls and 

liquidations, lending and borrowing activity appeared to have been growing through the end of 2021. 

Activity has appeared to decline through the first half of 2022.60 

Investors and consumers may also engage in lending and staking through decentralized markets 

and intermediaries. According to one estimate, DeFi protocols developed for lending and other 

yield farming activities appear to account for a little over one-third of the TVL in all DeFi platforms.61 

Lending participants expect to receive new tokens issued by a DeFi protocol, representing their pro 

rata claim on the protocol’s lending pool, which they are able to redeem later for the assets originally 

placed plus accrued interest. Lending participants also may earn reward tokens for providing liquidity, 

which are ofen governance tokens issued by the protocol that may increase the expected return 

beyond accrued interest. 

58 Because loans generally are disbursed in digital coins or tokens and are secured by other crypto-assets, the self-referential nature of 

these activities may present wrong-way risks, meaning that a party’s credit risk is correlated with the value of the underlying asset. See, 

e.g., sirio araMonte, sebastian doerr, wenqian huang & andreas sChriMPf, defi lending: interMediation without inforMation? 1-2 (bis, BIS Bulletin No. 

57, 2022), https://www.bis.org/publ/bisbull57.pdf. 

59 Though credit assessments typically are not required for borrower loan approvals, more and more centralized crypto-asset lending 

platforms are carrying out certain “know your customer” or KYC diligence on customers to comply with anti-money laundering and other 

illicit financial activities laws. 

60 This may be due, at least in part, to the fact that several prominent platforms were faced with enforcement actions from state or federal 

regulators, while others experienced liquidity strains due to a broad decline in crypto-asset prices, leading more than one platform to 

place limits on or altogether suspend customer withdrawals. See, e.g., seC, BlockFi Agrees to Pay $100 Million in Penalties and Pursue 

Registration of its Crypto Lending Product, (Feb. 14, 2022), https://www.sec.gov/news/press-release/2022-26; MacKenzie Sigalos, From $25 

billion to $167 million: How a major crypto lender collapsed and dragged many investors down with it, CnbC (Jul. 18, 2022), https://www. 

cnbc.com/2022/07/17/how-the-fall-of-celsius-dragged-down-crypto-investors.html. 

61 DeFi DEXs currently account for just over a quarter of all TVL in DeFi, while all other protocol categories combined make up the rest. See 

defi llaMa, Protocol Categories, https://defillama.com/categories. 
18 

 

 

Participants may also borrow crypto-assets from DeFi lending protocols. Like centralized lending 

platforms, DeFi lending protocols generally permit users to borrow only a fraction of their cryptoasset collateral (i.e., the loans are “over-collateralized,” in some cases up to 150% of the loan), users 

who can provide the required collateral can participate in transactions on the platform, and there 

is no credit assessment on borrowers. Borrowers are typically subject to a collateralization ratio 

(sometimes called a “health factor”62) which, if breached, will lead to their loan being liquidated and a 

portion of their collateral being seized, inclusive of a liquidation fee. These liquidation fees are ofen 

not disclosed to the user in loan documentation, but may instead be incorporated by reference to the 

protocol’s documentation or frequently asked questions.63 

Investors in crypto-assets can also earn returns on their holdings through staking,64 which is the 

process of “locking up”—or committing—crypto-assets to support the operation of the underlying 

blockchain in exchange for rewards. Like crypto-assets generally, staking reward estimates are volatile 

and can change unpredictably over time, but as of August 2022, one data aggregator estimated that 

the top 206 staked assets generated an average annual return of 8.82%.65 

Raising Capital (e.g., ICOs) 

Startup companies, developers, and other participants in the crypto-asset ecosystem have raised 

funds from investors and other users to create blockchain projects, establish DAOs or DeFi protocols, 

or simply to create a new coin or token. Such funds have been raised through so-called “initial coin 

oferings,” or ICOs, which have been compared to crowdfunding and initial public oferings (IPOs) in 

traditional regulated securities markets.66 

A typical ICO starts with the developer or project owner issuing a white paper that provides some 

information on the goals of the project and other details.67 Tokens ofered through the project are 

ofen labeled as “utility tokens,” which purport to provide investors a means to later obtain access to 

certain products or services in exchange for the tokens. Alternatively, tokens may purport to represent 

an ownership stake in the project or a proportional right to earn certain rewards. Tokens are ofen 

then sold in secondary markets to other investors, either through centralized or decentralized cryptoasset platforms or other intermediaries. 

62 See aaVe, Risk Parameters, https://docs.aave.com/risk/asset-risk/risk-parameters#health-factor. 

63 See, e.g., Alexis Goldstein, Director of Financial Policy, Open Markets Institute, Written Testimony before the United States Congress Joint 

Economic Committee (Nov. 17, 2021), at 20, https://www.jec.senate.gov/public/_cache/files/aa387917-9456-4b1f-a948-f086594c4d15/ 

alexis-goldstein-jec-crypto-hearing-testimony.pdf. 

64 Staking returns are only applicable in crypto-assets native to blockchains that use the proof-of-stake (PoS) consensus mechanism. In 

PoS blockchains, validators are selected to verify new blocks of data to be added to the network based on the quantity of native coins 

they have staked. Some investors pool assets to meet staking requirements, which increases the validator’s chances of being selected 

to verify blocks and generates rewards—usually in the form of fees paid in new native blockchain coins—that typically are distributed to 

pool contributors on a pro-rata basis. “Staking” is also sometimes loosely referred to by certain DeFi protocols as a synonym for simply 

locking assets into a smart contract on the protocol. 

65 staKing rewards, Top 10 Crypto Assets by Staking Marketcap, https://www.stakingrewards.com. As with other data sources regarding crypto 

assets noted above, such figures may not be entirely reliable, as evidenced by this site’s disclaimer regarding the accuracy of information. 

See staKing rewards, Disclaimer, https://www.stakingrewards.com/disclaimer. 

66 Whether or not a particular ICO entails an ofering of securities will depend on consideration and evaluation of the facts and 

circumstances. See seC, supra note 31, at 10, 17; SEC v. Kik Interactive Inc., 19 Civ. 5244 (S.D.N.Y. 2020); SEC v. Telegram Group Inc., 448 F. 

Supp. 3d, 352 (S.D.N.Y. 2020) (granting preliminary injunction under the securities laws). 

67 Initial crypto-asset oferings may bear diferent labels more specific to the type of entity or purpose of the capital raise or may be 

structured and executed slightly diferently, but the general concept is the same. 
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Opportunities in Native Crypto-asset Financial Markets, Products, and Services 

The capability ofered by blockchain technology to transact in “trustless” environments with reduced 

number of intermediaries creates a number of potential opportunities, many of which are yet to be 

realized. Proponents have long claimed that new financial products and services could be created 

to operate in an automated and distributed environment with potentially lower operating costs and 

enabled by faster crypto-asset payment settlement activity. There could also be more widely available 

financial products and services with direct-to-consumer and consumer-to-consumer features of 

crypto-asset technologies and business models. For example, specialized assets with novel features 

appealing to discrete types of purchasers may emerge.68 This may ofer some an alternative to 

traditional markets where the creation of financial and non-financial products is subject to diferent 

degrees of intermediation that create variations in the benefits that entrepreneurs, businesses, 

investors, and consumers realize from capital investments.69 

The degree to which consumers, investors, and businesses may or may not benefit from current 

practices for the creation and trading of crypto-assets depends upon a range of factors. Many of 

these factors are similar to those that are present in traditional financial markets, albeit with unique 

applications in the crypto-asset context. For example, search costs in crypto-asset markets are 

high because of the increasing variation in and lack of definitive information about crypto-assets, 

which may make them more dificult to value, combined with the sheer number of crypto-assets and 

markets, which means investors must devote more resources to identify attractive investments and 

avoid resource misallocations as well as scams.70 Crypto-asset markets may also lack liquidity and be 

prone to bubbles71 as a result of 24/7 trading and faster settlement, similar to the dynamics present 

in traditional financial markets.72 Finally, credit risk associated with the underlying leveraged trading 

in crypto-asset markets may not be controlled fully by collateralization and automated liquidation 

practices used with many crypto-asset loans.73 Further, in order for these markets to reach their full 

potential, they must be operated in compliance with applicable laws and regulations. 

Financial Market and Payment System Infrastructures 

To date, the primary use cases, and accompanying future opportunities, of crypto-assets for financial 

markets and payments depend upon their potential for faster and less expensive payment and 

transaction settlement. 

68 See JosePh abadi & MarCus brunnerMeier, bloCKChain eConoMiCs (NBER, Working Paper 25407, 2018), https://www.nber.org/system/ 

files/working_papers/w25407/w25407.pdf; Hugo Benedetti & Ehsan Nikbakht, Returns and Network Growth of Digital Tokens Afer 

Cross Listings, Journal of CorPorate finanCe (Vol. 66 Issue 101853, Feb. 2021), https://www.sciencedirect.com/science/article/pii/ 

S0929119920302972?via%3Dihub; and Paul P. MoMtaz, is deCentralized finanCe (defi) effiCient? (the anderson sChool at uCla, 2022), https:// 

www.researchgate.net/publication/360226953_IS_DECENTRALIZED_FINANCE_DEFI_EFFICIENT. 

69 See Paul P. MoMtaz, supra note 68. 

70 Id., at 8-10. 

71 F.A. Enoksen, Ch.J. Landsnes, K. Lučivjanská, and P. Molnár, Understanding Risk of Bubbles in Cryptocurrencies, Journal of eConoMiC behaVior 

and organization (Vol. 176, Aug. 2020), at 129-144, https://www.sciencedirect.com/science/article/pii/S0167268120301505?via%3Dihub. 

72 Wei Xiong & Jialin Yu, The Chinese Warrants Bubble, aMeriCan eConoMiC reView (Vol. 101 No. 6, Oct. 2011), at 2723–2753, https://www.aeaweb. 

org/articles?id=10.1257/aer.101.6.2723; oliVier J. blanChard & MarK w. watson, bubbles, rational exPeCtations and finanCial MarKets (nber, 

Working Paper 0945, 1982), https://www.nber.org/papers/w0945; and J. Michael Harrison & David M. Kreps, Speculative Investor Behavior 

in a Stock Market with Heterogeneous Expectations, quarterly Journal of eConoMiCs (Vol. 92 No 2, 1978), at 323-336, https://www.jstor.org/ 

stable/1884166?seq=1. 

73 sirio araMonte, sebastian doerr, wenqian huang & andreas sChriMPf, supra note 58, at 2. See also Eli Tan, Many Bored Ape NFTs Are in Danger of 

Getting Liquidated as Borrowed Money Comes Back to Bite, CoindesK (Aug. 19, 2022), https://www.coindesk.com/business/2022/08/19/ 

many-bored-ape-nfs-are-in-danger-of-getting-liquidated-as-borrowed-money-comes-back-to-bite. 
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Payments 

Increased competition associated with the development and introduction of crypto-asset-based 

faster payment systems may prompt the existing fiat-based payment systems to respond with more 

competitive, innovative, and inclusive oferings. The degree to which these benefits will be realized 

depends on the extent and permanence of the adoption of faster crypto-asset-based payment 

systems.74 

While crypto-assets have not become widely adopted as a medium of exchange in the real economy, 

which limits their viability as a payment mechanism, some versions of peer-to-peer faster payments 

functionality exist within the crypto-asset ecosystem, and payment services are available to 

businesses and consumers directly through crypto-asset platforms and some payment platforms.75 

Though such services are generally not yet significantly scaled or interoperable, they do represent 

working examples of practical uses of crypto-asset payment systems for individual businesses, 

investors, and consumers. For example:76 

•	 Crypto-asset service providers and blockchain technologies could improve eficiency in 

international payments and remittances for businesses and individual customers.77 These 

and similar alternatives could help address the lack of interoperability across the payment 

infrastructures of diferent countries and the absence of a single global banking network or service 

that enables faster international funds settlement. These changes could provide an alternative 

to the current system of time consuming and expensive correspondent banking processes to 

complete international payments and remittances.78 

•	 Applications of crypto-assets and DLT technologies could improve trade credit provision and 

other administrative processes related to trade in physical goods. Common problems in the 

sector include the lack of visibility in physical supply chain processes, ineficient manual 

paperwork requirements, regulatory and compliance costs, fraud risks, and high transaction 

costs. DLT applications in trade finance could create a single source of reference information to 

help participants synchronize the movement of physical goods, information, and financing, at 

times paired with smart contract and foreign exchange functions that may eliminate the need for 

correspondent banks and additional transaction fees.79 

74 See the report required by Section 4(b) of the Executive Order for additional discussion of payments. 

75 It is important to note that, since sending crypto-assets from one wallet to another typically requires an on-chain transaction, there is a 

non-deterministic fee that these platforms will pass on to users, to pay the miner or the validator a gas fee; these fees can be high in times 

of peak congestion. 

76 Note that these projects are referenced here only as examples, and this report does not endorse or recommend the use of any specific 

asset, product, platform, or intermediary. The mention of, or absence of reference to, any particular project or application also does not 

reflect a view on viability, operational soundness, or legal status of such project or application. 

77 See inter-aMeriCan deVeloPMent banK, Cross border PayMents with bloCKChain 38 (2020), https://publications.iadb.org/publications/english/ 

document/Cross-Border-Payments-with-Blockchain.pdf. See also friederiKe rühMann, sai aashirVad Konda, Paul horroCKs & nina taKa, Can 

bloCKChain teChnologies reduCe the Cost of reMittanCes? 4 (organisation for eConoMiC CooPeration and deVeloPMent (oeCd), 2020), https://www.oecdilibrary.org/docserver/d4d6ac8f-en.pdf?expires=1661626664&id=id&accname=guest&checksum=0B50ED298A2B06C0625EB90BF9EBB569. 

78 Jason eKberg, MiChael ho, teK yew Chia, laura liu, naVeen Mallela, harshiKa Patel & suKrit Khatri, unloCKing $120 billion Value in Cross-border 

PayMents 5 (oliVer wyMan, 2021), https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2021/nov/unlocking-120-

billion-value-in-cross-border-payments.pdf. 

79 Ilias Ioannou & Guven Demirel, Blockchain and supply chain finance: a critical literature review at the intersection of operations, finance 

and law, Journal of banKing and finanCial teChnology (Vol. 6, May 9, 2022), at 83–107, https://doi.org/10.1007/s42786-022-00040-1. 
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•	 Crypto-asset platforms, protocols, and applications have also introduced services that may allow 

users to create payment streams for employees, contractors, suppliers, and other beneficiaries. 

Such systems may provide faster access to funds and act as a close substitute for cash. These 

services could be particularly useful for gig workers, lower income populations, and those who are 

unbanked or underbanked. 

•	 Finally, stablecoins purport to provide features that make them both more stable than non-assetbacked crypto-assets as a means of payment or settlement for crypto-asset-based transactions, 

and potentially, more broadly useful. 

Clearing and Settlement Uses and Related Opportunities 

Crypto-asset technologies aspire to make real-time settlement standard practice, potentially reducing 

risks and expenses of trading compared to secondary markets for most traditional non-derivative 

financial products.80 Current plans to shorten the settlement cycle for U.S. securities markets do not 

set a goal of real-time settlement, so in the absence of broader adoption of real-time settlement, 

crypto-asset technologies may present an opportunity.81 

Tokenization, the process of digitally representing an existing real asset (e.g., securities, real estate, 

commodities, art) on a distributed ledger,82 involves a public or private ledger that links the economic 

value and rights derived from these real assets with digital tokens. The act of tokenizing any asset, 

including intangible assets (e.g., intellectual property), introduces the technological benefits of DLT 

to the related clearing and settlement processes by processing transaction details and automating 

all other transaction related events through settlement.83 Such application may create innovative 

methods for settling and clearing transactions, an area of finance with potential for growth—with 

several financial institutions exploring methods to improve the clearing or settlement of traditional 

securities transactions using blockchain technology.84 These applications generally are using a 

private permissioned blockchain environment rather than a public, permissionless environment that 

helps improve the integrity of the system.85 The scope of future tokenized crypto-asset activities on 

permissioned blockchains is potentially very large, with proxies for the estimated market capitalization 

of financial products in this segment including the value of securities held in custody by the Depository 

80 bis, strengthening rePo Clearing and settleMent arrangeMents 19 (2010), https://www.bis.org/cpmi/publ/d91.pdf. See also George Jia, 

Implications of Diverging Settlement Standards, DTCC (Aug. 6, 2020), https://www.dtcc.com/dtcc-connection/articles/2020/august/06/ 

implications-of-diverging-settlement-standards. 

81 Shortening the Securities Transaction Settlement Cycle, 87 Fed. Reg. 10436 (Feb. 24, 2022). 

82 The Financial Stability Board (FSB) defines tokenization as “the representation of traditional assets – e.g., financial instruments, a basket 

of collateral or real assets – on DLT.” See fsb, deCentralised finanCial teChnologies: rePort on finanCial stability, regulatory and goVernanCe iMPliCations 

13 (2019), https://www.fsb.org/2019/06/decentralised-financial-technologies-report-on-financial-stability-regulatory-and-governanceimplications. 

83 Ben St. Clair, Repo by the minute’ could reshape lending – but not quite yet, risK.net (Aug. 4, 2022), https://www.risk.net/ 

derivatives/7952356/repo-by-the-minute-could-reshape-lending-but-not-quite-yet. 

84 See, e.g., Matthew Leising, Goldman Begins Trading on JPMorgan’s Repo Blockchain Network, blooMberg (Jun. 22, 2021), https://www. 

bloomberg.com/news/articles/2021-06-22/goldman-sachs-begins-trading-on-jpmorgan-repo-blockchain-network#xj4y7vzkg. The article 

reports on new technology related activities of JP Morgan, Bank of New York Mellon Corp., Goldman Sachs Group Inc., Paxos Trust Co., 

and Arca. 

85 iota Kaousar nassr, the toKenisation of assets and Potential iMPliCations for finanCial MarKets (oeCd, 2020), https://www.oecd.org/finance/TheTokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.htm. 
22 

 

 

 

 

Trust and Clearing Corporation (over $70 trillion),86 and assets under management across asset classes 

in private markets ($9.8 trillion).87 

The integration of blockchain technologies and crypto-assets into clearing and settlement of 

traditional securities processes may allow for faster and cheaper transactions, increased transparency 

of asset positions, and increased liquidity through fractionalization.88 Technology investments made 

by many incumbent firms in banking, insurance, asset management, and other sectors may also 

help to enable a transition towards increasing digitization of assets. Examples of pilot projects using 

blockchain technology and crypto-assets in financial market infrastructure services include:89 

•	 A platform for clearing members that digitalizes pre-IPO equity securities, throughout issuance, 

distribution, and secondary transfer, and is designed to expand into other markets such as funds, 

debt, real estate, and loans. The platform is designed to be blockchain agnostic but will initially 

support issuance of securities on the public Ethereum network. 

•	 A private permissioned distributed ledger system that records changes in ownership of securities 

and cash resulting from the settlement of securities transactions between participants using a 

digitized security entitlement—a digital representation of the security.  The system is designed to 

conduct real-time delivery-versus-payment settlement of securities and cash for trades. 

•	 A blockchain-based commodities settlement platform that settles transactions across gold, silver, 

platinum, and palladium that allows customers to pre-fund settlements and net multilaterally, 

creating a single platform where settlement occurs for both metals and cash positions. 

Other Commercial Activities 

The activities, predominantly trading and other forms of speculation, discussed above currently 

comprise most of the transactions involving crypto-assets or occurring in the crypto-asset ecosystem. 

Nevertheless, consumers and other users of crypto-assets are engaging in a few diferent types of 

activities that have ostensibly non-financial aims, including social clubs and data storage built around 

crypto-assets and decentralized protocols. A recent report by the U.S. Government Accountability 

Ofice (GAO) found that blockchain has a wide range of potential non-financial uses, including 

applications to organize supply chains, create less hierarchical organizations, and document title 

registries for real estate.90 

86 dtCC, DTCC to Launch Platform to Digitalize and Modernize Private Markets, (Nov. 9, 2021), https://www.dtcc.com/news/2021/ 

november/09/dtcc-to-launch-platform-to-digitalize-and-modernize-private-markets. 

87 MCKinsey & CoMPany, PriVate MarKets rally to new heights: MCKinsey global PriVate MarKets reView 2022 2 (2022), https://www.mckinsey.com/ 

industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review. 

88 iota Kaousar nassr, supra note 85, at 7. 

89 Note that these projects are referenced here only as examples, and this report does not endorse or recommend the use of any specific 

asset, product, platform, or intermediary. The mention of, or absence of reference to, any particular project or application also does not 

reflect a view on viability, operational soundness, or legal status of such project or application. 

90 u.s. goVernMent aCCountability offiCe, bloCKChain: eMerging teChnology offers benefits for soMe aPPliCations but faCes Challenges 1 (2022), https:// 

www.gao.gov/assets/gao-22-104625.pdf. 
23 

 

 

 

 

 

Most such eforts are still in the pilot stage, and some prominent non-financial use cases have 

encountered challenges or made significant misrepresentations.91 For example, the GAO found that 

most blockchain networks are not designed to be interoperable and cannot communicate with other 

blockchains.92 Organizations that want to use blockchain also face legal and regulatory uncertainties 

and have found it dificult to find skilled workers to implement their blockchain projects. 

Non-Fungible Tokens 

Whereas some activities involving crypto-assets rely on fungible coins and tokens that are 

interchangeable with one another, a class of crypto-assets (NFTs) has developed that allows the 

tokenization of distinct characteristics such that each token is unique and distinguishable from any 

other. NFTs have a range of potential uses, including establishing a record of purchase and potentially 

ownership and authenticity of a digital work or asset through a unique cryptographic code that cannot 

be replicated. The primary uses of NFTs currently may be non-financial in nature, such as digital art 

and other digital collectibles, akin to collecting trading cards or other collections, including “virtual 

real estate.”93 In practice, however, they can be highly speculative investments—many of which have 

been marketed as such by the issuers of NFTs and their agents. Among consumers and investors, NFTs 

have become one of the most used segments of the crypto-asset ecosystem. However, the legal rights 

conveyed by NFTs are ofen unclear, raising issues that courts may have to resolve.94 

NFTs may enable new methods for artists or others to sell their works in digital form, but may also 

introduce new risks for artists.95 An NFT can be designed to include an in-built royalty system such 

that the content creator (or others) can earn a profit each time the NFT is resold.96 Participants in the 

NFT space include content creators,97 consumers, investors or users, and miners/validators. They also 

include platforms that facilitate the creation, distribution, ofer and sale of NFTs. 

NFT projects ofen center around “collections,” which consist of multiple digital works—e.g., up to 

10,000 NFTs in so-called “10K projects”—created around a single theme but each with slight variation, 

ofen created algorithmically. Consumers, investors, or other users seek to own NFTs and engage in 

primary and secondary transactions. They include collectors and fans, who may be buying for reasons 

other than material value or an expected return, but also include speculators and so-called flippers 

hoping to make quick gains. The vast majority of NFT transactions are at the retail level, defined as 

91 See, e.g., Matt Binder, Web3 darling Helium has bragged about Lime being a client for years. Lime says it isn't true., Mashable (Jul. 29, 2022), 

https://mashable.com/article/helium-lime-web3-crypto. 

92 For more background on blockchain interoperability, see rafael belChior, andre VasConCelos, sergio guerrero & Miguel Correia, a surVey on 

bloCKChain interoPerability: Past, Present, and future trends (arxiV, 2021), https://arxiv.org/abs/2005.14282. 

93 In a famous example, in March 2021, an NFT representing a digital work by an artist sold through an auction for over $69 million. 

See Scott Reyburn, JPG File Sells for $69 Million, as ‘NFT Mania’ Gathers Pace, the new yorK tiMes (Mar. 25, 2021), https://www.nytimes. 

com/2021/03/11/arts/design/nf-auction-christies-beeple.html. 

94 See Julie M. Moringiello & Christopher K. Odinet, supra note 9, at 7. 

95 See, e.g., Kevin Collier, NFT art sales are booming. Just without some artists' permission., nbC news (Jan. 10, 2022), https://www.nbcnews. 

com/tech/security/nf-art-sales-are-booming-just-artists-permission-rcna10798. 

96 Rosanna McLaughlin, ‘I went from having to borrow money to making $4m in a day’: how NFTs are shaking up the art world, the guardian 

(Nov. 6, 2021), www.theguardian.com/artanddesign/2021/nov/06/how-nfs-non-fungible-tokens-are-shaking-up-the-art-world. 

97 Content creators include individual artists, celebrities, NFT project teams (groups that plan and initiate NFT projects), and others. 
24 

 

 

 

 

 

trades worth less than $10,000, making the NFT space more retail-driven than overall crypto-asset 

markets.98 

NFTs are commonly transacted on centralized marketplaces, specialized websites where users can buy, 

sell, and trade NFTs similar to how users might trade other coins and tokens. Approximately $40 billion 

worth of crypto-assets are estimated to have been sent to major NFT marketplaces in 2021, and more 

than $37 billion as of May 1, 2022;99 however, more recent industry figures suggest that NFT transaction 

volumes are declining.100 While some NFT marketplaces may provide custody services for users’ NFTs, 

many marketplaces do not and—as with other crypto-assets—users may need their own blockchainsecured wallets to store and access their NFTs. 

NFTs are created, or minted, according to “non-fungible” token standards such that ownership can 

be demonstrated and verified through entries in a blockchain ledger.101 Minting refers to the process 

whereby an NFT is created and transferred to its initial owner and requires a transaction with the 

smart contract of the NFT project or marketplace hosted on the blockchain. Minting NFTs can be a 

competitive process, with buyers frequently competing on the basis of the gas fees they are willing 

to pay to record a transaction on a blockchain. As with other crypto-assets, miners or validators are 

needed to execute the computational and validation work necessary to record NFTs to the blockchain. 

Because miners and validators determine the order in which they will validate pending transactions 

and are incentivized to prioritize transactions based on the fees they can earn, they can benefit from 

“gas wars” between buyers in fast-moving markets.102 

Gaming and Entertainment 

The growing role of NFTs in video games and other online entertainment systems is another use case. 

While traditional video games have long enabled users to make in-game purchases of content and 

premium features, for example, to enhance their game playing experience, such transactions have 

generally been one-way flows of payments from players to game developers. But the integration of NFTs 

98 Chainalysis groups NFT transaction into three categories: (i) Retail—transactions for less than $10,000 in cryptocurrency; (ii) NFT 

Collectors—transactions between $10,000 and $100,000; and (iii) Institutional—transactions for more than $100,000. By this 

classification, as of October 31, 2021, about 80% of NFT transactions—by transaction count—were at the retail level, 19% were at the 

NFT collector level, and less than 1% were institutional. However, in terms of transaction volume, retail NFT transactions are quite small, 

accounting for just 11% of trading volume during the period studied, while NFT collector-sized and institutional-sized transactions 

accounted for 63% and 26%, respectively, of NFT transaction volume. See Chainalysis, the 2021 nft MarKet rePort 5-6 (2021), 

https://go.chainalysis.com/nf-market-report.html. 

99 Chainalysis, NFT Transaction Activity Stabilizing in 2022 Afer Explosive Growth in 2021, (May 5, 2022), https://blog.chainalysis.com/reports/ 

chainalysis-web3-report-preview-nfs. 

100 See Raphael Minter, NFT Global Sales Hit 2022 Low, Sinking More Than $4 Billion, be[in]CryPto (Aug. 4, 2022), https://beincrypto.com/nfglobal-sales-hit-2022-low-sinking-more-than-4-billion. 

101 On the Ethereum blockchain, for example, whereas most “fungible” tokens are created according to the ERC-20 token standard, NFTs are 

created according to the “non-fungible” ERC-721 token standard. 

102 In periods of volatility, a buyer may not only lose the opportunity to mint the NFT at the ofered price altogether, but they may also incur 

losses in spent fees attempting to do so. That is, miners still collect transaction fees for failed mints, and these amounts can be quite 

substantial, and in some cases may exceed what goes to the content creators. Many blockchain transactions, including the minting of 

NFTs, involve multiple execution steps, and the gas price is applied to each separate step. Buyers attempting to mint NFTs will indicate 

what they are willing to pay per execution step, as well as set a capped aggregate amount. Miners will choose transactions with higher gas 

prices, but if the number of execution steps—which is ofen not known before initiating the transaction—is suficient to exhaust the user’s 

fee-spending cap, the user will “run out of gas,” resulting in a failed mint. The miner, however, retains the gas collected for execution steps 

performed up to that point. These costs may not always be transparent to those attempting to mint an NFT, especially new users. 
25 

 

 

 

 

 

 

into popular games, as well as the development of blockchain-native games, means that players can 

purchase tokenized game features and attributes which they own and are able to transfer.103 In addition, 

online or blockchain-enabled “metaverses”—digital worlds where participants can interact virtually with 

other users and purchase tokenized digital real estate and other “merchandise”—have grown in popularity 

as form of entertainment. With an estimated 215 million, or 66% of, Americans playing video games at 

least once per week, the potential market for such so-called “play-to-earn” games is substantial.104 

Potential Opportunities in NFTs 

NFTs have a number of potential future applications, including: (i) enabling the recording and 

verification of transfers of real estate ownership; (ii) facilitating automatic royalty payments for music 

and film; (iii) preventing duplication and counterfeits in the titling of other property and consumer 

goods; (iv) enabling more digital credentials, including identification, licensing, certification; and (v) 

facilitating financial industry legal compliance. 

NFTs have the potential to function across both digital spaces and the physical world. As a result, 

NFTs can include features that serve as membership cards or tickets, providing access to events, 

exclusive merchandise, and special discounts.105  However, many of the potential NFT use cases are 

still materializing, in part due to evolving technological and legal landscape, including with respect to 

licensing, contracts, copyright and intellectual property, anti-money laundering, and data protection.106 

IV. RISKS AND EXPOSURES FOR CONSUMERS, INVESTORS, AND BUSINESSES 

Having considered the potential opportunities presented by crypto-asset products and services, 

this part of the report reviews the risks posed by crypto-assets. These risks are divided into three 

categories: (i) conduct risks, including product, and investor, consumer, and business protection (e.g., 

thef, fraud) risks; (ii) operational risks, including the technology-specific risks of crypto-assets and 

systems; and (iii) risks arising from crypto-asset intermediation. Some of the risks discussed in this 

part are unique to the crypto-asset ecosystem, as a result of the features of crypto-assets. Others are 

simply a form of risk already present in traditional finance markets, but which is heightened due to the 

specific attributes of the crypto-asset ecosystem. 

103 Though tokenized game features and attributes are, on the surface, intended to enhance players’ experiences within the gaming 

environment, to the extent these NFTs have tradable value there is a possibility that some players will become incentivized to use 

them predominantly as speculative assets, purchasing in-game NFTs primarily with the aim of selling them for a future profit. Indeed, 

players both in the U.S. and abroad have taken to playing certain games as a way to earn a living, and some games have deployed 

design features and incentives in order to create an “investor mindset” among new players. In addition, the increased prevalence of 

“gamification” of investment activities more generally has come under greater scrutiny in recent years. See James Fallows Tierney, 

Investment Games, duKe law Journal (Vol. 72, Forthcoming 2022-23), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3916407. 

104 EntertainMent software assoCiation, essential faCts about the Video gaMe industry (2022), https://www.theesa.com/resource/2022-essentialfacts-about-the-video-game-industry. 

105 Steve Kaczynski & Scott Duke Kominers, How NFTs Create Value, Harvard Business Review (Nov. 10, 2021), https://hbr.org/2021/11/hownfs-create-value. 

106 For example, since NFTs essentially represent the original and unique cryptographic code or on-chain token linked to the of-chain 

digital work or real-world asset, ownership of an NFT may not translate to ownership of an underlying asset or the associated rights 

(such as copyright and licensing rights). See, e.g., Stuart Levi, Mana Ghaemmaghami & Gabriel Mohr, Skadden Discusses the Growing 

Complexity of Commercial Rights Issues In NFTs, the Cls blue sKy blog (Jun. 1, 2022), https://clsbluesky.law.columbia.edu/2022/06/01/ 

skadden-discusses-the-growing-complexity-of-commercial-rights-issues-in-nfs. NFTs can also be used to facilitate money laundering 

and terror financing; digital art assets are inherently easier than traditional art for such purposes. See u.s. dePartMent of the treasury, 

study of the faCilitation of Money laundering and terror finanCe through the trade in the worKs of art (2022), https://home.treasury.gov/system/ 

files/136/Treasury_Study_WoA.pdf. 
26 

 

 

 

 

This part then considers factors afecting the relative exposure of consumers, investors, and 

businesses to these risks, including due to market participants’ non-compliance with current laws and 

regulations, and ongoing changes related to the scope and application of those legal requirements. 

Conduct Risks 

Consumers, investors, and businesses using or investing in crypto-assets are exposed to a variety of 

conduct risks in the crypto-asset ecosystem. Investing is ofen at the core of crypto-asset activity; 

accordingly, the conduct risks below largely focus on risks associated with investing activities. 

Crypto-assets and markets that operate out of compliance with applicable laws and regulations, or are 

unregulated, can breed fraud, abusive market practices, and disclosure gaps.107  Certain practices in 

the crypto-asset ecosystem have resulted in financial harm to consumers, investors, and businesses; 

unfair and inequitable outcomes; and damage to the integrity of the market. Some notable conduct 

risks are described below, but risks are likely to continue to evolve as crypto-asset markets change and 

therefore require vigilant and robust regulatory supervision and oversight.108 

Fraud, Thef, and Mismanagement 

As the crypto-asset market has grown, so has the volume of fraud, scams, and thef in the ecosystem; 

indeed, unlawful transaction activity globally reached an all-time high in value in 2021.109 

Criminals ofen take advantage of innovations and new technologies to perpetrate fraudulent 

activities, including promises or guarantees of high returns. Moreover, the crypto-asset ecosystem 

has unique features that make it an increasingly attractive target for unlawful activity, including the 

ongoing evolution of the underlying technology, pseudonymity, irreversibility of transactions, and the 

current asymmetry of information between issuers of crypto-assets and consumers and investors. 

Multiple U.S. government agencies track and publish crypto-asset related complaints reported by 

the public, which have indicated a sharp increase in losses related to crypto-assets. They have also 

issued warnings related to their findings, including noting a material increase in crypto-assets as a 

payment method for all types of scams, including investment scams, romance scams, and business and 

government impersonation scams.110 

•	 The Federal Bureau of Investigation’s Internet Crime Complaint Center (IC3) has warned against 

the scams leveraging cryptocurrency ATMs,111 cryptocurrency customer support impersonators, 

as well as romance scams that involve investment opportunities. In 2021, the IC3 received 34,202 

107 iosCo, supra note 21, at 36. 

108 Id., at 5. 

109 At the same time, transaction activity associated with unlawful applications reached an all-time low as a share of all crypto-asset 

activity, reflecting the growth in overall transaction volume. See Chainalysis, the 2022 CryPto CriMe rePort 3-4 (2022), https://go.chainalysis. 

com/2022-Crypto-Crime-Report.html. 

110 For more information on crypto-asset scams, see ftC, Reports show scammers cashing in on crypto craze, (Jun. 2022), www.fc.gov/ 

system/files/fc_gov/pdf/Crypto%20Spotlight%20FINAL%20June%202022.pdf. 

111 Criminal actors, in various fraudulent schemes, maliciously leverage physical cryptocurrency ATMs to receive payments from victims.  

See, e.g., fbi, The FBI Warns of Fraudulent Schemes Leveraging Cryptocurrency ATMs and QR Codes to Facilitate Payment, (Nov. 4, 2021), 

https://www.ic3.gov/Media/Y2021/PSA211104. 
27 

 

 

complaints involving the use of some type of crypto-asset. While the number of complaints 

decreased by approximately 3% in 2021 year-over-year, the loss amount reported in IC3 complaints 

increased by nearly 600%, from $246 million in 2020 to more than $1.6 billion in 2021.112 

•	 The Consumer Financial Protection Bureau (CFPB) had 2,404 published crypto-asset consumer 

complaints in 2021 compared to 983 in 2020, amounting an increase of over 140%. As of July 15, 

2022, the CFPB had 906 complaints year-to-date and 1,870 published complaints in the prior 12 

months.113 

•	 The Federal Trade Commission (FTC) had more than 46,000 reported incidents of fraud between 

January 1, 2021, and March 31, 2022, with people claiming losses that exceeded $1 billion worth of 

cryptocurrencies. Cryptocurrencies represented 24% of all fraud-related losses reported to the FTC 

during that period—more than any other payment method.114 The median individual reported loss 

was $2,600.115 

Measuring or estimating the volume of crime involving crypto-assets, or any criminal activity, can be 

challenging as it relies on self-reporting by victims and thus is likely to be underreported. However, 

given the public nature of blockchains, several private firms have been able to use proprietary 

methodologies to track losses from known thefs, scams, and frauds. According to one private sector 

estimate, there was $14 billion worth of crypto-asset-based crime, globally, in 2021, up from $7.8 

billion in 2020; the breakdown is as follows: 

•	 Scams: Scams were the largest form of crypto-asset-based crime by transaction volume in 2021. 

The number of scams in 2021 rose by over 60% year-over-year, while the value of stolen crypto112 Fbi, 2021 internet CriMe rePort 13 (2021), https://www.ic3.gov/Media/PDF/AnnualReport/2021_IC3Report.pdf. 

113 CFPB, CFPB Complaint Database, https://www.consumerfinance.gov/data-research/consumer-complaints/search. 

114 FTC, supra note 110. 

115 Id. 
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assets rose by over 80% in 2021 to $7.8 billion. $2.8 billion of this total came from a relatively 

new but increasingly common scheme known as a “rug pull,” in which developers build out what 

appears to be legitimate crypto-asset projects, misleading investors into purchasing tokens 

associated with a project, before ultimately draining the funds provided by those investors and 

disappearing, typically driving the token’s value to zero.116 

•	 Thefs: Of the $14 billion in crypto-asset-based crime in 2021, thef rose by over 500% year-overyear to $3.2 billion in total.117 Thefs include security breaches that target individuals’ private keys, 

which can be obtained through phishing, key logging, or social engineering, code exploits, and 

flash loan attacks.118 2021 also marked the first year when the level of thef in DeFi surpassed thef 

on centralized exchanges; out of $3.2 billion of total stolen funds, $2.3 billion was stolen from DeFi 

protocols, as opposed to centralized platforms, which represented a year-over-year increase of 

over 1,300%.119 

Analysts believe that most instances of thef from DeFi protocols can be traced back to errors in the 

smart contract code governing those protocols, which hackers exploit to steal funds, or promoters 

exploit flaws in their operating code that can lead to erroneous transactions, similar to the errors 

that allow rug pulls to occur. Users, who ofen lack the ability to read the code, must rely on a 

developer’s word—ofered, for example, through a protocol’s white paper—that a smart contract 

will perform as described. Still, even auditing of the code may be insuficient to prevent thef as 

nearly 30% of code exploits and over 70% of flash loan attacks occurred on platforms audited 

within the prior year.120 Sophisticated hacks, especially hacks perpetrated by nation state actors, 

have also emerged as an area of concern.121 

•	 Other: Of the remaining $3 billion of crypto-asset-based crime in 2021, nearly $2 billion was 

associated with drug traficking. Other activity can be traced to sales of stolen logins or credit 

cards, ransomware, malware, terrorism financing, and child abuse material. 

116 Chainalysis, supra note 109, at 3, 5, 24, and 81-84. Note that the definition of rug pulls is evolving, particularly as an innovation in 

scamming. Another form of a rug pull would include limiting sell orders, where tokens are coded only to be bought but unable to 

be sold. See Valerio Puggioni, Crypto rug pulls: What is a rug pull in crypto and 6 ways to spot it, CointelegraPh (Feb. 6, 2022), https:// 

cointelegraph.com/explained/crypto-rug-pulls-what-is-a-rug-pull-in-crypto-and-6-ways-to-spot-it. See also Koinly, Rug Pulls: Your 

Complete Guide, (Mar. 31, 2022), https://koinly.io/blog/crypto-rug-pulls-guide. 

117 Id., at 6. 

118 In an innovation unique to DeFi lending, some protocols may support “flash loans,” which enable users to borrow, use, and repay cryptoassets in a single transaction that is recorded on the blockchain in the same data block. Because there is no default risk associated 

with flash loans, users can borrow without posting collateral and without risk of being liquidated. A “flash loan attack” can occur when 

the temporary surge of funds obtained in a flash loan is used to manipulate prices of crypto-assets, ofen through the interaction of 

multiple DeFi services, enabling attackers to take over the governance of a protocol, change the code, and drain the treasury. See, e.g., 

world eConoMiC foruM, deCentralized finanCe (defi) PoliCy-MaKer toolKit 18 (2021), https://www3.weforum.org/docs/WEF_DeFi_Policy_Maker_ 

Toolkit_2021.pdf. See also Shaurya Malwa, Solana DeFi Protocol Nirvana Drained of Liquidity Afer Flash Loan Exploit, CoindesK (Jul. 28, 

2022), https://www.coindesk.com/tech/2022/07/28/solana-defi-protocol-nirvana-drained-of-liquidity-afer-flash-loan-exploit. 

119 Chainalysis, supra note 109, at 70. 

120 Id., at 73. 

121 Hacks linked to nation state actors, responsible for some of the unlawful activity discussed in this section, have advanced to become 

persistent threats in the crypto-asset industry. One example was in the play-to-earn crypto-asset segment of the ecosystem, where 

the game Axie Infinity collapsed following a $620 million hack of its Ronin Network side-chain, which was attributed to hackers 

afiliated with Democratic People’s Republic of Korea. See Chainalysis, supra note 109, at 120. See also Aaron Schafer, North Korean 

hackers linked to $260 million Axie Infinity crypto heist, the washington Post (Apr. 14, 2022), https://www.washingtonpost.com/ 

technology/2022/04/14/us-links-axie-crypto-heist-north-korea. 
29 

 

 

 

As discussed in more detail in Part VI, Recommendations, U.S. regulatory and law enforcement 

authorities should aggressively pursue investigations and enforcement actions, and pursue vigilant 

monitoring of the crypto-asset sector for unlawful activity. 

Information Asymmetry: Lack of Transparency 

The traditional capital markets have statutes and regulations that create a robust disclosure regime, 

providing consumers and investors with material information, including with respect to conflicts 

of interest, so that users can better understand the risks of participation and make more informed 

decisions regarding their investment risks.122 In the crypto-asset ecosystem, issuers and platforms may 

be acting in non-compliance with these statutes and regulations and, thus, do not maintain the same 

protocols to protect investors. Further, disclosures in the crypto-asset ecosystem that are provided 

may lack standardization and may not disclose material information integral to assessing risk. 

Crypto-asset Investments and Governance 

Absent compliance with comprehensive, mandatory disclosure requirements, including with respect 

to conflicts of interest, information asymmetries will likely advantage insiders at the expense of the 

smallest investors and those with the least access to information. Currently, investors may lack 

material information necessary to assess the risk of crypto-asset investments, including with respect 

to the probability and severity of the loss on the investment; instead, promoters of crypto-asset 

investments may at best be providing investors with only broad details or superficial disclosures.123 

This lack of disclosure and transparency has been prevalent in the ICO market, and instances of 

outright deception are not uncommon. One review of documents produced for 1,450 digital coin 

oferings found 271 with red flags that include plagiarized investor documents, promises of guaranteed 

returns, and missing or fake executive teams.124 ICOs were growing in popularity when, in 2017, the 

SEC issued an investigative report concluding that a token issued through such an ofering in 2016 was 

a securities ofering requiring either registration or an exemption under federal securities laws.125 Even 

before that report, the SEC was cautioning investors—many of whom are retail investors—and market 

professionals about investing in crypto-assets, including ICOs, warning that such investments may 

be securities, may be required to be registered with the SEC, and pose substantial risks. Risks in ICOs 

include not only their high susceptibility to volatility, information asymmetry, and price depreciation, 

but also a substantial risk of loss through fraud and market manipulation. The SEC has brought a 

number of civil actions to enforce the federal securities registration requirements and other applicable 

laws and regulations.126 More resources may be necessary, however, to address the evolving and 

growing rate of frauds, manipulations, and other misconduct. 

122 Rostin Behnam, Chair, CFTC, Keynote Address of Chairman Rostin Behnam at the Brookings Institution Webcast of The Future of Crypto 

Regulation (Jul. 25, 2022), https://www.cfc.gov/PressRoom/SpeechesTestimony/opabehnam24. See also Gary Gensler, Chair, SEC, 

Testimony Before the United States House of Representatives Committee on Financial Services (Oct. 5, 2021), https://www.sec.gov/ 

news/testimony/gensler-2021-10-05. 

123 Caroline Crenshaw, supra note 30, at 5-6. 

124 Shane Shiflett & Coulter Jones, Buyer Beware: Hundreds of Bitcoin Wannabes Show Hallmarks of Fraud, the wall street Journal (May 17, 

2018), www.wsj.com/articles/buyer-beware-hundreds-of-bitcoin-wannabes-show-hallmarks-of-fraud-1526573115. 

125 See SEC, supra note 31. 

126 See SEC, Crypto Assets and Cyber Enforcement Actions, https://www.sec.gov/spotlight/cybersecurity-enforcement-actions. 
30 

  

 

 

The NFT market has similar disclosure and integrity gaps, where, for example, consumers can 

unknowingly buy NFTs that may contain copyright infringements.127 The industry has seen a 

significant increase in the number of lawsuits filed, with claims related to deceitful marketing tactics 

or for sales made under false pretenses.128 However, investors ofen sufer from a lack of recourse 

because there is insuficient information on whom to hold accountable or because accountable parties 

may be outside the jurisdiction of the U.S. courts.129 

Crypto-asset investment arrangements also ofen fail to provide disclosures with respect to conflicts 

of interest, which is a cornerstone of investor protection in traditional financial markets. Much of DeFi 

is funded by venture capital and other professional investors.  The underlying funding deals ofen 

grant professional investors equity, options, advisory roles, access to project team management, 

formal or informal say on governance and operations, anti-dilution rights, and the ability to distribute 

controlling interests to allies, among other benefits, which present opportunities for conflicts of 

interest.  These arrangements are rarely disclosed to retail investors, but they can have a significant 

impact on investment values and outcomes.130 

For example, one common form of governance, used broadly in DeFi applications, is the issuance of 

“governance tokens,” which purport to allow disparate participants to introduce and vote on proposals 

determining the function of a blockchain or overlying protocols. One key risk that, due to inadequate 

disclosure, may not be apparent to consumers and investors is the concentration of governance tokens 

or voting rights among a limited number of actors. Developers and early investors in a crypto-asset 

project may keep control of the platform by allocating significant shares of governance tokens to 

themselves or otherwise maintaining de facto control.131 Consumers and investors should understand 

that the extent to which true decentralization exists in crypto-asset markets is questionable, and 

claims of decentralization may be exaggerated.132 

Crypto-asset Platforms 

Compared to registered financial market intermediaries—which are subject to rules and laws that 

promote market integrity and govern risks and business conduct, including identifying, disclosing, 

and mitigating conflicts of interest133 and adhering to AML/CFT requirements—many crypto-asset 

platforms may either not yet be in compliance with, or may actively claim not to be subject to, existing 

applicable U.S. laws and regulations, including registration requirements.134 Consumers, investors, 

127 Cristina Criddle, Hermes Clashes with Artist Who Created MetaBirkins NFT, finanCial tiMes (Dec. 10, 2021), https://www.f.com/ 

content/7953d195-53f6-48d2-8514-460a0ebd9aee. 

128 James Fanelli, Crypto Industry Sees Surge in Lawsuits as Investor Losses Pile Up, The wall street Journal (Jun. 1, 2022), www.wsj.com/ 

articles/as-crypto-losses-hit-investors-litigation-picks-up-11654084801. 

129 Samantha Hissong, NFT Scams Are Everywhere. Here’s How to Avoid Them, rolling stone (Jan. 24, 2022), https://www.rollingstone.com/ 

culture/culture-features/nf-crypto-scams-how-to-not-get-scammed-1286614. 

130 Caroline Crenshaw, supra note 30, at 9. 

131 See, e.g., Danny Nelson & Tracy Wang, Master of Anons: How a Crypto Developer Faked a DeFi Ecosystem, CoindesK (Aug. 4, 2022), https:// 

www.coindesk.com/layer2/2022/08/04/master-of-anons-how-a-crypto-developer-faked-a-defi-ecosystem. For further discussion of 

governance in decentralized finance, see Sirio Aramonte, Wenqian Huang & Andreas Schrimpf, supra note 29, at 27-29. See also igor 

MaKaroV & antoinette sChoar, CryPtoCurrenCies and deCentralized finanCe (defi) (the brooKings institution, 2022), https://www.brookings.edu/wpcontent/uploads/2022/03/SP22_BPEA_MakarovSchoar_conf-draf.pdf. 

132 See, e.g., Sirio Aramonte, Wenqian Huang & Andreas Schrimpf, supra note 29. 

133 finra, Conflicts of Interest, https://www.finra.org/rules-guidance/key-topics/conflicts-of-interest. 

134 See the report required by Section 7(b) of the Executive Order for additional information on illicit finance risks. 
31 

 

 

and businesses using centralized and decentralized crypto-asset platforms are subject to a variety of 

risks and inconsistent practices, including the fact that crypto-assets and crypto-asset intermediaries 

may be unregistered or otherwise not in compliance with applicable law and that guidance and 

supervision of crypto-assets is still developing. 

Access to Platforms and Illegal Activity 

Access criteria for registered financial markets helps ensure that access to the systems or exchanges 

and to associated products is transparent and objective and may support a “gatekeeping” role that 

assists in preventing criminal or illegal activity. But access criteria can be varied and inconsistent 

among crypto-asset platforms. When the onboarding process used by platforms is limited or opaque, 

the risks that the platform may be used for illegal activities increases. Indeed, certain digital platforms 

have been charged with violating anti-money laundering laws and failing to implement adequate 

required anti-money laundering programs.135 

Suitability 

Registered financial market intermediaries also seek to protect consumers and investors on platforms 

by limiting participation on the platform to investors that are transacting in assets that match their 

individual financial situations or risk tolerance levels. Crypto-asset platforms that displace registered 

intermediaries can also leave retail investors without access to professional financial advisors or other 

intermediaries who help screen potential investments for quality and legitimacy or who are required 

by fiduciary standards to act in the best financial interest of their clients.136  Further, crypto-asset 

platforms may not be conducting suitability assessments or providing adequate risk disclosures to 

investors, increasing the likelihood of investor harm.137 

Conflicts of Interest 

Crypto-asset platforms ofen do not disclose activities or aspects of their structure (e.g., common 

ownership; market making; proprietary trading; and settlement, custody, and advisory services) that 

may lead to conflicts of interest or that, if the platforms were registered, would be prohibited by statute 

or regulation. Many trading platforms are themselves heavily invested in crypto-assets and conduct 

proprietary trading out of compliance with laws to which they are subject or without oversight. 

The conflicts of interests in crypto-asset platforms are many and varied. Platforms may be able to 

hide conflicted relationships through afiliates in other jurisdictions.138 Some platforms have multiple 

afiliates, including proprietary trading funds, that are wholly owned or controlled by the platform 

or its related parties. Some platforms provide large investors with favorable treatment, such as free 

distributions of coins or tokens, known as “airdrops,” or private cash-outs away from the market.139 

135 See, e.g., CFTC, Federal Court Orders BitMEX to Pay $100 Million for Illegally Operating a Cryptocurrency Trading Platform and Anti-Money 

Laundering Violations, (Aug. 10, 2021), https://www.cfc.gov/PressRoom/PressReleases/8412-21. 

136 Caroline Crenshaw, supra note 30, at 9. See also Kat Tretina, How Fiduciary Duty Impacts Financial Advisors, forbes (Jul. 15, 2022), https:// 

www.forbes.com/advisor/investing/financial-advisor/what-is-fiduciary-duty. 

137 IOSCO, supra note 15, at 10. 

138 Sam Reynolds, Crypto Trading Firm TPS Capital Denied Ties to Insolvent Three Arrows. Court Documents Indicate a Connection, CoindesK 

(Jul. 19, 2022), https://www.coindesk.com/business/2022/07/19/crypto-trading-firm-tps-capital-denied-ties-to-insolvent-three-arrowscourt-documents-indicate-a-connection. 

139 new yorK state offiCe of the attorney general, INVESTOR ALERT: Attorney General James Warns New Yorkers About Cryptocurrency Investment 

Risks, (Jun. 2, 2022), https://ag.ny.gov/press-release/2022/investor-alert-attorney-general-james-warns-new-yorkers-about-cryptocurrency. 
32 

 

 

 

 

Platforms may also engage in steering, with preferential fees for using the specific stablecoins 

associated with their platforms. Insider trading can also occur in crypto-asset markets, including on 

some of the largest crypto-asset platforms.140 

Price Discovery and Market Manipulation 

U.S. laws and regulations are designed to safeguard market integrity and protect against price 

manipulation and other abusive trading practices. Market manipulation and misleading or 

fraudulent and deceptive market conduct is prohibited and distorts the price discovery process, 

or prices themselves, and unfairly disadvantages investors. Currently, crypto-asset platforms may 

be out of compliance with applicable laws and regulations designed to protect investors and may 

maintain varied and inconsistent practices around trade settlement, data reporting, surveillance, and 

enforcement of price manipulation, creating serious risk for investors.141 

In the crypto-asset ecosystem, the visibility of transactions on a blockchain is also limited by 

pseudonymity; without an eficient method for determining the identity of market participants, it is 

dificult to ascertain if asset prices and trading volumes reflect organic interest or are the product of 

manipulative trading, including by using bots to operate multiple wallets or a group of people trading 

collusively.142  As a result, the values of coins and tokens may be propped up by automated trading 

or bots that are engaged in wash trading, or platforms may report misleading or inaccurate price 

information, including transactions based on self-trading.143 

Bots also may be programmed to spot when another investor is trying to make a purchase and then 

buy ahead of the trade. Such front-running is a form of value extraction from natural traders and 

hinders the ability of investors to obtain reliable information before making an investment decision. 

As detailed in Part VI, this report recommends a variety of actions to combat market manipulation and 

information asymmetry and their related risks, including increased investigation and enforcement to 

bring more crypto-assets and intermediaries into compliance with applicable laws and regulations 

and their associated disclosure requirements. 

Problematic Terms of Service 

Some users of crypto-assets are subject to problematic terms of service. For example, users staking 

their crypto-assets face a number of other potential risks, including insuficiently disclosed lock-up 

periods during which staked assets cannot be withdrawn, waiting periods for honoring withdrawal 

requests, exposure to the performance and integrity of a staking pool operator, and the risk of the pool 

140 See SEC, SEC Charges Former Coinbase Manager, Two Others in Crypto Asset Insider Trading Action, (Jul. 21, 2022), https://www.sec.gov/ 

news/press-release/2022-127. See also ester félez-Viñas, luKe Johnson & talis J. Putnins, insider trading in CryPtoCurrenCy MarKets (2022), 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4184367. See also Alexis Goldstein, supra note 63. 

141 Rostin Behnam, supra note 122. 

142 See Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order Setting Aside Action by Delegated Authority and Disapproving a 

Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 83 Fed. 

Reg. 37579 (Aug. 1, 2018). See also SEC, Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Disapproving a Proposed 

Rule Change, as Modified by Amendment No. 1, To List and Trade Shares of the ARK 21 Shares Bitcoin ETF Under BZX Rule 14.11€(4), 

Commodity-Based Trust Shares, 87 Fed. Reg. 20014 (Mar. 31, 2022), at 20017. 

143 See, e.g., bitwise asset ManageMent, Presentation to the u.s. seCurities and exChange CoMMission (2019), https://www.sec.gov/comments/ 

sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf. See also CFTC, CFTC Orders Coinbase Inc. to Pay $6.5 Million for False, 

Misleading, or Inaccurate Reporting and Wash Trading, (Release No. 8369-21, Mar. 19, 2021), https://www.cfc.gov/PressRoom/ 

PressReleases/8369-21. 
33 

 

 

 

 

 

being hacked, which could result in the total loss of funds. Further, some stablecoins do not grant U.S. 

retail users any redemption rights, leaving them reliant on trading their stablecoins for U.S. dollars on 

digital asset trading platforms. 

DeFi borrowers are at risk of having their collateral liquidated and a loan terminated at any time 

should the value of their collateral fall below a pre-determined liquidation threshold.144 Ofen, 

liquidation may involve third-party liquidators that are incentivized to repay insuficiently 

collateralized loans—however briefly—in exchange for acquiring some or all of borrowers’ collateral at 

a discount.145 Users of platforms that recently entered bankruptcy have also reported that marketing 

of certain crypto-asset platforms did not match the reality of the safety of their assets.146 

Finally, many crypto-asset intermediaries and product contracts employ dispute resolution 

mechanisms—such as arbitration clauses and class action bans—also utilized by traditional finance 

companies, that inhibit consumers’ and investors’ ability to pursue legal claims.147 

Operational Risks 

Operational risk is defined generally as the risk of loss caused by flawed or failed processes, policies, 

systems, or events.148  In the context of multilateral systems for settling and recording financial 

transactions, this includes the risk that deficiencies in information systems or internal processes, 

human errors, governance and management failures, or disruptions from external events will reduce, 

deteriorate, or cause a breakdown in services provided. Such deficiencies in information systems or 

processes also include errors or delays in processing, system outages, information security threats, 

such as cyberattacks, insuficient capacity, fraud, data loss, and leakage (e.g., calculation errors, 

omissions, and inaccuracies).149 

When assets with substantial value reside and trade on permissioned or permissionless blockchains, 

asset owners are reliant upon the blockchain systems for access to their digital property. Further, 

crypto-asset systems use diferent technologies, transaction processes, and distributed governance 

structures with novel features that may not be as robust as standards for mitigating operational risk 

in registered markets.150 These characteristics of crypto-asset technology and products expose users 

to unique operational risks. Some examples include the absence of reversal mechanisms or other 

fail-safes for accidental or erroneous transactions, issues associated with the lack of blockchain 

144 Liquidation of insuficiently collateralized DeFi loans usually happens automatically in real-time. For this reason, borrowers are 

incentivized to post more collateral than the minimum required to avoid forced liquidation. See, e.g., sirio araMonte, sebastian doerr, 

wenqian huang & andreas sChriMPf, supra note 58, at 2-3. 

145 world eConoMiC foruM, supra note 118, at 18. 

146 See, e.g., Molly White, Excerpts from letters to the judge in the Voyager Digital bankruptcy case, Mollywhite.net, (Jul. 23, 2022), https:// 

blog.mollywhite.net/voyager-letters. See also Molly White, Excerpts from letters to the judge in the Celsius Network bankruptcy case, 

Mollywhite.net, (Jul. 22, 2022), https://blog.mollywhite.net/celsius-letters. 

147 See Alexis Goldstein, supra note 63, at 3. See also Tamar Meshel & Moin A. Yahya, Crypto Dispute Resolution: An Empirical Study, Journal 

of law, teChnology and PoliCy (Oct. 5, 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975500; Julie M. Moringiello & 

Christopher K. Odinet, supra note 9, at 61-63. 

148 See, e.g., bis, international ConVergenCe of CaPital MeasureMent and CaPital standards: a reVised fraMeworK 140 (2005), https://www.bis.org/publ/ 

bcbs118.html. See also 12 C.F.R. § 217.101. 

149 board of goVernors of the federal reserVe systeM, federal reserVe PoliCy on PayMent systeM risK (2021), https://www.federalreserve.gov/ 

paymentsystems/files/psr_policy.pdf. 

150 bis & oiCu-iosCo, PrinCiPles for finanCial MarKet infrastruCtures (2012), https://www.bis.org/cpmi/publ/d101a.pdf. 
34 

 

 

 

interoperability – including those arising from flaws with cross-chain bridges, vulnerabilities 

associated with private keys, and dificulties integrating blockchains with traditional or legacy 

systems. Therefore, consumers, investors, and businesses should be aware that increasing use of 

public blockchains as they currently exist exposes them to these new forms of risk. 

General Features and Decentralized Governance 

Public permissionless blockchains are ultimately forms of computer sofware and are subject to 

sofware vulnerabilities.151 Among other things, blockchains may have sofware bugs and the sofware 

may need to be continually updated to address such bugs and add features.152 Sofware is also 

vulnerable to attack by hackers. While certain security features of the largest public blockchains such 

as Bitcoin and Ethereum are considered strong, as the technology becomes more widely used, the 

incentives for attacks may increase.153 Thus, cybersecurity practices and protections will need to keep 

pace with the scale of adoption. 

Public permissionless blockchains also are generally based on open-source sofware, meaning 

sofware that allows for the inspection and modification of source code, is freely distributed, is 

technologically neutral, and grants free subsidiary licensing rights.154 While this arrangement 

increases the number of parties who may contribute to the continued development of the blockchain’s 

source code, it may reduce incentives for timely critical fixes to the sofware. Solutions to strengthen 

incentives for improved sofware development, such as core groups of developers that guide 

development or compensation for developers that devote more time to the shared project, may also 

introduce new problems such as conflicts of interest between the users of the network and the core 

group of developers or sources of funding.155 In addition, alternative governance structures designed 

to better align the interests of diferent constituencies may be subject to other vulnerabilities rooted in 

their design.156 

Smart contracts, which are widely used by many permissionless blockchains, also present risks as 

they combine the features of generally being immutable and publicly viewable. Taken together, these 

attributes pose several vulnerabilities that may be exploited by illicit actors to steal customer funds: 

once an attacker finds a bug in a smart contract and exploits it, immutable smart contract protocols 

limit developers’ ability to patch the exploited vulnerability, giving attackers more time to exploit the 

vulnerability and steal assets. 

Concerns with public permissionless blockchains are specific forms of the more general tension 

between decentralized and centralized features of decision-making associated with public 

151 Angela Walch, The Bitcoin Blockchain as Financial Market Infrastructure: A Consideration of Operational Risk, nyu Journal of legislation and 

PubliC PoliCy (Vol. 18, 2015), at 855, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579482. 

152 See, e.g., github, Bitcoin, https://github.com/bitcoin/bitcoin/labels/Bug. 

153 Angela Walch, supra note 151, at 863. For a more recent description of blockchain vulnerabilities and attack incentives, see, for example, 

Huashan Chen, Marcus Pendleton, Laurent Njilla, & Shouhuai Xu, A Survey on Ethereum Systems Security: Vulnerabilities, Attacks, and 

Defenses, aCM CoMPuting surVeys (Vol. 53 Issue 3, 2021), https://doi.org/10.1145/3391195. 

154 Chris dibona, saM oCKMan, & MarK stone oPen sourCes: VoiCes froM the reVolution 171-188 (O’Reilly, 1999). See also oPen sourCe initiatiVe, The 

Open Source Definition (Annotated), https://opensource.org/osd-annotated. 

155 Angela Walch, supra note 151, at 879. 

156 Wulf. A. Kaal, Blockchain-Based Corporate Governance, stanford Journal of bloCKChain law &PoliCy (Vol. 4 Issue 1, Aug. 23, 2019), 

https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=3441904. 
35 

 

 

 

 

 

 

blockchains. While a more decentralized system may strengthen public blockchain projects by 

spreading the benefits of consensus more widely once achieved, the costs of consensus increase with 

decentralization and reduce the likelihood of it being achieved, creating a significant vulnerability that 

limits the system’s suitability as a core operational feature or channel of a financial system.157 

Security and Scalability Tradeofs and De-anonymization 

A distributed ledger may be more secure because of its reduced centrality, but as more copies of the 

ledger are distributed to new nodes, and more computational resources are required to reach protocol 

consensus, transaction rates on the network slow down. This, in turn, reduces scale (unless a degree 

of centralization arises to improve validation eficiency), which reduces security.158 While solutions are 

emerging that seek to address scalability issues without sacrificing security, the main externality of the 

computationally heavy process of storing and processing transactions on a blockchain remains.159 

Issues with scalability of public blockchains manifest in unpredictable, volatile, and regressive fees 

that are imposed on users. For example, high transaction demand and an increase in the Ethereum 

gas price in May 2022 led to average daily transaction fees spiking to $196.68 versus a previous peak of 

$69.92 in May 2021.160 Such high fees not only reduce utility of the public blockchain but also have a 

regressive impact on users since high fees can make lower value transactions economically unfeasible. 

Similarly, blockchain congestion can also cause transaction times to vary widely and reduce reliability 

and utility for users. 

One of the attractions of crypto-assets for users is the ability to perform transactions pseudonymously. 

However, data analysis techniques have been developed that allow pseudonyms (hashes of public 

keys) to be linked to the IP address where a transaction originates, potentially fatally undermining 

the privacy of transactions on many public blockchains.161 Once a user’s wallet address is known, 

every transaction related to that wallet is publicly visible, and attempts to obscure such transactions 

are ofen easily unobscured with chain analysis tools. Even if one attempts to regain anonymity 

through a separate wallet, significant eforts and precautions would need to be taken to maintain that 

anonymity, including technological acumen that the average consumer may not possess.162 

Peer-to-Peer Verification, Mining Pools, and Validation Incentives 

Peer-to-peer verification protocols mean that, regardless of a blockchain’s transaction speed, there are 

delays in processing transactions that can be on the order of tens of minutes between the execution of 

157 Angela Walch, supra note 151, at 880. 

158 See JosePh abadi & MarKus K. brunnerMeier, bloCKChain eConoMiCs (federal reserVe banK PhiladelPhia, Working Paper No. 22-15, 2022), https://ssrn. 

com/abstract=4100197. 

159 niC Carter & linda Jeng, defi ProtoCol risKs: the Paradox of defi (risKbooKs, 2021), https://ssrn.com/abstract=3866699. 

160 bitinfoCharts, Ethereum Avg. Transaction Fee Historical Chart, https://bitinfocharts.com/comparison/ethereum-transactionfees.html#3y. 

161 Since all transactions stored on the blockchain are immutable, the entire history of actions done with an address can be traced and 

observed, although the identity of the person might be unknown. Should an address be linked with a person’s identity—for example, 

by accidental disclosure or through the use of data analytics tools—there would be significant implications for that user’s privacy. 

See alex biryuKoV, dMitry KhoVratoViCh & iVan PustogaroV, deanonyMisation of Clients in bitCoin P2P networK (arxiV, 2014), https://arxiv.org/ 

pdf/1405.7418.pdf. See also ferenC béres, istVán andrás seres, andrás a. benCzúr, & MiKerah quintyne-Collins, bloCKChain is watChing you: Profiling 

and deanonyMizing ethereuM users (arxiV, 2020), https://arxiv.org/pdf/2005.14051.pdf. 

162 Molly White, Abuse and harassment on the blockchain, Mollywhite.net (Jan. 22, 2022), https://blog.mollywhite.net/abuse-andharassment-on-the-blockchain. 
36 

 

 

 

 

 

 

 

 

 

 

 

 

 

a transaction and its publication to the network. These network delays in updating ledgers can cause 

a mismatched ledger to be generated and result in possible losses by fraud, system attacks, double 

spending, and fake transactions.163 

Mining has become a specialized industry with a significant concentration of players in mining pools.164 

If a mining pool were to control more than half of the total hash rate, it could lead to a 51% attack on 

the network.165 Such attacks may arise from misaligned incentives of miners.166 Further, decisions 

relating to the operation of a distributed ledger are made by the “core developers” of the sofware 

for that ledger and by validators of transactions on the ledger who determine the definitive record of 

ownership of crypto-assets on that ledger.167 

In a PoS environment, the power to validate and assemble transactions into blocks is a function of 

one’s share of all protocol tokens held, which can create incentives to collude. Such consolidation of 

power may allow a validator to control which transactions can be included in the final ledger. Because 

validators are typically rewarded with newly issued tokens, the consolidation of power through votebuying has been observed in some PoS blockchains.168 In PoW systems, miners also select, order, and 

propose transactions to be added to the blockchain record, meaning miners can profit, for example, 

from selling of earlier processing slots. This may afect the profitability of transactions and trigger or 

delay transfers of ownership governed by smart contracts.169 

Further, whether the consensus mechanism is PoS or PoW, miners are able to observe, select, and 

reorganize transactions during the verification process, and routinely include, exclude, or re-order 

transactions within the blocks they produce, therefore prioritizing transactions that pay higher 

fees. This discretionary practice, referred to as “miner extractable value” (MEV), is both opaque and 

potentially disadvantageous to users in the crypto-asset ecosystem. Indeed, some have observed that 

activities that generate MEV can resemble front-running or other market manipulation that is harmful 

to consumers and investors and have called for regulators to establish whether value extraction by 

miners constitutes illegal activity.170 

163 gareth w. Peters, ariane ChaPelle & efstathios Panayi, oPening disCussion on banKing seCtor risK exPosures and Vulnerabilities froM Virtual CurrenCies: 

an oPerational risK PersPeCtiVe (arxiV, 2014), http://arxiv.org/pdf/1409.1451.pdf. 

164 bloCKChain.CoM, Hashrate Distribution, https://www.blockchain.com/charts/pools. 

165 “Hash rate” is a measure of computational power and refers to the number of cryptographic hash functions a processor can calculate in 

a given time, usually denominated as hashes per second. See, e.g., dylan yaga, Peter Mell, niK roby & Karen sCarfone, bloCKChain teChnology 

oVerView (nist, 2018), https://nvlpubs.nist.gov/nistpubs/ir/2018/NIST.IR.8202.pdf. 

166 See Miles Carlsten, harry Kalodner, Matt weinberg & arVind narayanan, on the instability of bitCoin without the bloCK reward (PrinCeton uniVersity 

dePartMent of eConoMiCs, 2016), https://economics.princeton.edu/working-papers/on-the-instability-of-bitcoin-without-the-block-reward. 

See also eriC budish, the eConoMiC liMits of bitCoin and the bloCKChain (nber, Working Paper No. 24717, 2018), https://ericbudish.org/wpcontent/uploads/2022/03/economic_limits_bitcoin_blockchain.pdf. See also antonio fatas, the eConoMiCs of finteCh and digital CurrenCies 

39-45 (CePr Press, 2019), https://cepr.org/sites/default/files/publication-files/60138-the_economics_of_fintech_and_digital_currencies. 

pdf. 

167 Hilary J. Allen, DeFi: Shadow Banking 2.0?, williaM & Mary law reView (Feb. 18, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_ 

id=4038788. 

168 Brady Dale, Vote Buying Scandal Stokes Fears of EOS Governance Failure, CoindesK, (Oct. 3, 2018), https://www.coindesk.com/vitalikcalled-it-vote-buying-scandal-stokes-fears-of-eos-failure. 

169 Angela Walch, Professor of Law, St. Mary’s University School of Law, Written Testimony before the United States Senate Committee on 

Banking, Housing, and Urban Afairs, (Jul. 27, 2021), https://www.banking.senate.gov/imo/media/doc/Walch%20Testimony%207-27-21.pdf. 

See also Hilary J. Allen, supra note 167. 

170 raPhael auer, et al., supra note 28, at 4. 
37 

 

 

The increasing use of public blockchains exposes users to new forms of risks. As detailed in Part VI, this 

report recommends a multi-part approach to addressing these risks, including through the expanded 

application of existing operational risk management standards, when possible, enhanced use of 

supervisory guidance, as well as alerts to consumers, investors, and businesses to adopt improved 

diligence tactics, and actions to ensure financial literacy on crypto-assets, including with respect to 

operational risks that are unique to the crypto-asset ecosystem. 

Risks in Crypto-asset Intermediation 

In addition to conduct risks in the crypto-asset ecosystem and novel operational risks, there are also 

traditional financial risks that have the potential to manifest in crypto-asset markets, with specific 

implications given the dynamics of such markets. Crypto-assets, regardless of the range of financial 

and non-financial characteristics they may have, are ofen created, marketed, traded, and custodied 

using the same technology systems, security protocols, and financial and operational controls. The 

unique exposures between crypto-asset entities and products may create a basis for heightened 

concern. Namely, the firms acting as intermediaries, systems administrators, and other parties in 

crypto-asset markets may not suficiently account for the negative externalities that could afect 

these interconnected assets, firms, or activities, as compared to traditional financial firms whose nonfinancial activities are ofen limited or subject to significant controls. 

Consumers, investors, and businesses using crypto-assets are exposed to risks, as crypto-asset 

intermediaries may lack—or have chosen not to dedicate or develop—adequate resources or 

capabilities to perform their obligations, leading to a loss of value for the users, disruptions of the 

afected customers’ businesses, and reduced confidence in the crypto-asset sector generally. The 

resulting loss of confidence may also produce a local or generalized withdrawal of resources from 

afected firms or activities, increasing the impact of the initial efects.171 The potential risks associated 

with crypto-asset firms and market practices include those described below. 

Resources and Capabilities Risks 

The high volatility in the price of crypto-assets, including those used in lending and staking activities, 

may increase the risk of margin calls on crypto-asset intermediaries, as well as follow-on collateral 

liquidations if margin calls are not met. While some states regulate the safety and soundness of 

crypto-asset firms licensed as non-banks, state laws do not address the national and international 

scope of activities of these firms.172 As a result, capital and liquidity bufers to absorb and limit the 

efects of financial shocks and imbalances may be insuficient to address the increasing risk of firm 

failures and disruptions that may negatively impact consumers, investors, and businesses, particularly 

for the many development-stage crypto-asset firms and projects. 

Custody Risks 

While crypto-asset third-party custody is a dynamic and rapidly developing field, there is currently 

no comprehensive regime that protects consumers, investors, and businesses in the event of a 

171 MiChael taylor, “twin PeaKs”: a regulatory struCture for the new Century (Centre for the study of finanCial innoVation, 1995). 

172 Benjamin T. Seymour, The New Fintech Federalism, yale Journal of law & teChnology (Vol. 24, 2022), at 1, https://yjolt.org/sites/default/ 

files/seymour_-_the_new_fintech_federalism.pdf. 
38 

 

 

 

 

crypto-asset custodian’s insolvency and failure. Among other things, while many of the platform 

models involve custody, the concept of “custody” for crypto-assets is diferent than for traditional 

financial assets with which a customer may be familiar. Crypto-asset firms that appear to share 

characteristics of traditional financial firms but whose operating companies take the position that, 

or operate as if, they are unregulated may not qualify under provisions of the Bankruptcy Code,173 the 

Uniform Commercial Code, and the Securities Investor Protection Act that provide legal certainty for 

the treatment for traditional financial firms and financial contracts (e.g., commodity and securities 

contracts involving brokers, financial institutions, and clearing agencies).174 Thus, if a crypto-asset 

platform or other firm that custodies crypto-assets enters bankruptcy, customers may not be able 

to access or liquidate their crypto-assets for months or years, if at all.175 Such risks are particularly 

pronounced when an insolvent firm’s estate is concentrated in crypto-assets with volatile prices, which 

may complicate the administration of the bankruptcy proceeding. 

Crypto-asset third-party custodians may also hold customers’ keys in a centralized manner, 

comingling customers’ funds with the custodian’s own crypto-asset funds and creating a dependency 

of the customer on the custodian diferent than in more traditional financial custody relationships. If a 

custody provider were to be reorganized or liquidated under the Bankruptcy Code, a bankruptcy court 

may treat customers of the custodian as unsecured creditors who stand to lose some or all of their 

investment.176 Custodians may also use sub-custodians, which further compounds risks to customers 

by introducing a second layer of credit risk.177 

Risk Exposures: Regulatory Non-Compliance and Evolving Market Oversight 

Since the creation of crypto-assets, regulators and lawmakers have been applying existing financial 

market regulatory frameworks to crypto-assets. Although there is no simple, one-sized approach to all 

crypto-assets and related products and services, regulators have taken steps—through the issuance of 

guidance and enforcement actions—that respond to questions, and further action is needed to ensure 

a cohesive regulatory coverage. 

173 Banking institutions and other depositories are subject to special resolution regimes in case of insolvency. 

174 See, e.g., Philip D. Anker & George W. Shuster, Jr., Exceptional Insolvencies: Provisions of the Bankruptcy Code and SIPA Regarding BrokerDealers and Other Financial Market Participants and Contracts, wilMerhale (Sep. 17, 2008), https://www.wilmerhale.com/en/insights/ 

publications/exceptional-insolvencies-provisions-of-the-bankruptcy-code-and-sipa-regarding-broker-dealers-and-other-financialmarket-participants-and-contracts. See also Jeanne L. Schroeder, Bitcoin and the Uniform Commercial Code, uniVersity of MiaMi business 

law reView (Vol. 24 Issue 1, Jun. 1, 2016), https://repository.law.miami.edu/umblr/vol24/iss3/3. 

175 Vicky Ge Huang, Celsius Customers Are Losing Hope for Their Locked-Up Crypto, the wall street Journal (Jul. 3, 2022), www.wsj.com/ 

articles/celsius-customers-are-losing-hope-for-their-locked-up-crypto-11656840601?mod=series_cryptobitcoindogecoin. See also Eliot 

Brown & Yifan Wang, Crypto Broker Voyager Digital Files for Bankruptcy Protection, the wall street Journal (Jul. 6, 2022), https://www.wsj. 

com/articles/crypto-broker-voyager-digital-files-for-bankruptcy-protection-11657098630?mod=hp_lead_pos4. 

176 Sidney P. Levinson, Caroline N. Swett, Alison M. Hashmall & Elie J. Worenklein, Recent Disclosure Guidance Highlights Growing Concern 

Surrounding the Risks of User Assets Held by Various Crypto Custodians, debeVoise & PliMPton (Jun. 6, 2022), https://www.debevoise. 

com/insights/publications/2022/06/recent-disclosure-guidance-highlights. Banks are subject to a distinct irresolution regime, as the 

Bankruptcy Code precludes “banks” from being debtors. See Adam J. Levitin, Not Your Keys, Not Your Coins: Unpriced Credit Risk in 

Cryptocurrency, texas law reView (Vol. 101, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4107019. 

177 The use of smart contracts and distributed applications in DeFi also means that even non-custodied holdings of crypto-assets may 

be subject to new forms of intermediation risks and ineficiencies, such as those produced by the technical features of the sofware 

programs themselves and ones resulting from actions taken by DAOs, validators, miners and other parties that influence outcomes 

produced by smart contracts and distributed applications. See MiChael Casey, et al., supra note 43, at 4-5. 
39 

 

 

 

 

 

 

Questions around regulation and supervision of crypto-assets are complicated by the fact that some 

actors within the crypto-asset ecosystem attempt to design markets, products, and services such that 

they fall outside of the regulatory perimeter and actively dispute the application of existing laws and 

regulations. At the same time, other intermediaries have sought guidance on the structure, delivery, 

and reporting of crypto-asset activities to provide more regulatory certainty. This unique landscape 

afects the relative exposure of consumers, investors, and businesses to the risks of digital assets, 

markets, and technologies. 

Current Legal and Regulatory Landscape for Crypto-assets 

The current regulatory treatment of crypto-assets depends on the facts and circumstances of the 

crypto-asset, the nature of the activities, and the classification of entities or service providers. U.S. 

federal financial regulatory agencies with authority to address violations arising from the conduct risks 

associated with crypto-assets may include market regulators, banking regulators, agencies responsible 

for safeguarding the financial system from illicit use, and agencies with authority to enforce consumer 

protection laws. In addition, state agencies, including state securities and banking regulators ofen 

have authorities under state laws that apply to aspects of the crypto-asset ecosystem.178 

The financial regulation, supervision, and enforcement framework is generally based upon the 

following criteria: 

(i) The product and service that is being provided. The CFTC primarily oversees commodity 

derivatives and associated markets and intermediaries and maintains anti- fraud and antimanipulation enforcement over commodities that are not securities; the SEC oversees securities 

and securities derivatives and their associated markets and intermediaries; and the Department 

of Labor oversees the investment activities of retirement plan fiduciaries; 

(ii) The entity providing the service. For example, the Federal Reserve oversees activities of bank 

holding companies and state-chartered banks and savings associations that are members of the 

Federal Reserve System; the OCC supervises national banks and federal savings associations; 

and the FDIC is the federal supervisor for state-chartered banks and savings associations that 

are not members of the Federal Reserve System; and 

(iii) Whether an activity violates a civil or criminal statute. For example, the Department of Justice 

prosecutes various types of securities, commodities, and crypto-asset-related criminal activities, 

including various types of financial fraud. 

The CFPB also regulates the ofering of consumer financial products and services—which, depending 

on the facts and circumstances, may include a variety of crypto-asset related oferings—under the 

federal consumer financial laws, including (among others) the Dodd-Frank Act’s prohibition against 

unfair, deceptive, or abusive acts or practices for consumer financial products and services. Notably, 

no federal regulator currently has the authority to comprehensively oversee spot markets for cryptoassets that are not securities and to issue regulations over those markets to ensure market integrity.179 

178 See north aMeriCan seCurities adMinistrators assoCiation, NASAA Updates Coordinated Crypto Crackdown, (Aug. 7, 2019), https://www.nasaa. 

org/52027/nasaa-updates-coordinated-crypto-crackdown-2/?qoid=current-headlines. 

179 A more detailed discussion of the regulatory treatment of crypto-assets and potential gaps, especially regarding financial stability, may 

be found in the forthcoming report of the Financial Stability Oversight Council in response to the Section 6 of the Executive Order. 
40 

 

Efects of Legal and Regulatory Non-Compliance 

Notwithstanding the eforts of these legal and regulatory authorities, consumers, investors, and 

businesses remain exposed to risks, some of which arise from misconduct by bad actors, while others 

occur when products and services are not in compliance with regulatory requirements, regardless of 

intent. In particular, risks arise from non-compliance with (i) the extensive disclosure requirements 

for registered exchanges, products, and intermediaries that are designed to provide investors and 

customers with material and relevant information and (ii) the requirements around market conduct 

that are designed to provide fair, orderly, and eficient markets. 

Some traditional financial activities and consumer financial products and services, as well as native 

crypto-asset firms also may view themselves—and thus operate as if—their crypto-asset activities 

are not subject to federal laws and regulations. This could result in crypto-asset-based activities that 

are economically, but not necessarily legally, equivalent to traditional financial activities exposing 

consumers, investors, and businesses to significant economic risks because they are not regulated in 

an equivalent manner. For example, despite the apparent analogy to traditional savings and deposit 

accounts, crypto-asset platforms may restrict withdrawals and are not covered by deposit insurance.180 

Users of these crypto-asset products may be unaware of such diferences and therefore be less likely 

to take actions that could reduce their risk exposures. Further, crypto-asset users — or those who 

use intermediaries—that are out of compliance with laws and regulations generally are not receiving 

required disclosures regarding issues such as conflicts of interests, risks, and fees. 

Efects of Changes in the Scope and Application of Laws and Regulations 

Crypto-assets are rapidly developing, and the extent to which crypto-asset products, services, 

and technologies are, or should be, subject to certain U.S. laws and regulations covering conduct, 

operational, and intermediation risks is being actively debated. To some proponents of cryptoassets, a key goal underlying the creation and development of the crypto-asset ecosystem is the 

establishment of a peer-to-peer financial system that would eliminate the reliance on large incumbent 

intermediaries, such as banks and other traditional centralized institutions. Some extend that goal to 

avoiding the oversight associated with those traditional institutions. 

While these perspectives are animating the public discourse regarding crypto-assets, consumers, 

investors, and businesses may be exposed to heightened risk from unproven features and design flaws 

in crypto-asset products and services. The regulatory regimes for these products and services are also 

still evolving. 

As described in more detail in Part VI, Recommendations, regulatory agencies should use their existing 

authorities to address current and emerging risks in crypto-asset intermediation to the extent that 

such activities fall within their jurisdictions. Examples include the OCC’s interpretive letters to clarify 

180 The SEC has brought an enforcement action against a crypto-lending product for failure to properly register. See SEC, BlockFi Agrees 

to Pay $100 Million in Penalties and Pursue Registration of its Crypto Lending Product, (Feb.14, 2022), https://www.sec.gov/news/ 

press-release/2022-26. The FDIC has also issued cease and desist orders against crypto-asset companies for misstating whether their 

products or services are covered by federal deposit insurance. See fdiC, FDIC Issues Cease and Desist Letters to Five Companies For 

Making Crypto-Related False or Misleading Representations about Deposit Insurance, (Aug. 19, 2022), https://www.fdic.gov/news/pressreleases/2022/pr22060.html. 
41 

the expectations of its regulated entities regarding the safeguarding of crypto-assets for customers; 

the SEC’s special purpose broker-dealer statement on digital asset custody, which lays out certain 

circumstances in which the SEC will not take certain enforcement action against broker-dealers with 

respect to digital asset securities; and the Department of Labor’s compliance assistance release 

cautioning retirement plan fiduciaries to be mindful of their stringent obligations of prudence and 

loyalty in connection with investments in cryptocurrencies. 

V. OPPORTUNITIES AND RISKS FOR POPULATIONS VULNERABLE 

TO DISPARATE IMPACTS 

As discussed above, crypto-assets present a variety of potential opportunities and known and 

emerging risks for consumers, investors, and businesses. The nature and intensity of these risks and 

opportunities varies across populations and communities. This is due both to underlying social and 

economic factors (for example, wealth disparities, historic exclusion from the financial system, and 

uneven digital access), as well as crypto-asset-specific behaviors, including marketing practices that 

may be inappropriately targeting specific communities, potentially in an unfair or abusive manner. 

This part of the report identifies some of the benefits and opportunities that populations most 

vulnerable to disparate impacts may experience from the growth of the crypto-asset ecosystem. This 

part also discusses the unique risks that crypto-assets may present to these communities and notes 

risks identified elsewhere in this report that are likely to impact certain populations in disparate ways. 

For the purposes of this analysis, we consider populations most vulnerable to disparate impacts 

to include the low-income population, communities that have been historically excluded from 

the financial system or subject to discrimination in accessing financial services or wealth-building 

opportunities, including Black, Indigenous, and People of Color (BIPOC) communities, as well as 

unbanked and underbanked populations,181 the elderly, and children. Not all populations vulnerable 

to disparate impacts are alike, and there is substantial variation both within and across communities 

and individuals. Certain individuals might be considered vulnerable to disparate impact due to 

high exposure relative to disposable income, such as low-income individuals. Others may have an 

increased likelihood of encountering bias and discrimination, such as BIPOC individuals. Some elderly 

individuals may have less familiarity with digital oferings and may be more susceptible to fraud and 

scams. Children may be more impressionable and thus less prone to question targeted marketing. 

Disparate impacts are also likely to vary by crypto-asset ofering, with diferent products and services 

potentially posing diferent opportunities and risks for users. 

Some market participants have been promoting crypto-assets to those who lack access as a means 

to advance financial inclusion and build wealth, with the stated promise to serve as an alternative, 

or an entry point, to the banking system and traditional financial services. Specifically, some 

advocates have argued that crypto-assets can facilitate broader access to investment opportunities 

and potentially lower-cost, more accessible, financial products. There is limited data on the cryptoasset use and experience of populations vulnerable to disparate impacts. However, available 

181 As used in this report, “unbanked” refers to individuals without a bank account; “underbanked” refers to individuals with a bank account 

who make use of alternative financial services ofered by non-bank firms, such as money orders, bill payments services, and check 

cashing. 
42 

 

 

 

 

 

 

 

 

evidence to date suggests that potential financial inclusion benefits of crypto-assets largely have yet 

to materialize, and crypto-asset products may present increased risks to populations vulnerable to 

disparate impacts. 

Populations vulnerable to disparate impact are engaging with crypto-assets. Survey data from the 

Federal Reserve Board finds that 29% of respondents who held crypto-assets for investment purposes 

had an annual household income of less than $50,000.182 Additionally, certain BIPOC communities 

may be over-represented in crypto-asset ownership or may be more likely than white individuals to 

own crypto-assets.183 As explored below, elderly individuals have been targeted in fraud schemes and 

scams, and children have been targeted in marketing campaigns. Given these current risks, greater 

urgency in examining and responding to the potential disparate impacts of crypto-asset activities is 

warranted. 

Potential Opportunities for Populations Vulnerable to Disparate Impacts 

Some proponents argue that crypto-assets present opportunities to expand access to financial 

services, improve upon existing services by reducing transaction costs, and build wealth. However, 

evidence currently available indicates that realization of such benefits has been limited to date. 

Expanded Access to Financial Services 

There have long been gaps in access to financial services, resulting both from logistical and cost 

challenges in reaching consumers with afordable access to the products they need, and from a history 

of institutional discrimination through racist policies and practices that have had lasting systemic 

impacts that have limited access to financial services and wealth building opportunities for many BIPOC 

individuals.184 To this day, unbanked and underbanked rates are higher among lower-income and Black 

and Hispanic adults.185 Within this context, some market observers highlight the potential for cryptoassets to address financial inequities and provide more inclusive access to financial services.186 

182 board of goVernors of the federal reserVe systeM, supra note 53, at 45. 

183 Andrew Perrin, supra note 54; and Morning Consult, The State of Consumer Banking & Payments, (2022), https://go.morningconsult. 

com/rs/850-TAA-511/images/220120_State_of_Consumer_Banking.pdf. See also Terri Bradford, The Cryptic Nature of Black Consumer 

Cryptocurrency Ownership, federal reserVe banK of Kansas City (Jun. 1, 2022), https://www.kansascityfed.org/research/payments-systemresearch-briefings/the-cryptic-nature-of-black-consumer-cryptocurrency-ownership. 

184 See Rocio Sanchez-Moyano and Bina Patel Shrimali, The Racialized Roots of Financial Exclusion, federal reserVe banK of san franCisCo (Aug. 

19, 2021), https://www.frbsf.org/community-development/publications/community-development-investment-review/2021/august/ 

the-racialized-roots-of-financial-exclusion. See also Kristen Broady, Mac McComas & Amine Ouazad, An Analysis of Financial Institutions 

in Black-Majority Communities: Black Borrowers and Depositors Face Considerable Challenges in Accessing Banking Services, brooKings 

institution (Nov. 2, 2021), https://www.brookings.edu/research/an-analysis-of-financial-institutions-in-black-majority-communitiesblack-borrowers-and-depositors-face-considerable-challenges-in-accessing-banking-services. See also Kevin Fox Gotham, 

Race, Mortgage Lending and Loan Rejections in a U.S. City, soCiologiCal foCus (Vol. 31 No. 4, 1998), at 392-94, https://www.jstor.org/ 

stable/20832008. See also Jung Hyun Choi and Peter J. Mattingly, What Diferent Denial Rates Can Tell Us About Racial Disparities in the 

Mortgage Market, urban institute (Jan. 13, 2022), https://www.urban.org/urban-wire/what-diferent-denial-rates-can-tell-us-about-racialdisparities-mortgage-market. See also Pew Charitable trusts, who borrows, where they borrow, and why 9 (2012), https://www.pewtrusts. 

org/-/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf; and Pew Charitable trusts, the CoMPlex story of 

aMeriCan debt 4-5 (2015), https://www.pewtrusts.org/~/media/assets/2015/07/reach-of-debt-report_artfinal.pdf. 

185 Unbanked and underbanked rates are also higher among adults with less education. See board of goVernors of the federal reserVe systeM, 

supra note 53, at 43-44. 

186 See, e.g., world eConoMiC foruM, what is the Value ProPosition of stableCoins for finanCial inClusion? 11-12 (2021), https://www3.weforum.org/ 

docs/WEF_Value_Proposition_of_Stablecoins_for_Financial_Inclusion_2021.pdf. 
43 

 

 

 

 

 

 

 

According to data from one survey, a greater share of unbanked and underbanked individuals may 

own crypto-assets than individuals considered “fully banked.”187 Early evidence also suggests that 

unbanked individuals may be more inclined to use crypto-assets for transactions, indicating they may 

be interested in crypto-assets as an alternative means to accessing basic financial services.188 Most 

individuals who have owned crypto-assets have done so for investment purposes, and 99% of those 

who invested in crypto-assets—but did not use it for transactions—had a bank account.189 Of the small 

percentage of adults who had used crypto-assets for transactions, 13% were unbanked, compared to 

6% of adults who had not used crypto-assets.190 

These findings suggest an over-representation of unbanked individuals using crypto-assets for 

transactions; they also indicate that 87% of the small percentage of adults who are using cryptoassets for transactions have a bank account. The motivations for individuals—particularly banked 

individuals—to use crypto-assets for transactions are unclear, particularly given transaction costs and 

market volatility may limit the utility of crypto-assets as a medium of exchange. Transaction usage 

by both banked and unbanked individuals is very limited, yet it appears that some small portion of 

individuals who are underserved by the mainstream financial system may be using crypto-assets to 

engage in transactions. 

To understand the broader opportunity for crypto-assets to expand access to financial services, it is 

important to consider the reasons some individuals remain outside of the banking system. According 

to data from the FDIC, the top five reasons for individuals being unbanked—ranking in order of most 

commonly cited—are: (i) insuficient funds to meet minimum balance requirements, (ii) lack of trust in 

banks, (iii) privacy concerns, (iv) high bank account fees, and (v) lack of predictability of bank account 

fees.191 It is still unclear to what degree crypto-asset based financial solutions might address these 

concerns and expand access for unbanked individuals. 

To a certain degree, broader economic disparities underlie the specific disparities in access to, and 

use of, financial services.192 Financial needs, such as the lack of suficient resources to meet minimum 

balance requirements, cannot be addressed through financial services oferings—crypto-asset-based 

or otherwise. Instead, they require solutions that directly address the underlying economic issues.193 

With regard to issues of trust and privacy concerns, some crypto-asset proponents argue that 

consumers and businesses may be more inclined to trust crypto-assets due to the decentralized and 

187 Charlotte Principato, Banking the Unbanked Requires Raising Trust and Awareness. For the Underbanked, Better Service Means 

Payments Innovation, Morning Consult (Aug. 17, 2021), https://morningconsult.com/2021/08/17/trust-awareness-paynents-unbankedunderbanked. The survey found that 37% of underbanked and 12% of unbanked individuals owned cryptocurrency, compared to 10% 

of individuals considered fully banked. See also board of goVernors of the federal reserVe systeM, supra note 53, at 45-46. 

188 board of goVernors of the federal reserVe systeM, supra note 53, at 45-46. 

189 Id. In total, the survey found that 12% of adults had held or used cryptocurrencies in the past 12 months; 11% of adults had held 

cryptocurrency as an investment, while just 2% had used cryptocurrency to buy something or make a payment and 1% to send money 

to friends or family. 

190 Id. 

191 fdiC, how aMeriCa banKs: household use of banKing and finanCial serViCes 17 (2019), https://www.fdic.gov/analysis/householdsurvey/2019report.pdf. 

192 See board of goVernors of the federal reserVe systeM, supra note 53, at 43. 

193 Abbye Atkinson, Rethinking Credit as Social Provision, stanford law reView (May 2019), at 1093-1162, https://review.law.stanford.edu/wpcontent/uploads/sites/3/2019/05/Atkinson-71-Stan.-L.-Rev.-1093-2019.pdf. 
44 

 

 

 

 

 

 

 

pseudonymous nature of transactions and distribution and lack of traditional intermediaries. Trust 

in crypto-assets may be undermined by the risks related to operational issues, market volatility, 

targeting for fraud and scams, and privacy. 194 Additionally, many crypto-asset systems increasingly 

rely on centralized intermediaries and traditional financial institutions to carry out their functions or 

at a minimum to convert between crypto-assets and fiat currency. This may weaken the appeal of 

crypto-assets as an alternative for those who remain unbanked due to a lack of trust in such financial 

institutions, and more broadly inhibit unbanked individuals from accessing crypto-assets.195 

Another challenge to the opportunity for crypto-assets to expand access is the “digital divide,” the gap 

between those who have ready access to computers, smartphones, and the internet, and those who do 

not. Underbanked individuals and individuals more broadly who face barriers to mainstream financial 

services, including those with lower income and those who identify as BIPOC, are ofen more likely to 

lack access to certain technology services and infrastructure.196 

It is certainly the case that most, if not all, financial market intermediaries could improve reach and 

access to afordable financial products and services that meet the needs of consumers and businesses. 

To date, it appears that little progress has been accomplished through the use of crypto-asset based 

oferings as a means of greater financial inclusion. Only an estimated 1% of adults use crypto-assets 

exclusively for non-investment purposes,197 and just 12% of unbanked individuals own crypto-assets 

at all.198 Additionally, the ability of crypto-asset based financial services to address the concerns 

currently inhibiting individuals’ use of mainstream financial services remains unclear, and the digital 

divide remains a challenge. 

Reduced Transaction Costs 

Crypto-assets may ofer a means to provide users with lower-cost payment mechanisms, reducing 

bank fees, transfer fees and other costs. While this could prove a benefit to all users, individuals for 

whom such fees have been economically burdensome, or have inhibited their access to financial 

services, could particularly stand to benefit.199 As noted, high and unpredictable costs are among 

194 See world eConoMiC foruM, supra note 186, at 16, 22. 

195 Kristin N. Johnson, Decentralized Finance: Regulating Cryptocurrency Exchanges, williaM & Mary law reView (Vol. 62 Issue 6, 2021), at 1911, 

1921, https://scholarship.law.wm.edu/wmlr/vol62/iss6/4. See world eConoMiC foruM, supra note 186, at 13 (noting the “[l]ack of first- and 

last-mile infrastructure for conversions between physical cash and digital money” as a limitation on stablecoins’ financial inclusion 

prospects). Suggested alternatives to banks for storing crypto-assets include the use of gif cards, a credit card, or crypto-ATMs. See Kat 

Tretina, How to Buy Cryptocurrency, forbes adVisor (May 15, 2022), https://www.forbes.com/advisor/investing/cryptocurrency/how-tobuy-cryptocurrency. 

196 As of 2019, just 33.8% of unbanked households had home internet access, compared to 82.6% of banked households. See fdiC, 

how aMeriCa banKs: household use of banKing and finanCial serViCes aPPendix tables 48 (2019), https://www.fdic.gov/analysis/householdsurvey/2019appendix.pdf. See also Sara Atske & Andrew Perrin, Home broadband adoption, computer ownership vary by race, ethnicity in 

the U.S., Pew researCh Center (Jul. 16, 2021), https://www.pewresearch.org/fact-tank/2021/07/16/home-broadband-adoption-computerownership-vary-by-race-ethnicity-in-the-u-s. See also world eConoMiC foruM, supra note 186, at 13, 16. 

197 board of goVernors of the federal reserVe systeM, supra note 53, at 45-46. 

198 Charlotte Principato, supra note 187. 

199 See Ying Lei Toh, When Paying Bills, Low-Income Consumers Incur Higher Costs, federal reserVe banK of Kansas City (Nov. 23, 2021), https:// 

www.kansascityfed.org/research/payments-system-research-briefings/when-paying-bills-low-income-consumers-incur-higher-costs. 

See also Aaron Klein, Senior Fellow, Brookings Institution, Opening statement of Aaron Klein at roundtable on America’s unbanked and 

underbanked (Dec. 15, 2021), https://www.brookings.edu/opinions/opening-statement-of-aaron-klein-at-roundtable-on-americasunbanked-and-underbanked. 
45 

 

 

 

 

the most significant reasons individuals cited for being unbanked.200 Thus the potential for reduced 

transaction costs presents a significant opportunity to increase financial inclusion. 

While there is not currently suficient data to comprehensively evaluate whether the crypto-asset 

ecosystem generally provides lower-fee financial services than traditional banking, international 

financial transactions provide an example that may be instructive. Costs for these transactions tend to 

be high; the average cost of remittances under $200—which is ofen typical for low-income migrants— 

are on average 7% for a money transfer and can be as high as 15–20% of the principal in smaller 

migration corridors.201 In addition, despite arguments that crypto-assets could facilitate cheaper and 

faster remittance payments, evidence suggests that many international crypto-asset transfers are 

not currently cost-efective, faster, or easier alternatives to cash, especially given the complexity of 

converting crypto-assets to and from local currencies.202 The additional costs related to exchanging 

between fiat and cryptocurrencies alone can make such transactions more expensive than non-cryptoasset alternatives.203 These fees are ofen compounded by fees paid to miners to validate transactions, 

and fees for matching buy and sell orders, which can be prohibitively expensive, particularly for small 

transactions.204 According to analysts at crypto-asset platforms, the typical transaction price, or gas, 

on the Ethereum network can fluctuate widely depending on network congestion.205 This limited 

evidence suggests that the potential benefits of reduced transaction prices on crypto-asset based 

payments systems have yet to be realized. 

Potential Opportunities to Build Wealth 

As noted earlier, the majority of individuals who own crypto-assets do so for investment purposes.206 

Some members of communities historically excluded from wealth-building opportunities, including 

many BIPOC individuals, perceive crypto-assets as an opportunity to build wealth and narrow the 

racial wealth gap.207 The view that crypto-assets can help build wealth has been particularly attractive 

to members of historically excluded communities who have some amount of financial stability 

but may lack access to the range of wealth-building investment products that come with being an 

accredited investor or accessing professional investment advice. 

200 FDIC, supra note 191, at 17. See also Cities for finanCial eMPowerMent fund, Cfe fund banK on Coalition PlaybooK (2021), https://issuu.com/ 

cfefund/docs/bank_on_playbook_jan_2017. The report finds that prevalent reasons given cited by unbanked people for not having a 

bank account are “not having enough money to keep in an account” (43%) and “bank fees are too high” (32%). 

201 Dilip Ratha, Remittances: Funds for the Folks Back Home, international Monetary fund (Feb. 24, 2020), https://www.imf.org/external/pubs/ 

f/fandd/basics/remitt.htm. 

202 See, e.g., Dirk G. Baur & Thomas Dimpfl, The Volatility of Bitcoin and Its Role as a Medium of Exchange and a Store of Value, eMPiriCal 

eConoMiCs (Vol. 61, Jan. 5, 2021), at 2663–2683, https://doi.org/10.1007/s00181-020-01990-5. 

203 See Alexis Goldstein, Director of Financial Policy, Open Markets Institute, Written Testimony before the Committee on Banking, Housing, 

and Urban Afairs (Dec.14, 2021), at 10, https://www.banking.senate.gov/imo/media/doc/Goldstein%20Testimony%2012-14-21.pdf. 

Moving into and out of stablecoins can add to the foreign exchange transaction fees involved in remitting money. When accounting for 

these “double-hop” costs, total fees incurred by utilizing stablecoins and digital exchanges (ranging from $5.98 to $86.44) can be more 

expensive than fees associated a payment system like Western Union ($4.88). 

204 Paul Vigna, Crypto and Its Many Fees: What to Know About the Hidden Costs of Digital Currency, the wall street Journal (Dec. 18, 2021), 

https://www.wsj.com/articles/crypto-and-its-many-fees-what-to-know-about-the-hidden-costs-of-digital-currency-11639825202. 

205 Id. 

206 board of goVernors of the federal reserVe systeM, supra note 53, at 45-46. In total, the survey found that 12% of adults had held or 

used cryptocurrencies in the past 12 months; 11% of adults had held cryptocurrency as an investment, while just 2% had used 

cryptocurrency to buy something or make a payment and 1% to send money to friends or family. 

207 Taylor Nicole Rogers, Crypto collapse reverberates widely among black American investors, finanCial tiMes (Jul. 4, 2022), https://www. 

f.com/content/47d338e2-3d3c-40ce-8a09-abfa25c16a7f. 
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However, such communities may be inappropriately targeted by crypto-asset marketing, as well as 

fraud schemes, as explored in the part below exploring potential risks. Ultimately, the wealth-building 

potential of crypto-assets is highly uncertain, and some have expressed concern that disproportionate 

exposure by BIPOC communities could further exacerbate the racial wealth gap when crypto-asset 

markets decline.208 Additionally, these markets have been highly volatile, which could pose concerns 

particularly for individuals with lower incomes. These risks are explored below. 

Potential Risks to Populations Vulnerable to Disparate Impacts 

Diferent populations and individuals vulnerable to disparate impacts may be subject to greater harms 

depending on the nature of the particular risks of engaging with crypto-assets. Some may be more 

exposed to the volatility and risk of crypto-asset investing; others may be at greater risk of being 

preyed upon by targeted marketing, fraud, and scams; and still others may be more limited in their 

capacity to recover from financial harm. 

Market Volatility and Inadequate Disclosures 

Crypto-assets are subject to large price fluctuations, and consumer advocacy groups have warned of 

the lack of adequate consumer protection.209 In many ways, the risks associated with owning cryptoassets are the same for everyone. However, individuals with less resources, including lower-income 

individuals, may have greater exposure in relation to their disposable income, meaning incurred 

losses could have an outsized negative impact on their financial well-being. As noted above, 29% of 

respondents who held crypto-assets for investment purposes had an annual household income of less 

than $50,000.210 

Market volatility and a lack of protections or suficient risk disclosures could also undermine trust 

in crypto-assets, particularly among populations vulnerable to disparate impacts, some of whom 

may be particularly wary of financial markets and institutions. Unexpected losses due to market 

movements and a lack of understanding of potential exposure could undermine consumer trust and 

confidence in the crypto-asset ecosystem.211 This deterioration in trust may have the potential to drive 

further negative impact on the asset’s price. These dynamics are analogous to those experienced 

in the U.S. banking system prior to the development of the modern regime of banking law and 

regulation.212 During Reconstruction, many Black Americans were led to believe that their deposits in 

the Freedman’s Savings Bank were guaranteed by the federal government. Black Americans’ trust in 

financial institutions was afected by the deposits they lost when the bank collapsed and depositors’ 

208 Paulina Cachero, Crypto Collapse Threatens to Leave Black, Hispanic Investors Further Behind, blooMberg law (Jul. 7, 2022), https://news. 

bloomberglaw.com/banking-law/crypto-collapse-threatens-to-leave-black-hispanic-investors-further-behind. 

209 See, e.g., National Consumer Law Center, Comments to Department of the Treasury Ofice of the Comptroller of the Currency on the 

Advance notice of proposed rulemaking on National Bank and Federal savings Association Digital Activities (Aug. 3, 2020), at 19-20, 

https://www.nclc.org/images/pdf/rulemaking/2020-OCC-fintech-NCLC-comments.pdf. 

210 board of goVernors of the federal reserVe systeM, supra note 53, at 45. 

211 world eConoMiC foruM, supra note 186. See also Joe Weisenthal, Mark Cuban Calls for Stablecoin Regulation Afer Trading Token That 

Crashed to Zero, blooMberg (Jun. 17, 2021), https://www.bloomberg.com/news/articles/2021-06-17/mark-cuban-defi-iron-financecrashed-100?sref=M8H6LjUF#xj4y7vzkg; Elizabeth Lopatto, The Tether Controversy, Explained, the Verge (Aug. 16, 2021), https://www. 

theverge.com/22620464/tether-backing-cryptocurrency-stablecoin. 

212 Gary B. Gorton & Jefrey Zhang, Taming Wildcat Stablecoins, uniVersity of ChiCago law reView (Vol. 90, Forthcoming 2022), https://papers. 

ssrn.com/sol3/papers.cfm?abstract_id=3888752. 
47 

 

 

funds were lost.213 Researchers at the Federal Reserve Bank of Kansas City have argued that the 

collapse of a crypto-asset platform, and the resulting loss of customer funds, could be comparable to 

“a 21st century version of Freedman’s Savings Bank.”214 

Targeting 

Marketing 

In the past, vulnerable communities, especially low-income communities and communities of color, 

have been specifically targeted by financial services companies using deceptive sales tactics and 

marketing.215 There are several examples where crypto-asset companies are conducting similar 

marketing practices to particular populations, including those most vulnerable to disparate impact. 

Targeted advertising and brand partnerships with prominent athletes and celebrities have been 

used to attract new customers to crypto-assets, with a particular focus on underserved and racial 

minority communities.216 Recent surveys suggest that market participants believe that crypto-asset 

advertisements have been efective at raising awareness of, and encouraging more people to trade 

in, crypto-assets.217 Another example is the prevalence of crypto-asset ATMs (predominantly Bitcoin 

ATMs, or BTMs) in lower-income neighborhoods that lack bank branches.218 

Crypto-asset products may be marketed in ways that obscure their level of risk, which could 

exacerbate the impact of targeted marketing on vulnerable communities. As discussed in Parts II and 

IV, some crypto-assets and related products market themselves as safe and deposit-like, when they are 

actually volatile and lack protections including deposit insurance. As a result, consumers, especially 

those heavily targeted by crypto-asset marketing, might be at risk of viewing crypto-assets as stable 

consumer financial products, rather than as speculative financial assets, and therefore investing 

money they are not expecting, and may not be able to aford, to lose.219 In the case of BTMs, concerns 

have also been raised regarding high fees and lack of adequate regulation.220 

Recent studies have also shown that children are being exposed to crypto-assets at an early age and 

are ofen more familiar with them than their parents. One such study noted that 57% of kids surveyed 

213 Terri Bradford, supra note 183, at 3. 

214 Id., at 4. 

215 Examples include the prevalence of subprime mortgage originations and refinancing in communities of color prior to the financial crisis 

in 2008. See Linda E. Fisher, Target Marketing of Subprime Loans: Racialized Consumer Fraud & Reverse Redlining, Journal of law and PoliCy, 

(Vol. 18, 2009), https://brooklynworks.brooklaw.edu/jlp/vol18/iss1/3. 

216 See Taylor Nicole Rogers, Crypto Collapse Reverberates Widely Among Black American Investors, finanCial tiMes, July 5, 2022, https://www. 

f.com/content/47d338e2-3d3c-40ce-8a09-abfa25c16a7f. 

217 See Terri Bradford, supra note 183, at 4. 

218 See Susannah Luthi, Why Bitcoin ATMs are Vexing Rulemakers, PolitiCo (Jul. 6, 2022), https://www.politico.com/news/ 

magazine/2022/07/06/bitcoin-atms-regulations-00035083; see also Susan Tompor, Bitcoin ATMs Showing Up In Odd Spots Across 

Metro Detroit, detroit free Press (Jun. 2018), https://www.freep.com/story/money/personal-finance/susan-tompor/2018/06/28/ 

bitcoin-atm-stock-cryptocurrency-value/629133002; see also Andy Peters, Bitcoin ATMs Start To Spread — And To Draw Scrutiny, atlanta 

Journal-Constitution (Feb. 14, 2020), https://www.ajc.com/business/personal-finance/bitcoin-atms-start-spread-and-draw-scrutiny/ 

ZTbMPUOoc0LBlbgC4CLJoI. 

219 This concern could extend, for example, to messaging that equates machines that enable consumer to buy and sell crypto assets to 

ATMs that allow them to deposit funds into a bank account. 

220 See Susannah Luthi, supra note 218. 
48 

 

 

 

 

 

were familiar with crypto-assets (compared to 47% of their parents) and if given $100, 57% of kids 

said they would invest their money in crypto-assets (compared to 38% who would invest in stocks).221 

Some high schools have begun to incorporate study of crypto-assets into their financial literacy eforts 

and there are crypto-focused kids camps that provide children with a laptop, cellphone, and a digital 

wallet.222 The marketing of crypto-assets has extended to the launch of a children’s show that uses 

NFTs to cast the shows stars,223 NFT collections that are designed for children,224 and a kids-based 

crypto-asset piggybank app and debit card.225 

Fraud and Scams 

While data is limited regarding specific victims of fraud or scams, it is clear that at least one population 

vulnerable to disparate impacts, the elderly, are being targeted. 

At just over 34% of the U.S. population, older Americans are becoming an ever-increasing target 

for online fraud and scams (including cryptocurrency scams).226 Older Americans are generally 

at or past their peak of their wealth accumulation, are more likely to be isolated and emotionally 

vulnerable, may not understand current technologies, and therefore may be targets of frauds and 

scams.227 Additionally, financially vulnerable older Americans that lack financial and housing security 

are generally more likely to take unnecessary risks and fall prey to frauds and scams in the hope of 

improving their financial condition.228 In 2021, the FBI received more than 5,100 complaints involving 

some form of crypto-assets, with losses totaling over $241 million, from persons over the age of 60.229 

Recent data also suggests that older Americans that are victims of typical online scams (e.g., tech 

support and romance scams) are increasingly being asked to pay in cryptocurrencies, which are traded 

through private wallets using public exchanges and can be dificult to trace.230 

There are also indications that servicemembers are being targeted.  Consumer complaints to the CFPB 

show that crypto-assets are rising as a preferred payment method for scams targeting servicemembers 

through identity thef or romance scams. Hundreds of published servicemember complaints to the 

221 t. rowe PriCe, Families’ Excitement for Cryptocurrency Brings Risks and Opportunities, (Apr. 5, 2022), https://www.troweprice.com/content/ 

dam/trowecorp/Press%20Release%20-%20PKM22_release_FINAL%2004052022.pdf. 

222 Sophie Bearman, The Crypto Craze is Here to Stay – Now it’s Even Being Taught in High School, CNBC, (Feb. 2018), https://www.cnbc. 

com/2018/02/07/bitcoin-education-at-high-schools-and-colleges.html. See also CryPto Kids CaMP, Educating Future Leaders, https://www. 

cryptokidscamp.org; laVner eduCation, Crypto Camps & Courses for Kids, https://www.lavnercampsandprograms.com/crypto-camps-andcourses-for-kids. 

223 Cactus World, Cactus World to Launch First NFT Kids TV Show, (Jan. 4, 2022), https://www.einnews.com/pr_news/559611329/cactusworld-to-launch-first-nf-kids-tv-show. 

224 zigazoo, Zigazoo NFT Guide, https://www.zigazoo.com/nf-guide. 

225 PIGZBE App, https://www.finh.cc/pigzbe-app. 

226 Karen Kali, Age-Friendly Banking & Low- To Moderate-Income Older Adults, national CoMMunity reinVestMent Coalition (Nov. 2019), https:// 

ncrc.org/afb-standards/#_edn2. 

227 Marguerite DeLiema, Martha Deevy, Annamaria Lusardi & Olivia S Mitchell, Financial Fraud Among Older Americans: Evidence and 

Implications, national library of MediCine (2020), at 861-868, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7328021. 

228 Joint Center for housing studies of harVard uniVersity, Housing America’s Older Adults 2019, (2019), https://www.jchs.harvard.edu/sites/ 

default/files/Harvard_JCHS_Housing_Americas_Older_Adults_2019.pdf. 

229 Federal bureau of inVestigation, Elder Fraud Report 2021, (2021), https://www.justice.gov/file/1523276/download#:~:text=The%20 

number%20of%20elderly%20victims,over%20losses%20reported%20in%202020. 

230 Michal Gromek, Digital Investment Fraud Wave Hits Seniors, forbes (Oct. 31, 2019), https://www.forbes.com/sites/ 

michalgromek/2019/10/31/digital-investment-fraud-wave-hits-seniors/?sh=3ace68102780. 
49 

 

 

CFPB involved crypto-assets or crypto platforms in the last two years.231 

Privacy and Surveillance Risks 

Despite generally purported benefits of increased privacy with crypto-asset transactions, as discussed 

above, it is possible to use data aggregation techniques to uncover users’ wallet addresses and track 

every transaction related to that wallet. Ledger instruments like digital wallets record payments 

“on the books,” and DLT systems increasingly rely on centralized intermediaries, meaning that many 

crypto-asset systems require an operator who sees that money’s movement on the ledger.232 As 

a result, ledger distribution modulates, but does not eliminate, the ability to track ledger money, 

undermining the claim that DLT can provide greater anonymity than traditional bank accounts 

or bearer instruments, such as physical cash and coins. The absence of anonymity may dissuade 

members of some communities who place a high value on privacy from engaging with crypto-asset 

products and services. 

Crypto-asset companies also have the ability to collect a variety of their users’ financial, technical, 

and personal data.233 Such information may be shared with, or collected from, third-party companies, 

and these policies may not always be disclosed clearly to the consumer.234 In addition, crypto-asset 

companies have the potential to use payments data and digital transactions to gather sensitive data 

about consumers’ behavior, which may expose individuals to unwanted tracking and other privacy 

violations, worsening existing economic and social disparities. In addition, it has been reported that a 

digital crypto-asset platform has entered into a contract allowing a government agency to access data 

caches containing information, including geo-tracking to monitor transactions made through twelve 

diferent currencies including Ether, Tether, and Bitcoin.235 

Americans in general are skeptical of commercial and government information collection.236 Certain 

groups within the BIPOC community, in particular, both feel more vulnerable to having their private 

information exposed and are concerned about private or public entities having access to their 

information.237 The lack of pseudonymity in crypto-asset markets and information sharing relationships 

between crypto-asset firms may thus have disparate impacts on individuals within these communities. 

231 From September 6, 2020 to September 6, 2022, there were 305 published complaints from servicemembers about crypto-assets. For 

the purposes of this and other CFPB complaint data, crypto-asset complaints refer to published complaints submitted to the CFPB 

in which servicemembers selected the sub-product “virtual currency” as the subject of the complaint. Published complaints do 

not represent total complaints submitted. See CFPB, CFPB Complaint Database, https://www.consumerfinance.gov/data-research/ 

consumer-complaints/search/?chartType=line&dateInterval=Month&date_received_max=2022-09-06&date_received_min=2020-09-

06&lens=Overview&product=Money%20transfer%2C%20virtual%20currency%2C%20or%20money%20service%E2%80%A2Virtual%20 

currency&searchField=all&tab=Trends&tags=Servicemember. 

232 Angela Walch, Deconstructing 'Decentralization': Exploring the Core Claim of Crypto Systems, in CryPto assets: legal and Monetary PersPeCtiVes, 

oxford uniVersity Press (Chris Brummer ed., 2019), https://ssrn.com/abstract=3326244. 

233 See Anna Baydakova, How Binance, Coinbase and 22 Other Crypto Exchanges Handle Your Data, CoindesK (Jan. 27, 2022), https://www. 

coindesk.com/layer2/privacyweek/2022/01/27/before-you-click-i-agree-how-binance-coinbase-and-22-other-crypto-exchangeshandle-your-data. 

234 Id. 

235 See Gabriella Sotelo, Coinbase Is Selling Data on Crypto and 'Geotracking' to ICE, gizModo (Jun. 30, 2022), https://gizmodo.com/ 

coinbase-selling-crypto-data-geotracking-to-ice-1849130014. 

236 See Pew researCh Center, Americans and Privacy: Concerned, Confused and Feeling Lack of Control Over Their Personal Information, (Nov. 

15, 2019), https://www.pewresearch.org/internet/2019/11/15/americans-and-privacy-concerned-confused-and-feeling-lack-of-controlover-their-personal-information. 

237 Id. 
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VI. RECOMMENDATIONS 

This report reviews the risks associated with primary use cases and prospective opportunities for 

crypto-assets. Consumers, investors, and businesses are vulnerable to an array of risks in the cryptoasset ecosystem. 

Consistent with the objectives in the Executive Order to protect consumers, investors, and 

businesses as well as responsible development of payment innovations and digital assets, this report 

recommends a multi-pronged approach, described below. This approach builds on and complements 

other recommended actions as described in the President’s Working Group on Financial Markets (PWG) 

Report on Stablecoins238 as well as other reports pursuant to the Executive Order, including the report 

under Section 4 on the future of money and payments, and the report under Section 6, on financial 

stability risks and regulatory gaps. 

Even as stakeholders continue to deliberate on legislative proposals on the subject of crypto- asset 

market regulation, there are much needed actions to be undertaken in the meantime using the existing 

authorities available to the regulators to protect the U.S. consumers, investors, and businesses. These 

actions are described below. 

Recommendation 1: U.S. regulatory and law enforcement authorities should, as appropriate, pursue 

vigilant monitoring of the crypto-asset sector for unlawful activity, aggressively pursue investigations, 

and bring civil and criminal actions to enforce applicable laws with a particular focus on consumer, 

investor, and market protection. 

As discussed earlier in Part IV, frauds, thefs, and scams have emerged as an especially grave area of concern 

in the crypto-asset space. These unlawful activities cause significant financial harm to U.S. consumers, 

investors, and businesses, amounting to over $1.6 billion in total losses reported to the FBI in 2021 alone. 

•	 Expand and Increase Investigations and Enforcement: Regulators and law enforcement should 

continue and consider expanding eforts to investigate, and, where appropriate, bring enforcement 

or other legal action against unlawful activity in crypto-asset markets. In particular, authorities 

should, where appropriate, increase investigation into misrepresentations made to consumers and 

investors in crypto-assets, including, for example, false or misleading advertising, terms of service, 

claims of returns or income potential, or statements of protections available to users of cryptoassets. Even though overall crypto-asset activity appears to have decreased in the recent months, 

regulators and law enforcement should remain vigilant in case unlawful conduct does not subside 

or new types of illegal activities develop in the market. 

Crypto-asset use cases trigger obligations under federal consumer protection laws at least to the 

extent they are used for or in connection with ofering or providing consumer deposits, stored 

value instruments, retail and other consumer payment mechanisms, the transmittal, exchange, 

or storage of consumer funds, or in consumer credit arrangements. Relevant obligations include, 

but are not limited to, the prohibition on unfair, deceptive, or abusive acts or practices. Other 

potential uses of crypto-assets—including but not limited to the marketing and sale of crypto238 See, e.g., President’s worKing grouP on finanCial MarKets, the federal dePosit insuranCe CorPoration & the offiCe of the CoMPtroller of the CurrenCy, 

supra note 8. 
51 

assets as collectibles, or as features of gaming, entertainment, and other applications—are equally 

susceptible to various forms of unfair, fraudulent, misleading, or deceptive practices. As such, 

the CFPB and the FTC should continue to monitor and, as appropriate, expand eforts to conduct 

investigations of consumer complaints and use their authorities to enforce against and prevent 

unfair, deceptive, or abusive acts or practices in the industry. Similarly, to the extent that cryptoassets are marketed to retirement plans, the Department of Labor should conduct investigations 

to ensure proper fiduciary conduct, and to protect plans and plan participants from aggressive 

marketing, conflicts of interest, and imprudent and disloyal investments. 

Moreover, to the extent that trading, lending, borrowing, or other activity in crypto-assets involves 

securities or derivatives transactions, then these activities must be conducted in compliance with 

federal securities laws and the Commodity Exchange Act, including applicable regulations. The 

SEC and CFTC have engaged actively in the enforcement of fraud and other violations of federal 

laws and regulations and have allocated additional resources to these eforts. These eforts, 

maintaining crypto-assets as an enforcement priority, and continued development of specialized 

personnel and resources are all important for investor protection. 

•	 Coordinate Cross-Agency Enforcement Actions: Law enforcement oficials and regulators should, 

as appropriate, continue to coordinate and combat fraud to deter unlawful behavior and improve 

practices in crypto-asset markets. For example, the Department of Justice has an established team 

in its Market Integrity and Major Frauds Unit that leads national eforts to combat fraud and market 

manipulation involving cryptocurrency, in coordination with the Federal Reserve Board, the SEC, 

the CFTC, and other agencies. Other coordinated or parallel actions, such as the Federal Reserve 

and FDIC’s cease and desist notices regarding false or misleading representations of deposit 

insurance status, and the CFPB’s release of guidance on the same topic, are impactful and should 

be used more frequently, as appropriate—especially where consumers are likely to be misled by 

such misrepresentations. 

•	 Share Information on Illegal Crypto-asset Activity: Crypto-assets are continually evolving, as is 

the illegal activity that uses crypto-assets. To ensure broad and consistent enforcement and 

to supplement private sector analytics tools, regulators and law enforcement oficials should, 

as appropriate, share information regarding the type and scale of fraudulent, misleading, or 

manipulative market practices they are observing and investigating. For example, sharing data 

could help identify relevant clusters of unlawful activity and spot trends in scams and fraud types. 

Recommendation 2: U.S. regulatory agencies should use their existing authorities to issue supervisory 

guidance and rules, as needed, to address current and emerging risks in crypto-asset products and 

services for consumers, investors, and businesses. Agencies should work collaboratively to promote 

consistent and comprehensive oversight. 

The U.S. agencies should, as appropriate, review existing regulations and take steps to clarify 

regulatory requirements applicable to crypto-asset products and services, address novel fraudulent 

practices, and enhance disclosure requirements. These reviews should conclude with issuing 

clarifications, as appropriate, such as the recently released FDIC fact sheet on the scope of deposit 

insurance coverage that indicates that by federal law, the FDIC only insures deposits held in insured 
52 

banks and savings associations and only in the unlikely event of an insured bank’s failure. Where 

appropriate, agencies should also clarify that some crypto-asset products and services are regulated— 

despite assertions to the contrary by firms promoting these products and services—to help address 

gaps in disclosures. 

Crypto-asset products and services are new and rapidly developing, which can invoke jurisdictions 

and interests of multiple federal and state regulatory and law enforcement authorities in potentially 

novel ways. Further, crypto-assets and related intermediaries are subject to unique and evolving 

operational risks, including cyber risks. As such, active collaboration and coordination is necessary 

to ensure that crypto-asset products and services are subject to, and in compliance with, appropriate 

supervision, oversight, regulation, collection, and disclosure requirements. 

•	 Provide Guidance through Individual Actions: U.S. authorities have already taken useful steps to 

provide clarity in the crypto-asset space through individual agency actions such as supervisory 

guidance or rulemakings. Examples of such actions include the OCC’s interpretive letters that 

clarify expectations of its regulated entities in regards to safeguarding digital assets for customers, 

holding deposits that serve as reserves backing a stablecoin, and using distributed ledger 

technology to facilitate payments; the FDIC’s cease and desist actions for false or misleading 

representations about deposit insurance; and the SEC’s special purpose broker-dealer statement 

on digital asset custody that identifies the circumstances in which the SEC will not take certain 

enforcement action against broker-dealers with respect to digital asset securities. As appropriate, 

regulators should pursue supervisory guidance or rulemaking to ensure that all crypto-asset 

intermediaries properly account for novel operational risks, cyber risks, and consumer protection. 

•	 Collaborate to Improve Clarity: Collaborative cross-agency initiatives such as crypto-asset “policy 

sprints” undertaken by the U.S. federal prudential banking agencies provide meaningful benefits 

for consumers, investors, and businesses. The “policy sprints” resulted in productive engagements 

around common vocabulary, the identification and assessment of key risks, and the roadmap 

that identified areas of future focus. Interagency bodies such as the PWG’s Financial and Banking 

Information Infrastructure Committee (FBIIC) may also provide forums through which more 

targeted coordination and supervision of cyber and other operational risks can be developed. 

Such interagency coordination and parallel actions should continue, and, where appropriate, be 

further strengthened through the formation of new working groups to address emerging issues in 

crypto-asset markets and formal agreements to coordinate enforcement actions and share data. 

•	 Provide Plain Language Guidance: Given significant interest of individual consumers, investors, 

and populations vulnerable to disparate impacts in crypto-assets, and the many non-traditional 

forms of projects and firms involved in crypto-asset activities, regulatory agencies should, as 

much as possible, issue guidance, interpretations, and rulemaking related to crypto-assets in 

plain language. Plain language guidance is that which is readily understandable by an audience of 

laypersons, technologists, and non-professional parties with interests in the topic. One example 

of plain language guidance is the Department of Labor’s compliance assistance issued in March 

2022, which presented that agency’s “serious concerns” with cryptocurrencies as investments in 

defined contribution plans, such as 401(k) plans, in plain language easily understandable by plan 

fiduciaries, employers, and plan participants. Candid descriptions of the potential risks associated 
53 

 

 

 

 

with new categories of investments are an essential part of improving practices of plan fiduciaries 

when acting on behalf of plan participants in managing retirement holdings. 

Recommendation 3: U.S. authorities should, where appropriate, work individually and through the 

Financial Literacy and Education Commission (FLEC) to ensure that U.S. consumers, investors, and 

businesses have access to trustworthy information on crypto-assets. 

Users of crypto-asset platforms have significant exposure to risks, including risks of default and 

outright thef. Further, users ofen may not be fully aware of these risks, given crypto-asset market 

participants’ frequent emphasis on trading profits with minimal reference to losses, as well as the 

general lack of comprehensive disclosure. For these reasons, the FLEC should, as appropriate, 

coordinate and promote consumer education eforts on crypto-assets. These eforts should ensure 

that consumer-friendly, trustworthy, and consistent education materials are accessible and inclusive, 

to the maximum extent possible. Such materials should: 

(i) Highlight risks associated with investors’ or consumers’ use of crypto-assets, including 

heightened risks of frauds, thefs, and scams; 

(ii) Identify and warn against common practices employed by perpetrators of frauds, thefs, and 

scams; 

(iii) Provide information on how to report unlawful practices and submit consumer and investor 

complaints; and 

(iv) Provide information on operational risks that are unique to the crypto-asset ecosystem and how 

they may impact investment value. 

Considering the lack of data and information on use of crypto-assets by populations vulnerable to 

disparate impacts, FLEC member agencies should also consider exploring using existing surveys to 

collect new or additional data, as appropriate. 

Finally, the FLEC should, where appropriate, engage with industry leaders, academics, and other 

relevant parties to promote and coordinate public and private strategies for financial education 

outreach to consumers. 
54