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Cryptographic currency and economic security: threats, opportunities, and regulatory challenges

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Cryptographic currency and economic security: threats, opportunities, and regulatory challenges

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CRYPTOGRAPHIC CURRENCY AND ECONOMIC SECURITY:

THREATS, OPPORTUNITIES, AND REGULATORY CHALLENGES

by

Bijan P. Karimi

A Dissertation Presented to the
FACULTY OF THE USC SOL PRICE SCHOOL OF PUBLIC POLICY
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF POLICY, PLANNING AND DEVELOPMENT

December 2021

Copyright 2021 Bijan P. Karimi

ii
Acknowledgements
Doctoral research is a lonely affair. This research would not have been possible without
the following:

Committee Dr. Robertson, I asked you all to go on an adventure with me and you accepted
without hesitation. Dr. Southers, and SAIC Edwards (ret), guiding the research,
connecting me with industry experts, and providing pragmatic observations made
the research infinitely better. The goal of any research is to move the conversation
forward by listening to others, gathering my own evidence, reconciling the
observations, and creating new insights. Through our partnership, we have
achieved it.

My Family I’ve missed a lot over the last little while. Birthdays, trips, local adventures, and just
spending time went by the wayside – all to finish a goal I set for myself four years
ago. You have watched me struggle, listened to my banter about logic models, and
frustrations trying to research a topic that keeps changing. You kept me on track
and recharged my emotional battery when it was running low. Thank you is not
enough – but it is all I have.

My Classmates DPPD - One of the great opportunities of the program is to work with and learn
from a wide range of professionals. Diversity of thought adds immeasurably to
discussions about complex topics, and you helped open my eyes to impacts I had
not considered. You offered encouragement and guidance as you blazed the trail
before us, and I hope I did the same for those who follow. Weekly research check-
in sessions gave me the fortitude to “git ‘er done.”

NPS 1401/2 - Our WhatsApp banter extending the better part of seven years
provided me the mental reprieve when I needed a distraction. I could also throw
out a question or two and get quick, pragmatic replies on the state of technology,
government policy, and what token to purchase. Your knowledge of the homeland
security enterprise kept the research grounded with the essential goal of
evaluating emerging threats and figuring out how to mitigate their impacts.

Interviewees Many of you will never get credit for your perspectives on this complex topic. Your
candor during our discussions helped me understand the challenges of creating a
regulatory environment that supports this innovative technology while containing
harmful uses. My goal was to bring your observations to life and help others
understand the opportunity and the concerns that surround the financial unknown.

My Instructors Thank you introducing me to public policy and the foundations of public service. As
a public sector employee, but not someone who formally studied public policy, I did
not appreciate my broader role in government, and the conceptual foundations on
which it is built. I applied your lessons to my work and spoke to others about this
calling and we were better for it. I have taken concepts, sources, and frameworks
from each class and applied them to this research. You all had a hand in this work.

iii
Table of Contents

Acknowledgements ......................................................................................................... ii
List of Tables ...................................................................................................................vi
List of Figures ................................................................................................................. vii
Abbreviations ................................................................................................................ viii
Abstract ...........................................................................................................................ix
Preface ............................................................................................................................ x
Chapter 1: Introduction .................................................................................................... 1
The Double-Spending Problem ...................................................................... 4
Defining Cryptographic Currency ................................................................... 5
What Is Currency .................................................................................. 6
Types of Currency ................................................................................ 7
Currency Attributes ............................................................................. 12
Definitions ........................................................................................... 16
Bitcoin – the Bellwether ............................................................................... 16
Adoption of New Technology ....................................................................... 18
Innovation ........................................................................................... 19
Communications Channels ................................................................. 20
Social Systems ................................................................................... 21
Adoption Timeline ............................................................................... 22
Research Space .......................................................................................... 24
Understanding the Problem ................................................................ 25
Research Questions ........................................................................... 27
Contributions to Practice .............................................................................. 28
Cryptocurrency Uses .......................................................................... 29
Potential Impacts of Cryptocurrency Use on Economic Security ........ 30
Regulatory Inconsistencies and Gaps ................................................ 30
Research Boundaries and Limitations ......................................................... 31

Chapter 2: Literature Review ......................................................................................... 33
Cryptocurrency ............................................................................................ 33
Uses ................................................................................................... 33
Market ................................................................................................ 48
Economic Security ....................................................................................... 57
National .............................................................................................. 58
Individual ............................................................................................ 65
Regulatory Environment .............................................................................. 69
What Is Being Regulated .................................................................... 71
Who Is Being Regulated ..................................................................... 73
Federal Regulations ........................................................................... 78
State Regulations ............................................................................... 82
Summary ..................................................................................................... 84
iv
Cryptocurrency ................................................................................... 84
Economic Security .............................................................................. 85
Regulations ........................................................................................ 86

Chapter 3: Research Methods ...................................................................................... 89
Research Questions .................................................................................... 89
Approach ..................................................................................................... 89
Theoretical Paradigm/Worldview ................................................................. 89
Design .......................................................................................................... 90
Phenomenological .............................................................................. 91
Grounded Theory ............................................................................... 91
Sequential Mixed Methods ................................................................. 92
The Researcher ........................................................................................... 93
Literature Review ......................................................................................... 93
State and Federal Law Review .................................................................... 94
Participants .................................................................................................. 95
Sample Frame .................................................................................... 95
Interviewee Recruitment ..................................................................... 96
Interviewee Profile .............................................................................. 97
Instruments .................................................................................................. 99
Survey Tool ...................................................................................... 100
Interview Questions .......................................................................... 100
Setting .............................................................................................. 100
Procedure .................................................................................................. 101
Recruitment ...................................................................................... 101
Online Survey ................................................................................... 102
Interview ........................................................................................... 103
Validity .............................................................................................. 104
Data Analysis ............................................................................................. 105
Survey and Worksheet Responses .................................................. 106
Interview Worksheet Recode ............................................................ 106
Interview Thematic Coding ............................................................... 107
Coding Process ................................................................................ 108
Survey-Interview Link ....................................................................... 109
Risk Calculation ................................................................................ 109
Conclusion ................................................................................................. 110

Chapter 4: Findings ..................................................................................................... 111
Cryptocurrency .......................................................................................... 111
Market .............................................................................................. 112
Cryptocurrency Uses ........................................................................ 119
Adoption ........................................................................................... 131
Economic Security ..................................................................................... 136
Financial Innovation .......................................................................... 137
Overall Impact on Economic Security ............................................... 139
National Economic Security .............................................................. 140
v
Individual Economic Security ............................................................ 143
Regulations ................................................................................................ 146
Level of Regulation ........................................................................... 147
Federal and State Alignment ............................................................ 150
Regulatory Change........................................................................... 153
Regulatory Considerations ............................................................... 159
Summary ................................................................................................... 163
Cryptocurrency ................................................................................. 163
Economic Security ............................................................................ 164
Regulations ...................................................................................... 165

Chapter 5: Analysis ..................................................................................................... 167
Research Conclusions ............................................................................... 169
Potential Impacts of Cryptocurrency Use on Economic Security ...... 169
What Regulatory Changes Can Be Made ......................................... 176
Recommendations ..................................................................................... 180
Develop National Strategy ................................................................ 181
Establish Closer Public Private Partnerships .................................... 186
Implement Policy Agenda ................................................................. 189
Implementation .......................................................................................... 194
Cryptocurrency Adoption .................................................................. 194
Stakeholder Analysis ........................................................................ 196
Political Context ................................................................................ 199
Policy Design .................................................................................... 202
Logic Model ...................................................................................... 203
Limitations and Further Research .............................................................. 204
Conclusion ................................................................................................. 207
Struggle for Control .......................................................................... 208
Future ............................................................................................... 209

References .................................................................................................................. 212

Appendices ................................................................................................................. 225
Appendix A – Survey Instrument ............................................................... 225
Appendix B – Interview Script and Worksheets ......................................... 227

vi
List of Tables
Table 1 - Characteristics, Control, and Transaction Behavior of Different Types of
Currencies ...................................................................................................... 13
Table 2 - Definitions of Currency Types ........................................................................ 16
Table 3 - RAND Review of Literature Identifying Illegal Activity Facilitated by
Cryptocurrency ............................................................................................... 40
Table 4 - Bitcoin Annual Closing Values 3/28/2016–3/27/2021 ..................................... 51
Table 5 - Cryptocurrency Valuation by Use and Percent Share of U.S. Economic
Indicators 2015–2020 (Billions) ...................................................................... 56
Table 6 - Summary of Selected Money Transmitter Regulatory Initiatives .................... 77
Table 7 - Selected Federal Agencies and their Role in Cryptocurrency Regulation ...... 82
Table 8 - State Cryptocurrency Regulatory Environment .............................................. 83
Table 9 - Summary of Cryptocurrency Observations and Unanswered Questions ....... 85
Table 10 - Summary of Economic Security Observations and Unanswered Questions 86
Table 11 - Summary of Regulatory Observations and Unanswered Questions ............ 87
Table 12 - Mixed Methods Initial Methodology Selection .............................................. 92
Table 13 - Literature Review Search Terms and Phrases ............................................. 94
Table 14 - Stakeholder Group, Descriptions and Interviewee Count ............................. 97
Table 15 - Participant Profile by Stakeholder Group ..................................................... 98
Table 16 - Interview Experience .................................................................................. 104
Table 17 - Code Deck ................................................................................................. 108
Table 18 - Cryptocurrency Qualitative Risk Calculation Formula ................................ 110
Table 19 - Reliable Estimate of Cryptocurrency Market Size ...................................... 114
Table 20 - Thematic Summaries of Beneficial and Harmful Cryptocurrency Uses ...... 119
Table 21 - Top Cryptocurrency Attributes .................................................................... 120
Table 22 - Most Frequently Cited Beneficial Cryptocurrency Uses ............................. 122
Table 23 - Most Frequently Cited Harmful Cryptocurrency Uses ................................ 127
Table 24 - Risk of Cryptocurrency Use on National Economic Security ...................... 140
Table 25 - Risk of Cryptocurrency Use on Individual Economic Security .................... 144
Table 26 - Most Frequently Recommended Regulatory Change ................................ 153
Table 27 - Summary of Cryptocurrency Research Findings and Implications ............. 164
Table 28 - Summary of Economic Security Research Findings and Implications ........ 165
Table 29 - Summary of Regulatory Research Findings and Implications .................... 166
Table 30 - Cryptocurrency Stakeholder Characteristics .............................................. 198
Table 31 - Decision Groups for Implementing Political Change .................................. 200
Table 32 - Groups Rewarded and Punished by Recommendation Implementation .... 201
Table 33 - Areas for Future Research ......................................................................... 205
Table 34 - Cryptocurrency Industry Predictions .......................................................... 210

vii
List of Figures
Figure 1 - Technology Adoption Curve .......................................................................... 19
Figure 2 - Using Fiat and Non-Fiat Currency for Financial Transactions ....................... 26
Figure 3 - Research Questions ..................................................................................... 28
Figure 4 - Share of Total Cryptocurrency Transaction by Illicit Subcategory ................. 41
Figure 5 - Total Cryptocurrency Market Capitalization 1/1/2014–3/27/2021 .................. 49
Figure 6 - Total Market Capitalization by Token Share 3/27/2021–3/27/2021 ............... 49
Figure 7 - Number of Blockchain Wallet Users Worldwide 11/1/2011–2/22/2021 ......... 50
Figure 8 - Total Value of Illegal Cryptocurrency Sent and Received vs Percent of Total
Transactions 2017–2019 ............................................................................ 54
Figure 9 - Stakeholder Groupings in Research Space .................................................. 95
Figure 10 - Stakeholder Alignment to Public Policy Process ......................................... 96
Figure 11 - Cryptocurrency Market Change over Next Five Years .............................. 113
Figure 12 - Cryptocurrency as Financial Innovation .................................................... 137
Figure 13 - Risk of Cryptocurrency Use on Economic Security ................................... 139
Figure 14 - Risk of Cryptocurrency Use on National Economic Security ..................... 141
Figure 15 - Risk of Selected Cryptocurrency Uses on National Economic Security .... 142
Figure 16 - Risk of Cryptocurrency Use on Individual Economic Security ................... 145
Figure 17 - Risk of Selected Cryptocurrency Uses on Individual Economic Security .. 146
Figure 18 - Cryptocurrency Regulation in the United States ....................................... 147
Figure 19 - Regulation Encourage Beneficial Cryptocurrency Uses ............................ 148
Figure 20 - Regulation Discourages Harmful Cryptocurrency Uses ............................ 149
Figure 21 - Research Questions, Conclusions, and Recommendations ..................... 168
Figure 22 - Cryptocurrency and Internet Adoption Curve (Log Scale) ......................... 195
Figure 23 - Stakeholders in Crypto Currency to Fiat Currency Transaction ................ 196
Figure 24 - Logic Model for Creating Regulatory Environment that Supports Financial
Innovation and Contains Harmful Cryptocurrency Uses ........................... 204

viii
Abbreviations
Abbreviation Definition
AML Anti-Money Laundering
BA blockchain analytics
BSA Bank Secrecy Act
CBDC Central Bank Digital Currency
CE/FI currency exchanges/financial institutions
CFT Countering Financing of Terrorism
CFTC Commodity Futures and Trading Commission
CIA Central Intelligence Agency
Cryptocurrency Cryptographic Currency
CVC convertible virtual currencies
DeFi decentralized finance
DHS Department of Homeland Security
ESI Economic Security Index
FATF Financial Action Task Force
FBI Federal Bureau of Investigation
FDIC Federal Deposit Insurance Corporation
FinCEN Financial Crimes Enforcement Network
Fintech financial technology
GDP gross domestic product
ICO initial coin offering
KYC know your customer
MSB money service business
NS/LE national security/law enforcement
OCC Office of the Comptroller of the Currency
QR Quick Response
R/PM regulators/policy makers
SEC Securities and Exchange Commission
UCC uniform commercial code
WMD weapons of mass destruction

ix
Abstract
Currency serves as society’s memory of actions undertaken and the creation of
benefit. For thousands of years, it has facilitated exchange and is considered one of
mankind’s greatest inventions. It has changed in form and function and adapted to
technological advances as countries reached across oceans and trade became a global
endeavor. Yet, few could anticipate the transformational shift caused by Satoshi
Nakamoto’s introduction of bitcoin and the blockchain in 2008 and the disruptive impact
it would have on the financial system. Intermediary driven reconciliation was replaced
with algorithmic validation, allowing individuals to exchange value nearly
instantaneously anywhere in the world. Cryptographic currency was initially the domain
of the nefarious attempting to hide their transactions from the government, but over the
last decade, it has shown great promise in expanding access to financial markets,
decreasing costs, and improving transaction efficiency. This research explores those
beneficial and harmful uses, their impact on national and individual economic security,
and the regulatory environment. The findings reveal that a national strategy is needed to
align federal and state government efforts, public-private partnerships can help facilitate
knowledge transfer, and policy formulation and a policy agenda, consistently applied,
will provide the regulatory framework for containing harmful uses while allowing for
innovation.

Keywords: Cryptocurrency, Cryptographic Currency, Economic Security, National
Security, Decentralized Finance

x
Preface
My master’s thesis from the Naval Postgraduate School explored the connection
between economic, homeland, and national security. Since it was published in 2015, I
continued to be interested in transformational technologies and their impact on national
security. As I read more about cryptocurrency, I became intrigued about its connection
to all three elements of my previous research and wondered what effect it would have.
As the research began, I quickly realized how far-reaching the impact of this new
technology would be and the importance of getting the right information, to the right
people at the right time so critical decisions could be made. In that spirit, I went to work.
Through this process, I realized many of the talking heads were missing the meta
message behind crypto. Cryptocurrencies are not just the heralds of a new paradigm in
finance; they are the digitally embodiment of a loss in faith with the existing financial
structure. People may be upset with capitalism, but they are actually frustrated with a
financial environment stacked against them and they are doing something about it. The
GameStop run-up and sell off is just one example of how the system was reverse
engineered against large financial institutions, only to have regulators halt the activity
because of the disruptive nature. Entrenched powers are extremely threatened by all
the changes these instruments will bring and they have a vested interest in keeping the
status quo.
Studying cryptocurrency is akin to making decisions in a chaotic environment as
conceptualized in 1999 by David Snowden and expanded on with Mary Boone (2007).
Traditional notions of decision-making focus on problem simplification and application of
frameworks built on previous experience. But what happens when the environment is
xi
novel or chaotic and does not conform to predictable environments? Snowden
developed the Cynfin (Welsh word for environmental factors and experiences that
influence individual hermeneutics) framework to help leaders understand how to
navigate through novel environments.
As an example of the rapidly changing research space, in the month prior to
submitting this manuscript for review, the following events have occurred:
Cryptocurrency

• Tesla, Inc. announced it would accept bitcoin for vehicle purchases then
retracted that several weeks later citing the environmental impact of token
mining.
• Within one month, bitcoin was valued at $63,000 then dropped to ~$32,000.
• El Salvador became the first country to adopt bitcoin as legal tender and
intends to harness the heat from volcanos to power their mining operations.
• Dogecoin (a token created as a joke) increased in value 11,000%.
• PancakeBunny protocol for decentralized finance loans was exploited and
$45M of cryptoassets was stolen.
• Sheetz becomes first U.S. convenience store to accept cryptocurrency for gas
and goods inside the store.
• 100+ new financial tokens were created.

Economic
Security

• U.S. government officials proposed the infusion of $2.0+ trillion into the
economy for infrastructure repairs and improvements.
• U.S. inflationary concerns are increasing after an infusion of $1.7 trillion into
the U.S. economy for COVID-19 relief.
• Colonial pipeline was attacked by Russian a cyber gang and disabled fuel
distribution to the southeastern U.S. for four days. Gas prices spiked and fuel
shortages resulted. The company paid $4.4m in bitcoin to get the decryption
key.
• June 2021, U.S. government recovers almost half the ransom Colonial
Pipeline paid to hackers by tracking the wallets used.
• China announced it has created a Central Bank Digital Currency built on
blockchain and “air dropped” 50 million yuan to residents of Suzhou for them to
spend at online retailers and brick and mortar locations.

Regulatory

• Nebraska state legislature (following in Wyoming’s footsteps) sent a bill to the
governor asking to establish a state bank charter for digital asset depository
institutions.
• U.S. Treasury requests businesses to report transfers of cryptocurrency value
greater than $10,000.
• FinCEN issued an initial list of priorities for AML/CFT policy.
• Member of the Congressional blockchain caucus called for public or officials to
come up with a way to identify wallet holders and reverse transactions if a
crime is suspected.
• SEC sues five BitConnect promoters for $2 billion cryptocurrency scheme.
Source: Jefferies, 2021

xii
Among these changes, there is inconsistent information, a rapidly changing
problem space, new issues, and few frameworks to evaluate the next steps. This is the
same environment Snowden and Boone envisioned when identifying what actions to
take – establish order, sense where stability exists and does not, and move the situation
to a complex environment where some frameworks can be applied. This research
endeavors to identify areas that continue to change, potential vulnerabilities, and the
decisions that need to be made to bring some order to the rapidly evolving
cryptocurrency space.

“Out of chaos comes greatness”
Mary Daly, President
Federal Reserve Bank of San Francisco

1
Chapter 1: Introduction
For thousands of years, humans have used objects to represent value and
facilitate trade. Yet, it was the creation of coinage, and the guarantee of its worth by a
government that truly made consistent value exchange possible (Board of Governors of
the Federal Reserve System, 2015). Modern coinage had its origin around 600 B.C. in
the ancient Greek kingdom of Lydian in what is now Turkey (Whipps, 2007). Having a
relatively uniform medium of transaction backed by the government and serving to
facilitate exchange, store value, and be a unit of account can be considered one of
civilization’s greatest accomplishments (Rogoff, 2016; Mackintosh, 2017; Castronova,
2014; Kubát, 2015). The medium has helped individuals reach relative economic stasis
by allowing for the creation and storage of value and permitted governments to support
economic growth and facilitate cross-border partnerships through the exchange of
stable currencies among global community members.
Nation-state backed currency has been a reliable medium of exchange for
hundreds of years, but two significant changes paved the way for the creation of a new
currency environment: decoupling currency from gold standard and the digitization of
value exchange. Stepping away from the gold standard, initiated in 1931, and
completed in 1973, meant currency was no longer required to be backed by precious
metals. Until this time, someone could present a coin or paper note to a bank and
request actual gold in exchange. Following the decoupling, the government guaranteed
the value of the coin or note. Essentially, people trusted that their currency would retain
value because the government said so (Lioudis & Boyle, 2021). This change also
allowed the government to encourage consumer spending or saving based on monetary
2
supply adjustments. Digitization provided additional flexibility in the financial system
because value could be moved nearly effortlessly between financial intermediaries
domestically and internationally to reconcile a transaction while guaranteeing that the
value being sent existed in one account and was transferred to another account.
The 2007–2008 financial collapse caused trillions of dollars in wealth to
evaporate. A financial system centered on large institutions “too big to fail” functioned as
arbiters of individual transactions. They, in partnership with the government, provided
an essential element in our financial system – trust that currency would retain its value,
that financial instruments would be properly vetted, and the monetary supply would be
managed appropriately. For many, this event highlighted systemic issues with the
current finance and banking system and was the catalyst to look for other options or
create something better.
On October 31, 2008, less than two months after the collapse of Lehman
Brothers, Satoshi Nakamoto introduced bitcoin to the world. In a simple on-line post
belying the importance of his innovation, he stated, “The world needs an electronic
payment system based on cryptographic proof instead of trust.” Since then, bitcoin and
other cryptographic-based derivatives have been used legally by currency traders,
investors, and economic libertarians but also by criminals and terrorists to fund illegal
activities and avoid monitoring by government agencies. Like many innovations, this
novel financial technology (fintech) is agnostic; however, the application of the
technology and intent for use is where issues arise.
Globalization is the exchange of social and cultural ideals and the extension of
economic ties between countries. It has enabled individuals to connect, partner, and
3
jointly benefit from the exchange of goods and services (Karimi, 2015). The primary
method for facilitating these cross-border transactions is the intermediary-facilitated
exchange of fiat currency. Stable economic conditions facilitate these exchanges and
provide greater security and prosperity for nations and their residents. National
economic security is the ability of the United States to protect its own economic
prosperity via domestic policies, financial instruments, and international influence
(Karimi, 2015). Personal economic security is the ability to make money, maintain
financial stability, withstand shocks (e.g., unexpected expenses), and provide for basic
personal needs (Joo, 2008; Medyanik & Deyneka, 2019). The introduction of
decentralized finance (DeFi) and cryptocurrencies over the last decade may present an
emerging threat to the stable, regulated markets that provide a prosperous economic
environment while also providing more access to financial services and helping
individuals maintain individual financial security. This non-guaranteed, unregulated
currency has the potential to significantly impact personal and national economic
security and requires further study.
This chapter reviews some foundational concepts related to cryptocurrency: its
genesis, a definitional framework, as well as technology adoption before describing the
research space and contributions to practice. Chapter 2 describes the cryptocurrency
market and current uses of cryptocurrency, the components of national and personal
economic security, and the state and federal regulatory environment surrounding
fintech, and concludes with a summary of observations and list of unanswered
questions. Chapter 3 outlines the grounded theory centered, sequential mixed-methods
approach used to gather and analyze information from 20 industry stakeholders and
4
regulatory database. Chapter 4 bridges the literature and research outcomes and
generates a summary of findings and implications across the three areas of study.
Chapter 5 identifies specific conclusions within the research areas, links them to the
primary research questions, and recommends developing a national strategy,
establishing closer public-private partnerships, and implementing a policy to mitigate the
impact of harmful cryptocurrency use while supporting financial innovation.
The Double-Spending Problem
Cryptocurrency is a financial innovation that overcame a central problem with the
exchange of electronic value without an intermediary and ensured an individual does
not spend the same unit of value twice. In today’s system, an intermediary (e.g., bank)
ensures that individuals have enough money in their account to pay a bill. When the bill
is paid, it is removed from the buyer’s account and deposited in the seller’s. For this
same transaction to occur in a decentralized environment (i.e., between two individuals
who do not know each other, without an intermediary, with accounts they personally
manage, containing value not backed by a government, and without a guarantee that
the value even exists), a new technology needed to be created. Satoshi Nakamoto’s
(2008) invention of blockchain technology addressed this issue and ushered in a new
wave of financial innovation. The concept was to create a ledger of all transactions
(blocks) that continually build on themselves (hashes) into one long record (chain)
shared with everyone (transparent). It was the technological advancement of the
blockchain that was Nakamoto’s greatest contribution. The blockchain documents all
payment transactions in 10-minute increments. A copy of the ledger is then distributed
to all computers involved in validating these transactions. Thus, a chronological record
5
of all transactions is recorded, and available for review by anyone, anywhere. This
record is intended to establish trust in a new peer-to-peer currency based on
transparency; not one built on intermediaries and a government guarantee. With
widespread internet availability, increased computing power, and knowledge from
previous attempts, a currency evolution was possible. Bitcoin emerged from the work
and incremental innovation of others and embodied two significant innovations: an
unalterable universal ledger (dubbed the blockchain) and a unique set of incentives to
keep the ledger up to date (computational validation) while managing the total monetary
supply. In this new environment, instead of an institution holding the record-keeping
responsibility (or then distributed among multiple financial institutions), the blockchain
records these transactions between two wallets without the need of an intermediary
(Yermack, 2017). Since 2008, blockchain technology has become an accepted form of
accounting for the exchange of value between individuals and ushered in a radically
new form of DeFi and associated technology innovations.
Defining Cryptographic Currency
The characteristics of currency that made it a durable, reliable form of value
storage and used for centuries to facilitate transactions, is changing. Currency is a
complex system that relies on society’s trust and agreement that a symbol (money) can
hold value and be durable (Vigna & Casey, 2015). Currency has transformed from gold
coins to a digitally represented promise and along the way changed the way currency is
defined. To understand cryptographic currency (cryptocurrency), we need to consider it
alongside other types of currency and discuss what characteristics set them apart. This
review also serves to provide some definitional foundation to outline the taxation,
6
exchange regulation, security and money-laundering components of digital transactions
because they do not fit easily into existing categories (Kubát, 2015; Reddy, 2018).
Establishing a clear definition of cryptocurrency provides the linguistic foundation for
regulation and policy development and aids in the research discussion.
What Is Currency
Currency is the most generic form of value exchange. Currency is something
(anything almost) that two parties agree represents value and can be exchanged to
settle a debt. It is up to the buyer and seller what that thing is, in what form it is
exchanged (physical or digital), and how it is valued (Castronova, 2014; Future of
money, 2018). All the different types of units used for exchange whether digital, virtual,
or cryptographic are under this umbrella. In August 1971, President Nixon ended the
convertibility of the United States dollar to gold to moderate rising inflation and decrease
the unemployment rate. This decision created a “fiat” dollar that provided more
monetary policy flexibility. It relied on individuals to trust that the United States would
back the dollar and maintain its value (Ghizoni, n.d.). This action would become one of
the foundational concepts on which virtual currency is based – trusting that a unit of
currency exchanged between individuals will hold value. Centralized currency (i.e., fiat)
exists within a closed environment managed by a central body. Decentralized currency
(in any form) does not have such a control mechanism.
Money is defined as a medium of exchange or account authorized by a national
government to settle a debt between individuals (Dibrova, 2016). Virtual currency exists
in a blurry space when considering what is and is not money. Several sources concern
themselves with answering the question if virtual (and crypto by extension) currencies
7
are money. Most authors use the following three-part definition of money: (1) unit of
account, (2) medium of exchange, and (3) store of value (Castronova, 2014; Chuen,
2015; Mackintosh, 2017). Many authors cite the problem of virtual currency not meeting
the threshold to be a store of value (Vigna & Casey, 2015; Halaburda & Sarvary, 2015;
Diborva, 2016). Cryptocurrency is not a reliable store of value because of significant
price volatility. However, as virtual currencies gain wider adoption and value stabilizes,
they may more closely meet the definition of money.
For some, the concept of value storage is not an essential component of the
definition of money. Several authors explain virtual currency as a digital representation
of value that can be transferred, stored, or traded electronically but stop short of calling
it money. Internet decentralization changed the concept of electronic money and
enabled the creation of privately issued digital currency (Mullan, 2016). This new value
is not issued by a central bank nor does it represent a fiat currency (Baron, 2015;
Schroeder, 2008). Wolman in The End of Money (2012) quotes Kurt Tucholsky’s
succinct definition of money, "Money has value because it is universally accepted, and it
is universally accepted because it has value." While circular in logic, it summarizes the
trust that underscores money (or anything substituting for money) and allows it to be
accepted across uses. By this standard, anything can be money, so long as the
individuals in the transaction perceive value and believe it can be used for other items.
From this perspective, cryptocurrency is money.
Types of Currency
Current definitions of currency vary based on the form it takes, how it is being
used, and who controls it. Fernández ‐Villaverde (2018) provides a useful metaphor
8
when describing currency – it functions as society’s memory of actions undertaken and
the creation of benefit. A value is placed on the memory (more or less money for effort
and perceived benefit for the action). Initially, memory was represented by physical
coins, then digital documentation but an intermediary was verifying the memory. DeFi
removes the intermediary and relies on individuals to maintain the memory of actions
taken and their benefit. The unclear definition of cryptographic currency (a type of DeFi)
makes it challenging to apply existing regulations that focus primarily on fiat currency
and established capital markets (He et al., 2016). The following discussion describes
four types of currency: cash, digital, virtual, and cryptographic to help bring some clarity
to the broader research.
Digital transactions are not a new phenomenon and have existed in some form
since the 1970s when the Clearinghouse Interbank Payment System began (Committee
on Payment and Settlement Systems, 2003). However, only in the last decade has the
diversity of digital transaction types increased so significantly. Giovanni Sartori (1970)
described the challenge researchers have when applying existing methodologies to new
environments – conceptual stretching. This often results in a narrowing thought pattern
because a researcher tries to fit a new phenomenon into an existing framework often
through quantification. When faced with a novel environment, Sartori proposes
developing a “ladder of abstraction” that provides researchers with a new set of
conceptual cut-off points, thematic boundaries, and analytical frameworks from which to
study a new concept. We are in a new era of digital currency transactions and it
requires new ways of relating concepts before they can be quantified and studied.
Sartori believes that when observing a new phenomenon, quantification is a natural way
9
to evaluate it; yet, we first need to develop the concept of what we are quantifying.
However, with the introduction of cryptographic currencies (a type of virtual currency),
current definitional boundaries are being stretched.
Defining cryptocurrency as different from other types of electronic value
exchange is a comparative task – identifying what attributes apply to each and how they
are different. There must be identified and accepted conceptual definitions before we
can operationally compare and discuss differences. A ladder of abstraction as described
by Sartori can be employed to help conceptualize a new phenomenon – what is the
class of things to which it applies and what are the properties, distinctions, and
attributes of those things that allow for comparison and categorization. It is important to
make these distinctions because being too vague with descriptions does not align with
the specificity of study. When reviewing the types of currency, it becomes evident that
existing definitions may not adequately describe the referential object and new
classification is needed.
Cash. Cash is one of the most ubiquitous and easily understood forms of value
transfer. When people talk about cash, they mean a physical form of currency (coin or
paper) easily and privately exchanged between individuals (Wolman, 2012). Because it
is so readily available, easily divisible, and accepted worldwide, it is an easy benchmark
from which to make comparison. The dollar is backed by the U.S. government and
managed by the Federal Reserve. When exchanged between individuals, there is no
intermediary, allowing for a certain level of privacy that many individuals desire. Once
the U.S. dollar was taken off the gold standard, the supply became theoretically
unlimited; however, the Federal Reserve manages the national money supply (and
10
interest rates) closely to encourage desired consumer behaviors so it is unlikely supply
will ever be unlimited; otherwise, it would lead to hyperinflation. When transactions are
completed, the exchange is relatively private because someone outside the transaction
is unable to view what took place between the individuals. It is reversible as the parties
can agree to undo the transaction that has taken place. However, the utility of cash
decreases when large amounts need to be exchanged or transported.
Digital. Digital currency (or digital money) is an evolution of paper money and
hard currency and the electronic representation of fiat currency. “Funds in a bank
account are stored electronically, so they can be thought about as digital money”
(Halaburda & Sarvary, 2016, p. 48). Digital currencies are the result of a decrease in the
use of cash for daily transactions; they provide convenience but should not be
considered a new monetary instrument (Fernández ‐Villaverde, 2018). Nomenclature
related to digital currency is further confused because it is often called electronic
currency. Rogoff (2016) defines electronic currency as a unit of account between banks;
effectively, the electronic representation of fiat currency. For this research, digital and
electronic currencies are the same.
Virtual. Virtual currency is a digital representation of value not backed by any
government agency. Digital is the interface between conventional currency (tangible)
and the electronic environment, which allows for innovations in payment systems
(European Banking Authority, 2012; Ali et al., 2014b). “Virtual” is often used
interchangeably for “digital” when describing intangible currencies (Halaburda &
Sarvary, 2016; Chuen, 2015). Unfortunately, this broad description confuses the
nuanced difference about who “backs” the currency. Digital and virtual are types of
11
currency formats based on an electronic medium (as opposed to physical). The primary
distinction between digital and virtual currency is the centrality of control. Digital
currencies are electronic versions of fiat currencies, managed by a government agency.
Virtual currencies are representations of value offered and managed by private
organizations that set the policies for use; they are not secured by a government
(Baron, 2015). The European Banking Authority puts forth a definition of virtual currency
that succinctly summarizes these conditions and is useful for this research:
Virtual currency is a digital representation of value that is neither issued by a
central bank or public authority nor necessarily attached to a [fiat currency], but is
used by natural or legal persons as a means of exchange and can be
transferred, stored or traded electronically. (European Banking Authority, 2014,
p. 11)
Early examples of virtual currency were non-convertible to fiat currency and used to
incentivize users of the services providing them (European Banking Authority, 2014).
Airline programs offering “miles” began in the early 1980s (Future of Money, 2018).
Cryptographic. Cryptocurrencies record the exchange of value between
individuals with no intermediary in an unalterable transaction (Blockgeeks, 2018). The
cryptographic description refers to the process used to track exchanges between
individuals on a universal digital ledger using a series of hashes (Nakamoto, 2008; Ali et
al., 2014b). Cryptographic currencies are different from virtual currency because there is
no central control and the usage is bounded by the algorithmic underpinnings of the
token offering. Cryptocurrencies (e.g., Bitcoin, Ethereum) rely on cryptographic keys to
maintain the anonymity of the buyer and seller, though the transaction is recorded on a
12
fully transparent ledger using some version of blockchain technology. Intuitively,
cryptocurrency may be viewed as money, but strictly speaking, it is not (Kubát, 2015).
There is no backing of the value by any government and there is no transactional
middleman as described in the double-spending problem. Cryptocurrency cuts out the
transaction adjudicator but maintains the infrastructure to permit exchanges between
individuals. Ledger maintenance is moved from centralized financial institutions to a
decentralized, transparent system (Vigna & Casey, 2015).
Cryptocurrency has existed for less than a decade but in that time, has
conceptually transformed the fintech landscape. David Yermack, in a 2013 working
paper, asked the question “Is Bitcoin a Real Currency?” as awareness of the coin
gained an audience beyond cryptographic experts and computer hackers. Through his
research, he found that cryptocurrencies do not behave like other currencies when
evaluated by criteria widely accepted by economists and instead should be viewed as a
security (i.e., speculative investment). Yet, others see cryptocurrency as a fungible
medium of exchange, partially meeting the definition of money. Here is where the
categorical issue described by Sartori exists. By examining the attributes of currency,
we can determine if the existing definitional framework is valid or if alternates are
needed.
Currency Attributes
This section summarizes the characteristics, control mechanisms and transaction
behavior of digital, virtual, and cryptographic transactions and compares them to
commonly understood cash transactions. These characteristics are provided as a point
13
of reference to help evaluate the attributes of the different types of currency as
summarized in Table 1.
Table 1 - Characteristics, Control, and Transaction Behavior of Different Types of
Currencies
Currency Type
Attribute Cash Digital Virtual Cryptographic
Examples
Dollar
Euro
Yuan
Peso
Dollar
Euro
Yuan
Peso
Airline miles
Game ‘credits’
Starbucks points
Gas rewards
Bitcoin
Ethereum
Litecoin
Altcoins
Control Mechanisms
Backer Government Government Private Entity None
Policy Body Central bank Central Bank Private Entity Algorithm
Management Centralized Centralized Both Decentralized
Intermediary No Yes Sometimes No
Legal Status Regulated Regulated Varies Unregulated
Supply Varies Varies Unlimited Limited
Transaction
Format Physical Electronic Electronic Electronic
Convertibility Easy Easy Difficult Difficult
Circulation Universal Universal Limited Limited
Transparent No No Varies Yes
Trackable No Yes Yes Varies
Reversible Varies Yes Varies No
Source: Adapted and expanded from He et al., 2016; European Banking Authority, 2014

Control. As an extension of a government backed currency, digital currency is
guaranteed by the government and continues to be controlled by a central bank that
sets particular policies. The exchange of this currency is done through an intermediary
to ensure no duplicate spending of the currency. Virtual and cryptographic are not
14
similarly backed, and private entities or the algorithm establish the policies that govern
currency use. Issuers of virtual currency function as an intermediary by tracking when
credits are used (i.e., redemption of miles for an airline ticket). For cryptocurrency, there
is no intermediary (it is decentralized). Cash and digital currencies are legally
recognized by the issuing government. Virtual currency is subject to the issuer’s terms
of use, and generally not regulated by a government entity. The legal status of
cryptocurrency is unclear (and a major part of this research). Some individuals see
tokens as a security, others a commodity but regulatory agencies have not made any
definitive rulings, creating significant market uncertainty. The supply of fiat currency
varies based on decisions of the central bank. The supply of virtual currency is
controlled by the issuer and theoretically unlimited because they incentivize loyalty
between companies and consumers. The total supply of cryptographic currencies is
defined and limited by the token programming algorithm.
1
The limited supply creates the
perception of scarcity and helps to maintain the token’s value.
Transactions. By its very nature, any currency other than physical cash exists in
the ether (or some might say not at all). Digital currency is an electronic representation
of existing fiat money. One benefit of a currency overseen by a strong central
government is the guarantee that digital value can be redeemed for cash in a local
denomination (Rogoff, 2016). The fiat monetary system allows for nearly seamless
(though with a cost) exchange between other fiat currencies. Virtual (private) money has

1
The supply of a token can be changed by a majority consensus of miners. Token “miners” apply
computing power (often large data centers) to solve complex prime-number math problems that validate
transaction information. In payment, these miners receive some amount of the token. If a majority of
miners (people, corporations, and governments are all mining) agree there should be a change in supply,
the underlying programming can change.
15
no similar guarantee of convertibility and the user may be constrained in use by the
company’s terms and conditions. For example, airline miles can be used to purchase
tickets and items from the online store but easily turned into dollars to buy groceries.
Convertibility between cryptographic value and fiat value is becoming easier with the
use of exchange platforms but it is not as easy as fiat value. Circulation is the ubiquity of
currency use. Cash and digital currencies are recognized and accepted as legal tender
to complete a transaction. The use of virtual and cryptographic currencies for
transactions is limited to their operating environment (e.g., online store or others willing
to accept the token). Transparency represents the ability for someone unassociated
with the transaction to see the exchange of value. The exchange of cash between two
individuals is not tracked or recorded with identifying information. Digital transactions
are recorded by intermediaries, but the information is not publicly available.
Organizations issuing virtual currency record transactions within their own systems and
do not share the information. Transactions among cryptographic users are anonymous
with only an alphanumeric ID identifying who is involved in the transaction but all
transactions can be viewed in the publicly available blockchain ledger. Transaction
trackability is similar to transparency. Though with virtual currencies, the issuer is able
to track all transactions even if they are not transparent to others. Cryptographic
currencies can be seen by all but trackability of individuals involved in the exchange is
more challenging.
2
If a transaction is completed and needs to be undone, those
exchanging cash can mutually agree to unwind the transaction; however, if the parties

2
Initially, cryptocurrency transactions were considered completely anonymous. However, companies
specializing in blockchains ledger analysis have employed behavioral analysis and other forensic devices
to identify parties involved in transactions. This is primarily used in cases of suspected or known harmful
uses.
16
disagree, it is much more difficult to reverse the exchange. Undoing a transaction with
virtual currency is be subject to the terms and conditions of the private entity and may
be similarly challenging to undo. Digital currency transactions rely on an intermediary
and can be unwound if an exchange happens in error. Cryptographic transactions are
not reversible. For value to be returned to someone, a new transaction needs to be
initiated.
Definitions
Based on the preceding analysis, Table 2 identifies the definitions of currency
types that will be used in this research.
Table 2 - Definitions of Currency Types
Currency Type Definition
Digital
The electronic representation of government backed (fiat) currency that is
exchanged through an intermediary and is subject to the control and regulation of
the issuing government.
Virtual
“A digital representation of value that is neither issued by a central bank or public
authority nor necessarily attached to a [fiat currency] but is used by natural or
legal persons as a means of exchange and can be transferred, stored or traded
electronically.” (European Banking Authority, 2014, p. 11)
Cryptographic
A decentralized currency that permits anonymous value exchange between
individuals with no intermediary. The money supply is regulated by algorithmic
criteria and transactions are recorded using a transparent, unalterable ledger.

During the remainder of this study, the researcher will primarily discuss cryptocurrency
but reference will be made to DeFi. DeFi is the broader category of financial instruments
(e.g., loans) that do not have an intermediary (e.g., bank). Using the analysis above and
combining it with Sartori’s phenomenological categorization, we see existing financial
sector definitions and frameworks are sufficient to describe cryptocurrency.
Bitcoin – the Bellwether
Thousands of different cryptographic currencies have been created since the
double-spending problem was resolved but bitcoin remains the benchmark. In much the
17
same way that Xerox became synonymous with making a copy in the 1980s (which lead
them to defend their trademark in the industry), bitcoin is both a unique token and a
representation for all cryptocurrencies. Confidence in paper money exists because
individuals trust that their government will effectively manage the money supply,
maintain value through scarcity, and ensure value can be withdrawn from banks (a
custodian of the value) (King, 2016). Bitcoin creates scarcity to maintain value by
ensuring that no more than 21 million bitcoins can be generated (Goodman, 2015). A
digital wallet contains the addresses of each bitcoin balance from previous transactions
and functions as the custodian of value (Foley et al., 2018). Bitcoin’s market share,
brand recognition and use by others (utility in versatility) have created a critical mass for
use and make it the most desirable token for facilitating legal and illegal transactions
(Silfversten et al., 2020). There was an early perception that bitcoin was a novelty
financial product, magical internet money used by wrongdoers, dark web purveyors,
those wanting to shield their financial matters from the government, and the generally
curious. A decade later, cryptocurrency value has spiked and, though volatile, is gaining
trust, finding its place in the broader financial ecosystem, and unlikely to go anywhere
soon (CE/FI 3). However, it is important to understand that there are thousands of
different cryptocurrency token offerings, all with unique features designed to solve
perceived shortcomings of previous versions. The researcher will refer to
cryptocurrency generically but may use bitcoin when providing hypothetical examples -
in many cases, the two can be used interchangeably. However, there are cryptographic
tokens designed with specific characteristics (e.g., Etherium as transaction platform,
18
Monero for transaction privacy). In those cases, the researcher will identify them
individually.
Adoption of New Technology
Perceived failures of the existing financial system and introduction of Nakamoto’s
solution to the double-spending problem created an opportunity for financial innovation.
Like all innovations, there are factors that contribute to a path of widespread adoption
(e.g., VHS) or relegation to obsolescence (e.g., Betamax) even though the innovation
may represent a superior technology. Adoption of new technology follows a similar
curve initially popularized by Everett Rogers in 1962. He identified four elements in the
diffusion of innovation: the innovation itself, communication channels used to share the
change, social system of norms, and time (Rogers, 1995). The collective strength of
each element determines the adoption of time and the new technology’s associated
adoption curve. Three hypothetical innovations are shown in Figure 1.
Innovations with stronger elements will increase adoption over a shorter period
(Innovation 1). An innovation with weaker elements will reach adoption over a longer
period (Innovation 3). The utility of cryptocurrency increases as more people use it so it
is plausible that adoption will follow a similar trajectory (Presthus & O’Malley, 2017).
Drawing a parallel to the fax machine, it was a communication innovation when it was
first released but there needed to be a critical mass of users to make the technology
viable and provide the necessary utility. If no one else has a fax machine, what is the
point of having one yourself – there is no one to send it to.

19
Figure 1 - Technology Adoption Curve

Source: Rogers, 1995, p. 11

Similarly, when more people accept cryptocurrency for regular transactions, then more
people will be likely to use it. In this way, the utility of use does not come from the token
but instead in the ability to facilitate the exchange of value with others also using the
token. It will be useful to briefly explore the four adoption elements and consider where
cryptocurrency may be on this adoption glideslope as we set the context for the
research discussion.
Innovation
The advent of cryptocurrency is innovation born out of an unmet need. Digital
transactions provided speed and flexibility but lacked the privacy of exchanging cash.
Nakamoto solved the double-spending problem at a time when confidence in the
centralized financial system was low, there was inequitable access to financial markets,
transfer costs were high, and only mass-market products were available. Early adopters
incubated the new technology and ultimately created over 5000 different cryptocurrency
20
tokens, each with their own unique attributes and target audiences attempting to
address perceived gaps (Newfeld, 2020).
Cash and digital currency do not differ in purpose but rather in technical
execution (Castronova, 2014). The process of verifying a transaction has changed in
form - from paper ledger to electronic, but the concept remains the same, i.e., verifying
that one account has enough value to exchange with another through a series of bank
ledger transfers. The Clearing House Interbank Payments System began in 1970 as a
replacement for paper-based clearing and is used by all financial institutions and point
of sale systems to route transactions from the point of sale to settlement (Committee on
Payment and Settlement Systems, 2003). The market economy works because of trust
– trust in monetary policy, trust in banks, trust in loan repayment, and trust that policies
will benefit all components of the financial system (King, 2016). Cryptographic
currencies rely on a distributed ledger to record these transactions to create trust,
eliminating the need for multiple bank verifications (and associated costs) (Ali et al.,
2014a). If a buyer and seller agree on a common platform for value exchange, then
form is irrelevant. Fear of irrelevance is driving existing financial institutions to innovate
as well. The creation of stable cryptocurrencies, a combination of decentralized ledgers
and fiat currency, is an attempt to incorporate the innovation into the existing system,
though it is not without issue and design needs (Calcaterra et al., 2020).
Communication Channels
Roger’s (1995) initial diffusion models assumed a linear progression of
communication. Social media and the exponential progression of information sharing
require a conceptual change. New media channels serve a dual role – they increase
21
awareness among the masses, while allowing affinity groups (potentially across long
distances) to collectively develop new concepts for how the innovation can be applied in
novel situations. Advances in fintech and the initial wild swings in value, followed by the
unimaginable climb in value of bitcoin, have been the subject of media articles for a
decade. Fear, uncertainty and doubt (all a byproduct of communications) about
cryptocurrency plays a significant role in adoption. The volatility in value, alarmist media
coverage, concerns about environmental impact, and use for illicit activities create an
uncertain environment for broader use. Ria Bhutoria (2021) maintains a website
dedicated to capturing articles that propagate these impressions. For the majority,
mainstream media forms the basis for their opinions about cryptocurrency and its
viability as a financial product. However, social media allows smaller groups to come
together, learn about the new technology’s technological underpinnings (i.e., the
blockchain and hash resolution), and devise ways this technology can be further
improved upon and used to address gaps in the current financial system.
Social Systems
Community-based currencies have existed since 600 BC. They facilitated trade
within the communities that offered them but also relied on the social capital built up
between community members ensuring they could be redeemed. Accepting the use of
common currencies across communities and a wider geographic area required society’s
trust to shift from individual guarantees to a government guarantee. The change from
fiat currency to DeFi required a similar shift in trust. The internet enabled new, often
geographically diverse, communities to form. They, in turn, developed and use
cryptographic currencies to account for exchange within their community (European
22
Central Bank, 2012). Though mass marketing and social media trumpet new
innovations in the cryptocurrency sphere, it is still an innovation that many people do not
understand. Adoption of the technology relies on social systems within these new
communities to normalize the message that cryptocurrency use. Saiedi et al. (2021)
explore the drivers of cryptocurrency adoption, focusing on the socio-economic and
institutional factors. Their research shows technology evolution continues at
unprecedented rates but money, the nature of its use and the method by which it is
exchanged, are evolving much more slowly.
Adoption Timeline
The time required for an innovation to attain market adoption varies based
primarily on ease of use and perceived utility. A car is a means of conveyance – a sure
improvement on the horse and buggy. Someone may not need to know how a car
works, other than the gas, brakes, and rule of the road, to get from one place to the
next. Similarly, someone may not need to know how value is transferred from one
person to the next, so long as it happens easily and reliably. Presthus and O'Malley
(2017) researched end user adoption of cryptocurrency. They found lack of coin
stability, security, and ease of use for payment (i.e., utility, accessibility, simplicity) were
barriers to adoption. Saiedi et al. (2021) found increased adoption of cryptocurrencies in
areas where there is distrust of the national financial system and uncontrolled inflation
coupled with expansion of technical infrastructure that enables access to new tools.
They also found the highest adoption among criminal enterprises focusing on illegal
drugs and money laundering and in areas with the highest regulatory enforcement.
Cryptocurrency adoption will expand when usage (i.e., ease of transaction or exchange)
23
is separated from the underlying technology; similar to separating the process of driving
from the mechanics of what the car does. Cryptocurrency has two components, the
enabling technology and a new currency whose value and usability are uncertain. This
combination may further delay adoption by a large group (Shin, 2008). Currently, the
time needed to understand how cryptocurrency works, the technological knowledge to
set up a wallet, and the lack of utility in conducting transactions are all barriers to
adoption. However, these barriers are being addressed by wallet custodians and other
financial institutions to encourage use (Presthus & O’Malley, 2017). Though bitcoin has
not overcome all the social obstacles, in the decade plus since it began, it has started to
function more similarly to an existing currency. However, at the same time, acceptance
of its function as a new form of value exchange has negated its shortcomings when
compared to an “'analog” currency (Yermack, 2013).
The potential for widespread adoption of cryptocurrency for daily use is still
uncertain. Presthus and O’Malley conducted a survey of 135 people to gain better
understanding of why people do and do not adopt new payment methods for regular
use. The authors determine that many of the people using cryptocurrencies are
intrigued by the novelty and, for some speculators, the potential financial upside. In
Wildcat Currency, Edward Castronova (2014) believes these currencies have become
so popular because they enable traders to consistently exchange value with a high level
of anonymity. Widespread adoption of the currency is not likely until a critical mass
starts using it, thus providing social confirmation that this is an acceptable form of
currency. However, it is a catch-22 situation – more people will use it when more people
are using it (Presthus & O’Malley, 2017).
24
Current cryptocurrency adoption levels will not cause a significant shift in global
exchange but do represent a departure from the current banking establishment. Future
adoption as a new payment technology is a function of how well cryptocurrency
addresses perceived gaps in the current user experience, how widely it is
communicated, and if social constructs bolster its use. This follows a well-worn path
described by Rogers.
Research Space
When the researcher began exploring the social and economic implications of
cryptocurrency in 2017, there was little research in this area. What research did exist,
focused primarily on the algorithmic mechanics of creating a coin and the functional
benefits of open-ledger management built on the blockchain. Fortunately, other
researchers found a similar gap and began exploring not just how cryptocurrency
operates, but what elements and assumptions of our existing systems are altered by
this disruptive technology. There was a companion social change also taking place.
Individuals were not having their financial needs met in the current financial
environment and new DeFi tools were emerging to meet these needs.
Currency, in the form of the U.S. dollar, is the fluid that lubricates the modern
economy. The Federal Reserve is responsible for maintaining the economic stability of
the nation, and by extension, the globe as the U.S. dollar is the world’s reserve
currency. In this way, there is a fiduciary responsibility on U.S. regulatory agencies to
maintain this stability. That stability and the dollar that supports it, could be seen as a
public good, something whose health we all benefit from and needs to be maintained.
When seen in this light, it must also be asked how we define the public good, how is it
25
supported, and does everyone derive the same “good” from this public resource. If
benefits of the financial system are not equally shared, people may search elsewhere
for solutions. Unmet social needs and innovation are helping drive the use of
cryptographic tokens. It is essential to understand the adoption behaviors and consider
what appropriate regulatory framework should exist to ensure national and individual
economic security while promoting the development of new technology that is rising to
answer the unmet need.
Understanding the Problem
From a young age, most children are taught the basics of financial transactions –
you receive physical money (e.g., allowance) for performing tasks (e.g., making the bed
or taking out the trash). You then spend that money on something you want (e.g., ice
cream). However, when money is exchanged electronically and two parties are using an
algorithmically controlled denomination, things become much more abstract. To help
frame the discussion of regulating the exchange of cryptographic currencies, Figure 2
depicts three financial transaction scenarios.
In Scenario 1, Pete asks Sue to cut his lawn. When she finishes the job, Pete
pays Sue in dollars using Venmo. Sue then takes her dollars, to a local coffee house
and purchases a great cup of coffee from Victoria using her Visa card. In Scenario 2,
Pete is in a criminal organization and asks Sue to take care of someone for good. Once
she has done the job, Pete directly transfers bitcoin to her from his non-custodial wallet
pays her in bitcoin. Sue then uses her cryptocurrency to purchase weapons (again, via
non-custodial wallets) for her terrorist group from Victoria and pays in Monero, a token
specifically designed for transaction privacy. In Scenario 1, the exchange of value
26
occurs in an established financial environment. In Scenario 2, each of the transactions
are outside the regulated marketplace and untraceable,
3
preventing law enforcement
agencies from intervening to stop them.
Figure 2 - Using Fiat and Non-Fiat Currency for Financial Transactions

Source: Karimi, 2019

3
As we will see later in the research, traceability is becoming easier with new forensic tools that analyze
transaction ledgers. This creates additional incentives to create privacy focused tokens (like Monero) that
make it harder for law enforcement to catch criminals.
27
However, what happens when Sue, now shunning a life of crime, teaches Pete to
play the piano, saves up her money, and decides to buy a car (Scenario 3)? Neither of
those transactions are customarily settled using non-fiat currency so she must convert
her bitcoin into dollars. This transaction takes place in online marketplaces, brick and
mortar currency exchanges and financial institutions – each of which is already subject
to state, national, and international regulations. Here agencies can examine the source
or origin of the value being converted. Unfortunately, these regulations are not the
same, are enforced inconsistently, and target different things.
Research Questions
In Scenario 1, Pete, Sue, and Victoria maintain their individual economic security
by performing work, getting paid, and paying bills. In Scenario 2, there is an impact on
national security and national economic security. So, how can the harmful uses of
cryptocurrency be regulatorily contained (Scenario 2) while providing for financial
innovation that would allow DeFi to be used in Scenario 3? Figure 3 identifies the
primary and supporting questions in the research described by the scenarios above.
28
Figure 3 - Research Questions

Contributions to Practice
New York Times columnist Thomas Friedman frequently writes about
globalization and the rapid pace of technological change. In a 2013 editorial, Friedman
introduced the concept of the “Great Inflection.” He describes an environment where
technology and access to the internet are advancing so quickly that humans will have a
significant challenge adapting, extrapolating into the future, and identifying problems
29
before they arise. Friedman expands on this thought more fully in his 2016 book, Thank
You for Being Late: “our physical technologies [tools, cars, microchips] can get way
ahead of the ability of our social technologies [money, rule of law, regulations] to
manage them” (Friedman, 2016, p. 200). These themes are supported by World
Economic Forum research (2018) that believes individuals are not well suited to deal
with interconnected systems and feedback loops, such as the global economy and the
complex risks they contain (World Economic Forum, 2018).
Cryptocurrency is a financial evolution that financial markets and regulators were
not prepared for. This research will contribute to financial services and regulatory
practices by identifying current and emerging uses of cryptocurrency, describe potential
impacts of the emerging uses on national and individual economic security, and
describe the current regulatory environment with an eye towards mitigating the greatest
areas of security exposure while encouraging beneficial uses.
Cryptocurrency Uses
With the advent of electronic transfers, currency moving between individuals is
digitally recorded, tracked, and inspected. Along with connecting individuals across the
globe, this technical explosion has led to the boundaryless exchange of currency, but it
came at the expense of privacy. Cryptocurrencies are a new financial instrument
intended to maintain the benefits of electronic transactions and return privacy to the
transaction, and their use will continue to rapidly evolve. However, humans are not
particularly skilled at imagining what could happen and predicting the middle future. We
are constrained by our perceptions and experiences that limit our consideration of what
is possible. Interviewing a wide range of stakeholders provides more opportunity to
30
identify market conditions and scenarios where current and future cryptocurrency
capabilities are exploited for beneficial and harmful uses.
Potential Impacts of Cryptocurrency Use on Economic Security
It is unclear what the impact of current and future uses of cryptocurrency will be
on national and individual economic security. Drawing on the current and future
beneficial and harmful uses of cryptocurrency, the researcher will crosswalk those areas
with elements of economic security. Responses to these questions will be imputed into
a qualitative risk assessment to identify areas of concern and their relative level of
threat or opportunity to economic security. Securitization of economic issues elevates
their importance and suggests that they require additional protection because of their
relationship to national security. The research will also explore if the magnitude of
harmful uses outweighs the current and potential benefits of cryptocurrency use.
Regulatory Inconsistencies and Gaps
The internet allows for access to currency exchanges from any location, so all
levels of government and international organizations must partner to create and enforce
similar regulations. It is important for legislators and regulators to understand the
potential harmful impacts of innovations and maintain a secure, stable environment for
individual users. This must be balanced with creating an environment that encourages
technological development. A legislative and regulatory analysis will build off existing
national and state cryptocurrency regulations. Particular attention will be paid to areas
where existing and future harmful cryptocurrency use may impact economic security to
see if those areas have the necessary regulatory foundation. The research also sets out
to understand stakeholder receptivity to potential regulatory changes that promote legal
31
use. By analyzing interviewee responses, a study of their interests, intentions, and
interactions can be completed.
Research Boundaries and Limitations
The most significant challenge researching this topic is the rapidly changing
industry. Weeks (sometimes days) after portions were completed, new information was
available that confirmed existing findings or created new spaces to explore. Information
related to the social impact of cryptocurrency, changes in the market, wild fluctuations in
value, regulatory perspectives, international adoption, and new technological
innovations were some of the topics clamoring for media attention. To scope the effort,
the following boundaries were established:
• Technical underpinnings - The underlying technology that supports
cryptocurrency is, for some, the greater of the two innovations that has significant
implications for future uses. An extensive explanation of blockchain technology
and vulnerabilities can be found on many websites. This paper does not go into
that process but acknowledges that it is a defining characteristic of
cryptocurrency.
• Regulations - The regulatory exploration focused on laws and regulations in the
United States. Development and enforcement of international laws is a critical
element to any cryptocurrency discussion, especially when considering harmful
uses but was excluded here. It is an area for additional research and described
further in Chapter 5.
• National security - National security is the ability to protect national borders and
prosperity through political statesmanship, economic stability, and military
32
strength. National and individual economic security are components of economic
stability and described in the national security strategy. There are some
discussions of national security impacts but they are not explored in great detail.
This too is an area for research described in Chapter 5.
The researcher also acknowledges the following research limitations:
• Interviewees - Obtaining a large, randomly selected sample was not possible
within the research timeframe. Interviewees were obtained by convenience and
snowball sampling, making it prone to some bias.
• Regulatory analysis - the researcher is not a legal scholar and the regulatory
research was limited to data easily obtained from legislative databases.
Developing specific policies and recommendations would benefit from more
detailed research of state and international regulations.

33
Chapter 2: Literature Review
Cryptocurrency use facilitates illegal activities but also has also resulted in
significant positive innovation potentially benefitting the economic security of a large
portion of the population. Unfortunately, negative perceptions derived from early
adoption by criminals are problematic as legislators and regulators consider how to
provide the necessary guidance to encourage development while discouraging negative
uses. The researcher will look at three elements in this space: cryptocurrency,
economic security, and the regulatory environment to understand the current
environment and identify areas that require further investigation.
Cryptocurrency
Cryptocurrency and the underlying blockchain technology are considered by
some to be a transformational innovation to fintech. A change of this perceived
magnitude will have far-reaching consequences on existing institutions and likely
require significant adaptation. Developing an understanding of cryptocurrency’s impact
on the current financial system requires an exploration of the primary beneficial and
harmful uses discussed in today’s literature, the market size and growth of those uses,
and portion of national economy.
Uses
The new currency and underlying technology were a revelation to many. The
paradigm-shift created a new way of thinking about the function of currency. The
invention of cryptocurrency created a wide range of new uses cases in the fintech
sphere. The blinders had been taken off and intellectual creativity was taking hold. Early
adopters found ways to use the technology to circumvent laws and facilitate illegal
34
activities. Shortly after, others began exploring additional innovation opportunities as
bitcoin use increased and demonstrated its viability as a form of value transfer.
Beneficial. Individuals earn a wage, pay bills and, hopefully, gain some
enjoyment from their efforts. An essential component of money is its fungibility (i.e., it
can be exchanged across uses) (Wolman, 2012). Will cryptocurrency allow their
employers to pay them so they can cover the electric bill, pay daycare, and buy a cup of
coffee? People do not act on abstract concepts of what cryptocurrency can do for them;
they need to appreciate the direct impact to their own lives, which will drive behavioral
change (Baker & Mehmood, 2015). There are some practical benefits that drive
continued interest in and adoption of cryptocurrency. Primary among them are privacy,
lower transaction costs, access to financial markets, return on investment, and a hedge
against instability (Ali et al., 2014a; Vigna & Casey, 2015; Baron, 2015).
Privacy. Many individuals want total control over their money and the privacy to
buy and sell what they want without leaving a multi-layered activity trail linking them to
the transfers, as exists in the current global financial system. Initial users of
cryptocurrency sought it out for its perceived anonymity and nearly complete transaction
privacy as value moved between alphanumerically labeled wallets not tied to identifying
data. Only wallet custodians have customer information, though some individuals use
un-hosted wallets to add another layer of anonymity. In 2018, Seele wrote about
unethical behaviors enabled by cryptocurrency and set up the comparison between the
pro-social benefits of the technology and the criminal activity enabled by it. Interestingly,
as individuals increased their use of cryptocurrency to mask illegal activities, blockchain
analysis firms have increased as well. Drawing on the publicly available ledger, these
35
firms analyze the exchange of value among wallet IDs and can help law enforcement
identify illegal activity, effectively removing some of the privacy that draws users to the
token platform. Intuitively, tokens designed for maximum privacy would be preferred by
nefarious actors, yet there is little evidence to support this assumption (Silfversten et al.,
2020).
Decrease Transaction Costs. Each time value is moved along a transaction
chain, a financial institution is taking a small fee. There are over 20,000 institutions in
the United States that hold deposits, provide payment, and settle transactions. The
number of financial institutions continue to grow as on-line only institutions can function
with the electronic transfer of value and near-ubiquitous credit or direct-access account
transactions. The network required to support value exchange across the wide variety of
payment instruments is a convoluted system (Committee on Payment and Settlement
Systems, 2003). The costs for maintaining this system are borne by the customers who
use it. Individuals on the lower end of the socioeconomic spectrum using these services
are paying a disproportionally higher cost for monetary custodianship. For example,
remittance payments by workers are often facilitated by cash exchange businesses.
Sometimes, the charges for this service can be very high (17% in the case of Western
Union). In effect, those who can least afford paying fees are paying the most in fees.
Bitcoin's primary value proposition is to stop an outflow of money to middlemen and put
money back in the pocket of the person who earned it (Vigna & Casey, 2015). A token
transaction can be almost 1/10th the cost of a traditional financial reconciliation among
multiple fiduciaries (Kelly, 2015). Distributed ledger technology (the blockchain) permits
peer-to-peer transactions because transactions are recorded publicly and do not require
36
an intermediary (thus reducing transaction costs). This increases affordability and
access to financial markets (He et al., 2016; Yermack, 2017; Perkins, 2020; Kelly,
2015).
Access to Financial Markets. A cryptocurrency platform increases access and
opportunities to individuals not currently served by the financial market. The existing
banking system is risk averse and seeks customers who have reliable income, can
repay loans, and have higher credit scores. Those being excluded because they do not
meet these criteria can now turn to cryptocurrency as an alternative (Saiedi et al.,
2020). Equal access to financial services is a significant potential benefit of new fintech
tools. More individuals can get access to funds,
4
with reasonable terms and provide a
more stable financial environment for their families.
At its core, this technology is a form of social organization that promises to shift
the control of money and information away from the powerful elites and deliver it
to the people to whom it belongs, putting them back in charge of their assets and
talents. (Vigna & Casey, 2015, p. 6)
The coin and its underlying method for transaction verification will serve as the common
platform of value storage and exchange. For practical and logistical reasons,
cryptocurrencies are improvements over their cash counterparts: tokens can be created
and issued within weeks, forgery and fraud are managed, a higher degree of anonymity

4
One of the promises being made by DeFi proponents is the creation of financial products using stable
coins. These products are linked to USD but have the flexibility and lower cost of digital products and are
not tied to physical locations like a bank branch. Some financial technology companies (e.g., SoFi, Kiva)
are already offering micro-loan products entirely online but they are still built around the current financial
system. No DeFi loan products are widely available at the time of this research.
37
is offered, as well as a preset issuance to maintain the necessary volume for
transactions and integration with smart contracts (Fernández ‐Villaverde, 2018).
These same benefits can serve emerging economies in places where a financial
system does not exist (Williams, 2016). Seasonal workers or individuals who do not
want their income reported have few options other than cash to maintain value. This
makes them vulnerable to theft and violence. Unlike case-based transaction systems,
bitcoin allows the secure transfer of digital assets without the need for an intermediary
(Virtual Currency: Financial Innovation and National Security Implications, 2017). Cash-
based transaction systems inherently cost more than electronic and put an increased
burden (increased theft, cost to maintain, counterfeiting, etc.) on those individuals (often
those lower on the socio-economic scale) using them rather than having access to
traditional banking systems (Calcaterra et al., 2020). The millennial generation is
reluctant to use banks due to lingering negative impressions of the industry following the
2008 financial meltdown. Yet, as they step into the workforce, they still need financial
solutions that allow them to make purchases that exceed their income and require long-
term repayment (i.e., car or house). This creates the opening for digitally based
solutions (Kelly, 2015). There are significant opportunities for community banks to
provide services to individuals engaging in virtual currency transactions though they
must remain cautious and implement all existing know your customer (KYC) and Anti-
Money Laundering (AML) requirements (Young, 2015). Through the experimentation
process, many in the financial industry have come to accept and embrace some of the
improvements offered by the distributed technology and are looking for ways to
integrate it into the existing financial system (Kelly, 2015). This acceptance may not only
38
be driven by the improved technology but also by the establishment trying to take
control of the innovation before it eliminates their function.
Investment. Individual traders, institutional investors, and some corporations see
cryptocurrency as a new asset class that provides diversification in their investment
portfolio. Whether buy and hold, or exploiting the volatility with options, some investors
are using the recent spike in cryptocurrency value to increase portfolio gains. Individual
traders read stories daily about the meteoric rise of Bitcoin, Ethereum, and other tokens.
Had they invested $1,000 a year ago, they would have made untold returns. Therefore,
they are jumping into the market, with little or no knowledge of what they are actually
buying, with the hope of seeing similar returns on lesser well-known but surely soon-to-
appreciate tokens. Institutional investors are taking a more calculated approach but also
looking to diversify their investment portfolios. They too see cryptocurrency as a new
investment vehicle to generate returns. In February 2021, Tesla CEO Elon Musk added
credibility to cryptocurrency as an investment option by purchasing $1.5 billion bitcoin to
diversify its investments and maximize its return of cash on hand (Kovach, 2021).
5

These actions do not represent a wholesale change in the market, but they are signals
that some cryptocurrencies are stable enough to present an investment opportunity
outside of the existing fiat financial system.
Hedge Against Instability. The existing financial system is not without its own
risks including operating with too much credit, insufficient liquidity to resolve

5
In May 2021, Tesla announced it would no longer accept bitcoin for payment citing climate concerns
though it will keep its store of bitcoin as an asset on the corporate balance sheet. Climate concerns come
from the significant energy required to “mine” and validate a transaction are considerable, most often
done in developing countries using coal-powered plants, which adds carbon to the environment. This is
identified as an area for further exploration in the Conclusion.
39
transactions, and physical vulnerabilities. Placing value in alternative investments can
protect individuals from volatile and inflationary economies. Countries that closely
regulate their financial markets (i.e., increasing or decreasing the national money
supply) have the most to lose from the invention of cryptocurrency. Governments use
currency manipulation to guide purchase behavior and influence the global economy.
6

The mathematically controlled nature of the token supply maintains scarcity. For many
governments, the option to print money proved too tempting, which created economic
volatility and decreased the value of money already in circulation by printing more (King,
2016). Crypto currency allows store of value unlinked from fiat currency and not subject
to decisions aimed at benefitting the government, not necessarily the individual (The
Future of Money: Digital Currency, 2018). Globalization has led to a worldwide financial
market; cryptocurrencies are seen as a way to hedge against unstable economies like
those in Turkey, Venezuela, and China (Mueller & Squartini, 2020).
Individuals are drawn to cryptocurrency tokens because they provide some
transaction privacy, decrease transaction costs, increase access to the financial system,
and stabilize the financial condition in a volatile world. The very characteristics of
cryptographic tokens that provide beneficial uses also allow for harmful ones that cast a
negative view of the fintech innovation.
Harmful. Harmful uses of cryptocurrency garner more attention than the
beneficial ones. Criminals were some of the first to exploit the emerging technology for

6
Adding currency to the market (e.g., COVID 19 stimulus) and is intended to encourage spending. Low
(or negative in the case of Japan in 2014) interest rates are another way to spur spending because the
cost of money (i.e., interest rate to borrow) is very low, which encourages new purchases. Raising interest
rates makes the cost of money increase and with variable rate loans, especially those loaned to other
countries, the cost to repay loans can increase the debt burden and decrease funds for domestic
programs.
40
the anonymity, ability to make payments, circumvent financial regulations (e.g., KYC
laws) and safeguards designed to prevent the illegal use of funds and maintain a stable
market. Representative Perlmutter, in comments to the House of Representatives
Subcommittee on Financial Services, called the use of cryptocurrency one of the
greatest emerging threats to national security (The Future of Money: Digital Currency,
2018). In a 2020 RAND analysis, Eric Silfversten led a team of researchers to analyze
existing literature describing illegal activities facilitated by cryptocurrency. Those results
are summarized in Table 3.
Table 3 - RAND Review of Literature Identifying Illegal Activity Facilitated by
Cryptocurrency
Illegal activity Reason Cryptocurrency Was Used
Mention in
literature
Money Laundering
Elimination of geographic constraints, exploit regulatory gaps,
speed
34%
Payments (dark web
markets) for illegal
goods/ services
Access to and facilitation of sale/purchase of illegal goods and
services, access to new markets, faster transactions, lower fees
28%
Terrorist financing
Easier to solict funds (e.g., direct campaigns), transfer of value
anonymously with global reach, ideological alignment (i.e., not
western banking system),
7
use of multiple accounts
18%
Ransomware
Enables widespread attacks with little investment, global reach,
simplicity
13%
Financial Fraud Avoid regulatory scrutiny (AML, KYC, CFT, etc.) 8%
General cybercrime Easier logistics, global reach 8%
Note: Adapted from Silfversten et al., 2020

In the third year of its annual crypto crime report, summarized in Figure 4,
Chainalysis identified the percentage of market share of several illicit activities
employing cryptocurrency. Most often, it is white collar crime conducted by a small

7
Some countries do not want to use western banking systems because they are seen as “a tool of the
enemy.” Additionally, according to Shariah law, it is illegal to charge interest or pay on savings – things
that are part of western banking systems.
41
group of individuals with specific technical knowledge (2020). These findings align
closely with the RAND research.
Figure 4 - Share of Total Cryptocurrency Transaction by Illicit Subcategory

Source: Chainalysis, 2020, p. 5

Before we discuss the primary harmful uses of cryptocurrency, it is important to
understand where many of these activities are taking place – the dark web. The internet
consists of every networked device (computers, servers). It can be subdivided into three
components: surface web, deep web, and dark web (Chertoff, 2017). The surface web
contains the everyday websites individuals visit for mainstream news, sports, business,
and shopping. The deep web consists of any data whose access is managed by a
password (Facebook, Dropbox, corporate intranets, etc.). The dark web is a very small
42
portion of the web and hard to access, making up 0.01% of internet sites (Owen &
Savage, 2015). To access the dark web, users commonly employ a Tor browser ; an
open source tool that provides anonymity to those using the internet by “relaying” a
user’s internet requests through multiple servers that encrypt the traffic. Access to the
darkweb gives individuals the freedom to launder funds, make illegal purchases,
communicate covertly, and conduct fraudulent activities.
Money Laundering. Money laundering is a foundational component to most
cyber-crimes. Once criminals conduct their attack, they need to integrate the ill-gotten
gains back into the real economy. Criminals use a myriad of schemes, including cyber-
based, to facilitate over $1 trillion in fraud and financial crimes worldwide. In 2018,
private companies spent over $8 billion in AML controls but they have found control-
centered approaches to deal with transaction crimes have not adapted to identity-
based, data focused crimes (Hasham et al., 2019). Virtual currencies allow them to
conduct business, avoid detection, and convert illicit funds into fiat currency (Sykes &
Vanatko, 2019). The result of most crypto crime in value is taken from one wallet and
moved to another, not unlike physically stealing cash and putting it elsewhere, and
elaborate services and networks are developing to meet this increasing demand
(Chainalysis, 2020). In all cases, the value (crypto or physical) needs to be laundered.
In this process, criminals introduce value in the crypto financial system (placement),
conduct multiple transactions among different accounts (layering), and then reintroduce
the funds into the traditional financial system (integration) (Chainalysis, 2019). Money
laundering (and the activities it supports), financing terrorism and financing weapons of
43
mass destruction (WMD), are the most significant financing threats facing the U.S.
government (United States Treasury, 2020; Perkins, 2020).
Illegal Purchases. The majority of illegal purchases are made on dark-net
websites accessed through the Tor browser system and paid for with cryptocurrency
tokens. In these dens of ill-repute, all manner of illegal items can be purchased and
services obtained. In the late 2000s, Silk Road was the primary location to purchase
illegal goods (weapons, drugs, murder for hire, human trafficking, and abuse material).
Run by a webmaster using free internet at a San Francisco, CA public library, it was
shut down by the Federal Bureau of Investigation (FBI) in 2013. The majority of
exchanges on the website were conducted in bitcoin (Chertoff, 2017). Silk Road has
been reincarnated several times and joins other sites in a fragmented online
marketplace. “By drastically altering the quantity and scope of [illegal online] exchanges,
cryptocurrencies can be said to have transformed the quality and ubiquity of nefarious
commerce” (Dierksmeier & Seele, 2016, p. 7). Much of the dark web's transactions are
facilitated by alternative currency systems used with the express intent to avoid tracking
(Goodman, 2015). Law enforcement has tried hard to stop illegal darknet activity by
targeting marketplaces; however, as quickly as one site is closed, another takes its
place and participants easily move their business listings. Buyers and sellers are
increasingly using encrypted peer-to-peer messaging apps to coordinate transactions,
which further complicates efforts to track these activities (Chainalysis, 2019).
Funding Terrorism. Terrorists directly purchase supplies and equipment or
launder donations using cryptocurrency. Terrorists regularly exploit new methods to
fund their organizations and avoid detection. The 9/11 Commission Report (2004)
44
explained that terrorists have been very creative in their use and exploitation of new
methods to move money from legitimate sources, fundraising, or criminal activity to fund
illicit activities. Internal Revenue Service Criminal Investigation special agents have
tracked the adaptation of new financial tools by terrorist networks to raise funds and
support their illegal activities (Department of Justice, 2020). Terrorists are drawn to
bitcoin in particular because of wider acceptance, ease of making international
payments, access to illegal crypto exchanges, and ability for illegal transactions to be
hidden among the high volume of other exchanges on the blockchain (Silfversten et al.,
2020). In 2016, proof surfaced that a designated terrorist group had published a Quick
Response (QR) code for supporters to visit a site and donate to a token wallet. Former
Central Intelligence Agency (CIA) analyst and financial investigator Yaya Fanusie has
been investigating terrorists’ use of cryptocurrency to fund their operations since 2015.
He believes terrorist adoption of token payments is going to mirror that of the general
population. Both groups are experimenting with this as a payment vehicle and are
learning to use the technology for their benefit, and will add it to their financial fraud
toolbox (2020). This process accelerated as the price of bitcoin continued to climb
(Fanusie, 2020). In late summer 2020, the Department of Justice announced the
disruption of cryptocurrency-based fundraising campaigns by four terrorist groups: al-
Qassam Brigades, Hamas' military wing, al-Qaeda, and the Islamic State of Iraq and the
Levant. This seizure was the largest ever of cryptocurrency assets used by terrorists.
These organizations solicited funds from across the world via social media and
deposited them into over 300 accounts (Department of Justice, 2020).
45
Organized crime and terrorism can form a symbiotic relationship. Crime
syndicates may have the weapons and equipment needed by terrorists. Terrorist
organizations have funding that can be used to purchase these tools of destruction. This
alignment of organizations creates a particularly serious threat to global security and
stability (Martin, 2017). Martin (2017) provides a brief case study of the tri-border
between Brazil, Argentina, and Paraguay where Hezbollah supporters smuggle goods
and conduct financial crimes to support illegal activities in an area where government
control is weak. Terrorism is often cited as a reason cryptocurrency use needs to be
tightly regulated though some of the earlier researchers also question how pervasive
the use actually is. As the Fanusie, Martin, and Department of Justice examples
illustrate, terrorists are using cryptocurrency, but are these representatives of the
broader environment, or just a handful of cases? A Chainalysis study in 2020 suggests
terrorists’ use of cryptocurrency to finance their operations is in the early stages but has
quickly increased in technological sophistication over the last two years. However, while
it has increased in sophistication, it more unclear if it has increased in volume. A
separate RAND report concluded that, while cryptocurrency is used to fund terrorism, it
is not a significant operational enabler and assertions of widespread use are overblown
(Silfversten et al., 2020). In a 2020 interview, Yaya Fanusie stated that 2015 press
reports about Islamic State of Iraq and Syria using bitcoin (often used as an example of
terrorist use of cryptocurrency) could not be substantiated and may have been based on
speculative social media posts (though as he later stated, in 2016, there was some
evidence of that use). Further, he believes that while the anonymity of transactions may
have initially attracted use by terrorists, improvements in blockchain analytics that
46
remove some transaction privacy, now make cryptocurrency less attractive as a
financing vehicle.
Ransomware. Ransomware attacks have risen significantly, fueled by the
anonymity provided by cryptocurrency. These attacks have become a pervasive scam
affecting individuals and businesses, often beginning with a fraudulent email and
convincing wording that gets an unsuspecting user to click on a malicious weblink,
causing harmful software to download and encrypt a user’s computer files. These files
remain encrypted until the unsuspecting, and now thoroughly pissed, individual pays for
the encryption key. These payments are made using cryptocurrency. Cryptocurrency
has allowed more complex and more widespread attacks because multiple businesses
can be attacked simultaneously while the attacker remains anonymous when they get
paid (Hasham et al., 2019). Recent high-profile examples of ransomware include
WannaCry, petya, notpetya, SamSam, and Ryuk. The FBI estimates that ransomware
losses in 2016 were over $1 billion (Brewer, 2016). Ransomware attacks grew 350% in
2018 with an almost 50% increase in variants in 2019 (Purplesec, 2021). Initial
ransomware attacks were scattershot, the result of millions of emails sent out to
unsuspecting individuals and asking for only a few hundred dollars (in cryptocurrency)
for the key. Recent attacks have targeted large organizations with deep resources who
can pay significant ransoms to get their critical data back (Brewer, 2016). In May 2021,
Colonial Pipeline’s gas pipeline distribution network was crippled by a ransomware
attack. The company paid ~75 bitcoin (~$4.4 million) for decryption keys to regain
access to files to restore gas transmission to the eastern United States (Eaton & Volz,
2021). These ransomware attacks are made possible because the criminals can receive
47
the ransom, denominated in cryptocurrency, anywhere in the world, and store it in an
unhosted wallet until they are ready to use the value for other purposes.
Financial Fraud/Scam. Pump and dump token schemes are technological
variants of Ponzi schemes and intended to defraud investors through unregulated coin
offerings. Criminals (or entrepreneurs as they call themselves in marketing materials)
will create a new cryptocurrency token outside the purview of regulatory agencies with
unique features designed to meet a specific market gap. These frauds encourage
investment through social media, web blogs, Reddit threads, etc. Hype drives up
perceived scarcity and the token value rises. Then, because the criminal controls the
token (it is a programmable asset with no oversight), when a certain value is reached,
individuals exchange their majority share of artificially inflated coins for USD or other
cryptoasset (which then follows a laundering process as described above) and the price
plummets, taking the token’s value to zero (Morris, 2017). As interest in cryptocurrency
has risen, along with a high potential upside as reported by news agencies, scammers
have taken advantage of this irrational exuberance. Chainalysis (2019) identified over
2,000 scams between 2016–2018, with a four-time increase in 2017–2018. In 2020,
these schemes proliferate unabated and Chainalysis continues to report they are the
most frequent form of illegal activity, often praying on poorly informed individuals who
want to make their riches buying the new token low and selling high. While overall loss
is not large, for those individuals who lose a significant amount, the experience can be
devastating. The privacy and decentralization provided by cryptocurrencies allow
organizations and individuals to avoid regulatory supervision, compliance with AML and
48
Countering Financing of Terrorism (CFT) regulations, and interference from financial
institutions (Silfversten et al., 2020).
Market
The use of cryptocurrency continues to increase and disrupt the world of
traditional finance. Having an understanding of current market size and potential growth
gives context to the significance of cryptocurrency as a risk to economic security and
the broader financial system. There is no definitive answer to the size of the market due
to the private nature and circulation of some tokens, though current estimates can be
used for comparison to the size of the global economy.
Size. The cryptocurrency market was nascent for many years. After a run-up in
early 2018, the currency gained more interest resulting in a significant increase
beginning in February 2020. This increase is partially attributed to an increase in
awareness, improved wallet management, and investor confidence. Thousands of
cryptocurrencies are in circulation, representing billions of dollars in the decentralized
financial market (CoinMarketCap, 2021). There is no established method to capture
cryptocurrency market size though an estimate can be derived from adding the market
value of top traded coins. Two metrics are often used to evaluate market size – total
capitalization and total number of wallets. Coinbase and Coindesk are two of the largest
trading platforms, tracking thousands of cryptocurrencies and their aggregate value.
ElBahrawy et al. (2017) conducted an analysis of crypto currency birth and death rates
from April 2013–May 2017, finding that the rate is relatively stable with approximately
seven being created and the same dying each week. At the beginning of 2021, the total
value of the top 6,124 cryptoassets exceeded $1 trillion for the first time. As of March
49
27, 2021, the total cryptocurrency market cap was $1.7 trillion (Figure 5). The previous
peak of $760 billion was in late 2017 (Voell, 2021).
Figure 5 - Total Cryptocurrency Market Capitalization 1/1/2014–3/27/2021

Source: CoinMarketCap, 2021; Statista, 2021b

Almost 70% of the market cap is represented by bitcoin so as its value rises, and falls,
so too will the market, (Figure 6).
Figure 6 - Total Market Capitalization by Token Share 3/27/2021–3/27/2021

Source: TradingView, 2021

It is also useful to consider the difference between the value contained in tokens
and the number of users. Based on a 2014 analysis by Ali et al., almost 13 million
bitcoin (of eventual total 21 million) are circulating among 1–2 million users worldwide.
50
As evidenced by this estimate and others at the same time, while the total value of the
coin in circulation can be relatively easily determined by multiplying the number of
outstanding coins by the value of a single coin, the total number of users is much more
difficult to determine (Statista, 2021a). Based on a 2021 Statista.com market analysis,
68.2 million wallets were in use as of February 2021 (Figure 7).
Figure 7 - Number of Blockchain Wallet Users Worldwide 11/1/2011–2/22/2021

Source: Statista, 2021a; Statista, 2021b

A token can be evaluated as an investment and as a facilitator of value
exchange. However, even here there are challenges because the number of
transactions and wallets used may overestimate the total amount of activity because
individuals may utilize multiple wallets to conduct interlaced transactions intended to
obfuscate the intended recipient (Perkins, 2020). While not definitive, the $1.7 trillion in
51
value held among 68.2 million wallets provides a point for further exploration of growth
and percent of the overall global financial market.
Growth. Market growth tracks increase (or decrease) in overall capitalization
over time. When forecasting the cryptocurrency market, the high dependency on a small
number of coins (e.g., Bitcoin and Ethereum) make it difficult to accurately project where
the market will be in several months, much less several years. However, because of
bitcoin’s market dominance (Figure 6), it can be used for directional evaluation. Based
on bitcoin’s closing value data over the last five years (Table 4), the value of one token
has fluctuated between $422 and $55,989 USD.
Table 4 - Bitcoin Annual Closing Values 3/28/2016–3/27/2021
Year Ending Value Beginning Value Ending Overall Change
3/27/2021 $6,373 $55,989 798%
3/27/2020 $4,041 $6,373 58%
3/27/2019 $7,801 $4,041 -49%
3/27/2018 $1,045 $7,801 647%
3/27/2017 $422 $1,045 148%
Total 13,161%
Source: CoinMarketCap, 2021

Over the last five years, bitcoin has seen an increase in value of 13,161%. Over
the same period, Ethereum gained almost 860% (Voell, 2021). While neither coin is
representative of all tokens, and they are an order of magnitude different from one
another, their large changes demonstrate the significant increase seen in the broader
market overall even though less established coins may show even seen higher gains
(e.g., Dogecoin changed 14,240% in just the last year). Growth of cryptocurrencies can
be tied to the increased positive perception about their use, the utility they provide, and
the number of individuals using the coins for transactions (Saiedi et al., 2020).
52
The market economy does not effectively link present needs to an unknown
future. The financial system attempts to fund future investments based on knowledge of
the present (King, 2016). Users often seek out tokens for payments (purchase goods
without third party), value storage (investment), and utility (alternative to traditional
banks) (Newfeld, 2020). The increase in users (Figure 7) also tracks with the increase in
market value.
Percent Beneficial or Harmful. As attention to the increase in market size
continues, benefits and harms of cryptocurrency are frequently discussed as if they are
two sides of the same coin, implying, though not substantiated, that they also represent
equal shares of the overall market. The privacy afforded by cryptocurrency makes it
difficult to know what percent of the overall market is used for each purpose, so we will
use estimates to make educated guesses. There are conflicting perspectives on the
percent of cryptocurrency transactions that are illegal in nature. Some estimates are as
high as 25–44% of total transactions; others believe it is only 1% that can be
determined to be illegal. It is further complicated by the unregulated introduction of new
tokens. Many estimates are based on the value and market share of bitcoin, the most
well-known and widely traded cryptocurrency (Perkins, 2020).
In 2018, Foley et al. researched the amount of illegal activity financed through
cryptocurrency with the goal of understanding the scale of cryptocurrency use for this
new technology. Drawing on 2017 bitcoin blockchain information, they "estimate 27
million bitcoin market participants were primarily using bitcoin for illegal purposes.
These users annually conduct around 37 million transactions, with a value of around
$76 billion, and collectively hold around $7 billion worth of bitcoin" (p. 1800). This is an
53
essential benchmark to understand the magnitude of the perceived problem of illegal
cryptocurrency use, propose a methodology to consistently compare changes over time,
and look for trends. Using the anonymous but identifiable alpha-numeric wallet address,
Foley et al. (2018) developed a methodology to identify transactions and groups of
individuals involved in these exchanges. Additionally, they used behavioral
characteristics to differentiate between (likely) legal and illegal users. Through their
research, they found that just over one quarter of all users (26%) and nearly one half
(46%) of transactions are related to illegal activity. Their analysis of the total value
exchanged during the transactions identified 23% of dollar value and 49% of bitcoin
holdings was related to illegal activity.
In a series of separate studies by Chainalysis, they estimate that illegal
transactions make up less than 1.25% of all bitcoin activity from 2017–2019, though
they acknowledge that crime is a persistent and growing problem (Figure 8). RAND was
commissioned by the Electronic Coin Company to study its token, Zcash, and how it
may facilitate illegal activities. Their research found that the majority of transactions
across all tokens are legitimate. The RAND research looks specifically at Zcash but its
findings can serve as a benchmark for uses of other cryptocurrencies (Silfversten et al.,
2020). The study cites both the Foley et al. and Chainalysis estimates for illegal market
activity, favoring the Chainalysis findings.

54
Figure 8 - Total Value of Illegal Cryptocurrency Sent and Received vs Percent of
Total Transactions 2017–2019

Note: “Illicit entities” refers generically to organizations or individuals involved in illicit
activities. This categorization is based on a Chainalysis study of the accounts
involved in the transactions, previous account activity, and identifying links back to
darknet marketplaces and other known illegal activities.

Source: Chainalaysis, 2020, p. 5

The previous discussion focuses primarily on illicit use, leaving the reader to
deduce that the remainder (~99%) of the $1.7 trillion is being used for other activities.
Many of the beneficial use cases described earlier do not exist or are in development
(“vaporware” as some would say – a promise of products to come). Yes, there are
individuals who may use it for transactions, but it is nominal. This leaves one to consider
– where is the rest of the value? The third use case is investment. Many individuals (like
the researcher) have purchased tokens and allowed the value to sit, waiting for the
anticipated (the researcher hopes) increase in value. Still others are moving value
between tokens, as if they were stocks, taking incremental gains (or losses), and
55
moving the value around with the hopes of netting a positive return. Though, unlike
stocks, these tokens may not have been issued through an initial coin offering (ICO).
Further, the shares being purchased do not represent a creation of anything. Amazon,
Walmart, and Target are retail behemoths. General Motors, Ford, and Toyota build cars.
Google and Facebook sell advertising. What does a cryptocurrency token represent? It
represents the hope, not trust according to Castronova (2014) and Vigna (2015), that
enough people will believe that a token has value, thus it is valuable and scarcity of that
token if demand brings an increase in value.
Portion of National Economy. With a general understanding of cryptocurrency
market size, it can be compared to the U.S. economy to get a sense of proportion.
8

Cryptocurrency use is a global activity and comparing it only to the U.S. economy has
obvious shortcomings; however, regularly published financial benchmarks with
accepted methodologies provide the best foundation from which to make
generalizations. Combining market size and estimated use percentages from the
previous sections with U.S. monetary indicators, some general deductions can be made
about activity in the cryptocurrency space and the change over time. Table 5
summarizes estimated cryptocurrency market for the last six years, and breaks it into
approximate allocations by use – harmful, market speculation, and beneficial. These
amounts are then compared with U.S. monetary indicators for the areas those uses

8
Market capitalization, volume of transactions, and number of accounts were all considered as potential
metrics when calculating the percent cryptocurrency has of the “traditional” financial sector. Transaction
volume is problematic because some users employ mixers or tumblers that take value and send it
through tens (and sometimes hundreds) of accounts before depositing it in the final set of accounts. This
artificially inflates the number of cryptocurrency transactions. The number of accounts is also problematic
because not all accounts are held by a custodian; some are individually managed and kept dark. In favor
of market capitalization is the established methodology for calculating, and figures are readily available
allowing for standardized comparison.
56
would apply. Cash is the common alternate for harmful cryptocurrency uses so we use
M1.
9
Beneficial cryptocurrency uses focus on short-term deposits (also a part of M1)
and transactions of regular business. Financial institutions have yet to develop any
mass-market products and transactions make up only a fraction of the market. For
these measures, we will make comparisons with gross domestic product (GDP). Finally,
the remainder of the cryptocurrency transactions are in the market space, with
individuals investing and anticipating an increase in value. Here, we will compare it with
the U.S. equities market.
Table 5 - Cryptocurrency Valuation by Use and Percent Share of U.S. Economic
Indicators 2015–2020 (Billions)
Year
Cryptocurrency Market by Use Case U.S. Monetary Indicator and Cryptocurrency Share
Total Harmful Market Beneficial M1 CC % Equity Mkt CC% GDP CC%
2020 $1,700 $17.0 $1,681 $1.70 $6,621 0.26% $45,310 3.71% $22,675 0.01%
2019 $237 $2.3 $234 $0.24 $3,975 0.06% $37,689 0.62% $21,433 0.00%
2018 $129 $1.2 $127 $0.13 $3,780 0.03% $30,103 0.42% $20,612 0.00%
2017 $566 $5.6 $560 $0.57 $3,599 0.16% $31,775 1.76% $19,543 0.00%
2016 $18 $0.18 $17 $0.02 $3,323 0.01% $27,363 0.06% $18,745 0.00%
2015 $7 $0.07 $7.01 $0.01 $3,080 0.00% $25,077 0.03% $18,238 0.00%
Source: CoinMarketCap, 2021; Federal Reserve, 2021; Siblis Research Ltd., 2021; Statista, 2021c;
Researcher’s calculations

Based on this comparison, we see that cryptocurrency use has significantly
increased as a portion of M1 and the equity market. Though only a fraction of a percent
of M1, it has a not insignificant portion of the equity market. This assumes movement of
value previously held in those formats to the cryptocurrency alternative. Beneficial uses
continue to remain (by and large) in the “vaporware” phase and do not constitute a
meaningful portion of the U.S. GDP. However, as the market matures, there could be a

9
Cash is commonly reported as M1 in economic documents. M1 consists of U.S. currency in circulation
domestically and internationally (Westfall, 2021).
57
shift of value out of equities as the market stabilized (and opportunity for realized gains
decreases). Once a viable transactional ecosystem is established, M1 and GDP is more
likely to move to cryptocurrency-based value transactions.
Economic Security
The second component of the research space is economic security. This topic
will be explored at the national and individual level, including the connection to
cryptocurrency and regulations designed to maintain economic stability. A first order
effect of the advent of cryptocurrency is the disruption of analog financial structures.
Second order impacts will continue appearing in the coming years as greater
decentralization and peer-to-peer networks are established (Newfeld, 2020). Financial
structures and the macroeconomic policies and adjustments made to support a stable
financial system in the United States enable individual economic resilience, access to
the resources, finance and markets necessary to maintain state power, and individual
welfare (Buzan et al., 1998). A secure economic future is one with resilient domestic
production, free trade, and income to support an acceptable living standard
(Department of Homeland Security, 2020). The threat to economic security does not
come from loss to an individual or group; it comes from a lack of adherence to the rules
and systems that govern the environment – if they exist at all (Buzan et al., 1998).
Determinants of economic security are constantly in flux. Economic security is a
heterogeneous security complex because it is composed of a broad range of elements
that cross macro (national) and micro (individual) environments (Buzan et al., 1998).
The World Economic Forum Risk Survey respondents have identified economic risk as
a prominent concern for the last several years. In the 2020 and 2021 reports, asset
58
bubbles, commodity shocks, and pricing instability are seen as some of the biggest
near-term (3–5 years) threats. Countries with precarious economies are searching for
ways to decrease volatility while individuals seek havens to preserve what financial
stability they may already have. These environmental factors, paired with the COVID-19
driven economic downturn, may encourage governments and individuals to weather this
volatility by turning to cryptocurrency, making the sought-after national-individual
balance more difficult. The researcher is not an economist, so economic security
discussions may be simplistic to those experienced in the field. The purpose is to
provide a general overview of economic security so the reader has context when
considering potential cryptocurrency impacts.
National
National economic security is the ability for a nation to manage the country’s
economic health through policy instruments. Neu and Wolf (1994) describe economic
security as the ability of the United States (or any nation) to protect its own economic
prosperity via domestic policies and international influence. This concept is extended by
Kahler to also include a country’s economy being free from manipulation by other
governments that wield similar instruments (Kahler, 2004). National economic security
is characterized by a resilient economy that can absorb the impact of internal and
external factors and does not disrupt the normal process of living (Pankov, 2011).
Though it is important to acknowledge that the definition of security is inherently fluid
because it is often based on the context and the relationship of the item to which it is
being compared. For our purposes, economic security is balanced and sustained
economic growth (Karimi, 2015). Respondents to the World Economic Forum's risks
59
survey identified economic confrontations between nations, erosion of global
frameworks, and political confrontations as the top three short-term risks expected to
increase in 2019. Singularly, and combined, they may cause governments to explore
alternatives to the status quo that support their new priorities (World Economic Forum,
2019).
Economic security has preoccupied national governments when economic
shocks have been so unexpected and severe that existing social and political
arrangements appear threatened (Kahler, 2004). Western-led globalization has tightly
coupled some international economies through debt ownership, trade agreements, and
resource dependencies. Some countries emerging on the economic and political stage
feel the western-dominated constructs have not adapted to global changes (World
Economic Forum, 2019). The U.S. dollar is the global reserve currency and has allowed
U.S. policymakers tremendous flexibility to exert power and influence over other
countries as one element of a financial, political and military coercion. The creation of
cryptocurrencies provides a vehicle for value transfer outside of established channels
that often monitor compliance (Fanusie & Logan, 2019). Drawing on Persson and
Tabellini (1999), we will explore national economic security from the monetary policy,
money supply, and growth perspectives.
Macroeconomic Stability. Macroeconomic stability creates an environment that
minimizes economic cycles and encourages growth. Economic security is not only the
protection of national interests, but also the readiness and ability of government
institutions to create mechanisms for implementing and protecting national interests in
the development of a national economy (Pankov, 2011). Stability involves many
60
dimensions including sound fiscal policies, price stability, a functioning real-economy,
and sustainable debt (Ocampo, 2008). The 2008 financial market crash and the COVID-
19 pandemic are two of the most significant global shocks in the last 15 years.
Decreased confidence in centrally regulated financial markets following these events
makes cryptocurrency an interesting alternative for value preservation to some.
Cryptocurrency allows for value exchange without central authority, relying on
cryptographic algorithms to prevent fraud (Silfversten et al., 2020). This presents a
viable, though not yet scalable alternative. Cryptocurrency tokens pose a novel, though
currently marginal, threat to state powers associated with issuing currency (McKie,
2020). Ali et al. (2014a) do not currently believe digital currencies pose a significant risk
to the overall financial stability of a nation, but new developments could change that
calculation. Policymakers are considering environmental changes, failures of current
policies, and future changes likely to influence public economic behavior. The
connections between cryptocurrencies, their use in new financial instruments, and the
real economy will clearly influence economic growth and the power of the state
(Castronova, 2014). Fiat currencies (by definition) are not tied to a physical commodity
for valuation (i.e., gold or silver). This gives outsized influence to policymakers because
they are not limited by the amount of currency that can be in circulation (e.g., required to
have a certain percent of gold to represent the additional currency).
10
Their decisions to
vary the money supply significantly impact inflation and do not let the market anticipate
and adjust for policy shifts (Calcaterra et al., 2020). Using macroeconomic policies to

10
Some programmed cryptocurrencies have a known number of tokens in circulation, so value is
maintained because supply remains finite, removing the policymakers’ influence. Using Bitcoin as an
example, there are ~18.7M coins currently in circulation with 900 more added each day. When there are
21M bitcoins, the supply will be capped.
61
fine-tune and normalize the business cycle has limitations but they still can influence the
overall fiscal environment.
Managing Monetary Supply. A nation’s central bank varies the amount of
money in circulation and alters interest rates to manage the overall money supply.
Allocating a government’s financial assets between deposits (on demand and savings)
and currency affects the broader credit market and interest rates (Brunner & Meltzer,
1990). These adjustments influence (hopefully) behaviors in the broader market and,
thus, the overall money supply. Manipulation of these elements is akin to fiscal
interventions designed to address undesirable market conditions, such as high inflation
or stagnant spending. There is concern that an increase in state capitalism (i.e.,
manipulation) introduces market distortions and compromises international financial
institutions because free market forces are not allowed to guide policies (Hurwitz, 2017).
This perspective does not acknowledge the lag between when the market detects
irregularities and the market forces make a correction. Policy intervention can shorten
this difference.
Central banks, and the governments behind them, have the power to alter the
money supply by increasing or removing the amount of money in circulation. More
often, the amount of currency in circulation is increased through stimulus initiatives to
help those with marginal economic conditions. These tools have been used to manage
economic fluctuations for decades. However, by increasing the “pool” of money, the
value of the money already in circulation decreases (McKie, 2020). King (2016) believes
the fragility of the current global economic system exists because growth is primarily
driven by banks’ creation of money. Introducing mathematical controls or linking with a
62
stable digital currency may be a way to modulate the market. Large-scale (i.e., central
bank digital currency) rollout of new systems may be better suited to environments that
do not have robust existing financial system but a reliable central bank; though, that
should not stop developed economies from exploring their utility (Brummer, 2020).
Token-based securities with artificially fixed constraints (i.e., scarcity) present an
alternate to the devaluing fiat currencies issued by governments. They are an alternate
vehicle to preserve wealth rather than have it diluted through monetary supply
manipulation (McKie, 2020). Cryptocurrencies can meet the functions of money, but
their volatility and lack of practical utility do not make them likely to materially supplant
the existing financial system (Mueller & Squartini, 2020).
To develop policy, an understanding of transaction volume, value store, and
desired outcome is required. The current electronic payments system relies on
computers at banks and stores to report to one another the ownership and exchange of
value but the value is denominated in USD, Euros, or other fiat currencies. New
cryptocurrency systems are not tied to a single metric – exchange rate tables among
multiple cryptocurrencies permit seamless exchange of value between entities with little
tracking (Castronova, 2014). Fernández ‐Villaverde (2018) views cryptocurrency
offerings as a worse solution to a properly managed fiat currency; however, he does
believe that the characteristics of cryptocurrency, namely facilitating electronic
transactions, simplicity of payment infrastructure, and an alternative to individuals in
countries with poor monetary stability. The scope and scale of the cryptocurrency
market does not pose a threat to the monetary system as discussed earlier in the
cryptocurrency market size analysis. However, it will be important to monitor growth and
63
make course corrections prior to a significant impact (He et al., 2016). Libra, the virtual
currency (not cryptocurrency because supply is not mathematically controlled) could
impact governments and economies by concentrating power under a single
organization. Concerns about Google dominance in the search field will pale with the
possibility that Facebook controls a not insignificant portion of the global economy
(Duffy, 2019).
Bitcoin and other cryptocurrencies have received much attention in the popular
press but they have not yet gained widespread adoption. Moving value into an
unregulated environment using cryptocurrencies represents a potential financial
substitution for consumers, which weakens overall government monetary control
(Brunner & Meltzer, 1990). Some believe as trust in cryptocurrency increases, it will
become more mainstream, further increasing trust, driving more adoption in cyclic
behavior, until one day, cryptocurrencies will replace national currencies. Vigna and
Casey (2015) postulate that the broad use of cryptocurrency could spark an economic
crisis because it strips government policymakers of the capacity to adjust the money
supply and encourage spending during times of instability when the natural instinct is to
save (as we saw during the COVID-19 pandemic). Facing this prospect, several central
banks are looking at ways to create and issue their own tokens (Central Bank Digital
Currencies) that combine the benefits of cryptocurrency but the central regulation of a
fiat currency (Perkins, 2020).
Economic Growth. The final component of a stable national economy is
maintaining economic growth. Economic growth expands the economy, incentivizes
investment, increases employment, and leads to additional spending. A stable economy
64
created by macroeconomic policies and money supply management, keeps interest
rates low and supports growth. Sustained growth over many years has significantly
improved living standards and individual economic security. Barro and Sala-i-Martin
explore this important connection in Economic Growth (2003) and is reinforced by Bren
et al. (2019). They argue that growth is the most important part of macroeconomics and
most significant factor affecting individual income. Stone (2016), in congressional
testimony before the Committee on Small Business, states that growth increases the
overall size of the economy, improves financial conditions, and an individual’s standard
of living.
The responsibility for national economic security resides in several different
government agencies (e.g., Treasury, Commerce, State Department, National
Economic Council, etc.) each with their own view of how to measure success (Neu &
Wolf, 1994). The existing banking and financial system contains its own threats to
stability – taking on too much credit and not being able to repay, lack of liquidity to
resolve its own transactions, and physical vulnerabilities that may stop the ability to
function (Ali et al., 2014a). Sustained economic growth, and the resulting economic
security, can be found in environments with structured institutions providing regulatory
foundation, stable exchange, tax collection, and provision for the public good (Posen,
2018). The impacts of a positive economic sentiment and labor force growth can be
expanded through additional government investment and sound regulatory policies
(Stone, 2016). Decreases in growth can be attributed to a variety of factors including
political instability, unforeseen environmental changes, or poor policy execution
(Persson & Tabbellini, 1999; Stone, 2016; Barro & Sala-i-Martin, 2003). In situations
65
where any (or multiple) conditions are present, cryptocurrency may seem a viable
option to preserve value and maintain economic stability.
Individual
Economic security or financial security is the condition of having stable income or
other resources to support a standard of living now and in the foreseeable future.
Expressed succinctly, economic security is the sustained condition of personal financial
stability including the ability to make money, withstand shocks (e.g., unexpected
expenses), and provide for basic personal needs (Medyanik & Deyneka, 2019). Though
as outlined in Bossert and D'Ambrosio (2013), economic security is often described in
terms of the negative (i.e., insecurity) rather than the positive (i.e., security). This draws
on experiential comparisons related to the individual’s economic anxiety and sense of
vulnerability. Factors that contribute to economic insecurity include a potential loss of
money and unmanageable debt coupled with unfamiliarity with investment risk and use
of insurance to manage risk (Medyanik & Deyneka, 2019). Sohyun Joo (2008)
describes economic well-being as having adequate income and assets and access to
appropriate products and services and access to professional guidance. She concludes
that personal economic security could be evaluated along four dimensions: objective
financial condition, subjective financial condition, satisfaction, and behavior. Though it
includes an objective measure, it still relies heavily on subjective perceptions. A broad
discussion of individual economic security based on objective measures is outside the
scope of this effort. Instead, the researcher will focus on the objective financial condition
expanding it to include access to financial instruments and the ability to pay everyday
expenses as described by Breen (1991).
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The beneficial and harmful uses of cryptocurrency have different impacts on
individual security. The freedom to conduct individual transactions outside the centrally
managed financial system is offset by a decrease in consumer protection. The creation
and widespread use of cryptocurrency is hindered because of limited distribution, high
volatility, low utility for daily purchases, and inability to help manage inflationary
pressures. In these regards, fiat currency is preferable (Fernández ‐Villaverde, 2018).
However, cryptocurrency can co-exist, and perhaps functions best, when used as an
alternate to existing fiat currency. Once cryptocurrency valuations normalize (and there
is no evidence that is happening anytime soon), then they are more likely to become
accepted as a medium of exchange (Perkins, 2020).
Financial Condition. Individuals’ financial condition includes their income,
savings, and accumulated assets. Research related to economic insecurity was
considered a burgeoning field in 2013 and the body of knowledge focused on what
constituted insecurity, and by comparison, security. Initial studies focused on singular
measures or contributing factors. Hacker et al. (2013) proposed the Economic Security
Index (ESI) as a more accurate measure by combining the influences of: potential for
income loss, unanticipated medical spending, and wealth buffering. The ESI examines
the share of individuals who see a 25% or greater decline in their available household
income and do not have a sufficient safety net to replace the lost income. Economic
security is also a function of personal risk tolerance (i.e., economic uncertainty), the
ability to assess and protect themselves against risks, having a buffer to insulate them
from losses, and the comfort individuals have with the perceived potential their current
level of security could be disrupted (Medyanik & Deyneka, 2019; Hacker et al., 2013).
67
Economic security is different from financial satisfaction. Individuals can be satisfied
with their economic state but that does not make them secure. Personal financial
management, saving and investing, are behaviors that improve someone’s overall
financial condition. The resulting security is based on adequate income, wealth
generation, ability to manage consumption (pay bills), and maintain a positive financial
ratio (Joo, 2008). The return on cryptocurrency investments are not closely correlated to
traditional (currencies, stocks, or commodities) asset classes or inflationary pressure,
making them an attractive investment option for portfolio diversification. Yet, there are
misconceptions by regular investors that the virtual currency market is regulated, and it
is not. Further, the benefits of anonymity and transaction efficiency are offset by the
ability for a wallet to be hacked, no interest paid on investments, no consumer
protections, and heavy fluctuation in value (Mueller & Squartini, 2020).
Access to Financial Instruments. The ability to resist a financial shock can be
buffeted by access to capital and insurance. Access to capital allows for larger
purchases (i.e., home), education expenses, and to start a business. Each of these
activities is also investments in the family and a potential catalyst for wealth
accumulation and transfer to subsequent generations (Western et al., 2012). A positive
financial condition is often associated with an income level that enables someone to
resist an economic shock (i.e., unexpected healthcare issue, fire, etc.). Access to
insurance products can buffer an individual from unexpected fluctuations (Western et
al., 2012). The most frequently cited large loss is unforeseen medical expenses (Joo,
2008; Western et al., 2012; Medyanik & Deyneka, 2019). When considering both
income and loss, Western et al. (2012) find that security comes from the protection
68
against a significant loss more than a significant increase in income. In either case,
there are disparities in the availability of financial instruments to people of different
socio-economic status. Those perceived as higher risk (often associated with lower or
irregular income) pay more interest on borrowed capital or face higher insurance
premiums, making it less likely they can afford the payments. This effectively decreases
accessibility to the very tools needed to resist shocks and decrease economic
instability.
Unregulated cryptocurrency markets create an environment with few customer
protections. “Caveat Emptor” may be a rallying cry for free-market enthusiasts but it
absolves the government of a foundational role, providing for the public good
(Anderson, 2011). The lack of government action has provided an opportunity for the
private sector to step in and develop potential solutions. Sometime in 2021, a
Facebook-led experiment to launch a dollar-backed virtual currency with a supply
guided by an oversight group (thus not a cryptocurrency) is set to begin (Murphy, 2020).
Facebook sees this as an opportunity to provide financial service equity to its users.
However, there is some concern that if Facebook's billions of users worldwide begin to
use Libra, it could threaten the stability of some fiat financial systems. Facebook will
also control the currency wallet through its Novi subsidiary. In effect, Facebook is
creating the monetary supply and the bank to settle transactions (Duffy, 2019).
Regulatory concerns already caused the initiative to temporarily halt after the 2019
launch. Even after addressing security issues, there are still concerns and many
watching what will happen in terms of the national and individual economic security
impacts.
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Ability to Pay Expenses. The final measure of individual economic security is
the ability to pay expenses. Whether daily or unexpected, meeting financial obligations
is a tangible measure of economic security. Not having enough income, savings, or
insurance protection, exposes individuals to significant loss potential and will increase
their sense of economic insecurity (the subjective measures mentioned earlier). Many
conditions can contribute to individuals not being able to pay their bills, including lack of
income to pay basic life expenses, purchasing non-essential items, and no income
buffer. Much has been written about the increasing financial disparity in the U.S.
economy and the inequality has been exacerbated during the global pandemic. Those
with an education and jobs that allow them to work from home (often the two go
together), have been better able to weather the economic downturn.
Regulatory Environment
Current banking regulations were developed over decades to incrementally
address financial system needs and provide customer protection. The regulations were
initially developed for financial institutions, how they interact with their customers, and
the transfer of value. The introduction of cryptocurrency and associated fintech
innovations are a significant departure from the previous financial environment and the
regulatory process was not prepared for the rapid change. Over 2,000 different tokens
have been launched in the last decade (compared with 179 fiat currencies in the world)
(Mueller & Squartini, 2020). Policymakers responded by applying and modifying existing
policies to the new environment, with different levels of success. Cryptocurrencies are a
novel form of value storage that do not conform to traditional definitions of financial
products (e.g., security, commodity, asset) so it is unclear how long-established
70
systems of regulation apply. The current regulatory environment focuses on maintaining
fiat-currency stability and the status-quo of the broader financial system. It needs to
become more adaptable and address the multitude of tokens being offered.
The financial system exists to facilitate payments between parties and direct
savings towards productive uses within a regulatory framework (Williams, 2016). The
cryptocurrency industry is only 10 years old (still in its infancy by policy standards) but to
function more efficiently, this new form of payment needs a regulatory framework that
addresses its decentralized nature. This will bring some stability to the market, guide
future innovation, and provide boundaries for illegal activities. Additionally, it will help
the industry overcome the perception that cryptocurrencies present more benefit to
illegal activity rather than legal (Virtual Currencies, 2018). Saiedi et al. (2020) believe
stricter law enforcement efforts are not expected to hamper internet-based transactions
because of the limited capacity to control crime in the virtual environment.
Mobile phone usage and telecommunication network expansion have grown in
parallel with cryptocurrency, enabling access to the new decentralized financial industry
that is no longer tethered to physical locations. New, unregulated tools, accessible by
more individuals, require associated regulations to keep pace with these developments
(Guida, 2020). It is important for any legislation to support developments and
advancement in a new industry, but it should also provide the necessary boundaries to
ensure compliance and protection of the public interest. Respondents to the 2021 World
Economic Forum annual threat analysis identified the failure of government regulation
over technology as a near-term threat. This section will explore what is being regulated,
who is facing regulation, and the federal and state regulations currently in place.
71
What Is Being Regulated
Anything can be money, so long as the individuals in the transaction perceive
value and believe it can be used for other items (Wolman, 2012; Vigna & Casey, 2015).
As nation states evolved, one of the efficiencies they created was consolidating
currencies used in areas under their control, making trade more efficient. As empires
and countries expanded, so did their use of a single currency that aided in the creation
of common laws and regulations (Castronova, 2014). The current financial industry is
characterized by integrated markets, capital exchanges, and sprawling supply chains
governed by a patchwork of national and global regulations and tax treatments (Hurwitz,
2017). Banks offer services to validate transfers of value between individuals (often
geographically dispersed or untrusting parties) and track account holdings (Perkins,
2020). This industry relies on institution-centered adjudication of financial transactions
but the disruptive introduction of blockchain opensource ledger presents new regulatory
challenges (Yermack, 2017).
Cryptographic tokens exist in cyberspace with no governmental oversight or
regulation and individuals can hold their own value without anyone knowing how much
they have, where it comes from, or with whom it gets exchanged. For regulators and law
enforcement, their opportunity for intervention is the movement of value between the
real and virtual worlds. In the current financial environment, banks have accounts for
customers with verified identifies. Money flows into those accounts from multiple
(typically) known sources. When certain thresholds are met (i.e., transactions over
$10,000), additional information about the value sender or recipient are captured to help
the government combat criminal activities (Internal Revenue Service, May 22, 2021).
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Governments are taking steps to prevent cryptocurrencies from being used for illegal
purposes by applying existing laws to the new environment. Consequently, loopholes in
that application and the virtual nature of exchange allow domestic and international
actors to use cryptocurrencies to fund their activities. There are numerous risks and
policy issues related to cryptocurrency, chief among them: they could facilitate money
laundering and criminal activities, investors may not be familiar with their operation and
how to derive value, and individuals and exchanges are vulnerable to hacking (Perkins,
2020). The United States has been slow to change the policies that primarily favor its
economic position where emerging economies have taken steps to form their own
institutions and policies in response (Hurwitz, 2017). Others feel government regulations
are stifling fintech innovation and will put the United States behind other countries
actively supporting development. It is important to understand the scope and scale of
the issue so the government can take measured steps and not undermine developing
financial technologies (Silfversten et al., 2020).
The treatment of cryptocurrency under the law is predicated on its definition. To
some, cryptocurrency is not a “monetary instrument” because it does not meet the
definition of cash. Taking that as true, cryptocurrency should not be subject to monetary
laws. However, because cryptocurrency can facilitate an exchange of value, it is still
subject to U.S. federal laws (Sykes & Vanatko, 2019). Seele (2018) clearly describes
the regulatory challenge posed by cryptocurrencies – how should they be treated to be
regulated? Are they a currency? An asset? A conveyance of payment? Something
else? Or a combination? Is one classification appropriate or will it vary by the regulatory
agency's existing lens? As described in the definitions section, the researcher considers
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cryptocurrency as a viable way to exchange value and should be treated the same as
currency. Regulation of the virtual currency market requires state, federal, and
international organizations to be nimble and adaptable (Virtual Currencies, 2018). This
requires policymakers at the state, federal, and international organizations to agree on
how to treat this innovative currency.
Who Is Being Regulated
A government cannot regulate the use of cryptocurrency on the internet, but it
can regulate the methods non-fiat value is returned to the fiat economy and how it is
treated when it returns. China regulates its citizens’ access to information it deems
inappropriate, but the information still exists. Similarly, cryptocurrency exists on the
internet, but the U.S. government is trying to control points of entry into and off of the
fiat financial market. Officials responsible for enforcing anti-money laundering policies
only catch ~1% of the $1.6–2.0 trillion in annual financial crimes because they are using
old technology and tools. Regulatory responsibility is often split between law
enforcement agencies trying to identify and prosecute illegal activities, and bank
regulators trying to comply with rules but not necessarily ferret out those same activities
(Guida, 2020). Of regulations that do exist, most focus on financial institutions.
Cryptocurrencies can interact with the real economy in three ways: closed system
(value only exists within the community), unidirectional (real currency can be used to
purchase community virtual currency), and multidirectional (exchanges can be made
between real and virtual currency) (European Central Bank, 2012). The primary concern
is multi-directional exchange and the organizations that facilitate those transactions. He
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et al. (2016) propose that more emphasis be placed on the points of entry and exit from
the real into the virtual world.
The 9/11 Commission (2004) recommended tracking terrorist financing, and by
extension, remove the avenues of funding for terrorist activities. As cryptocurrency
becomes a viable avenue for financing the access to and utility of these value transfer
mechanisms, they must be carefully monitored. Criminals need to convert cash into
cryptocurrency or crypto into cash to move the value and use it to fund their enterprises
(Illicit Use of Virtual Currency and the Law Enforcement Response, 2018). In this
process, there are four primary participants: purchaser, seller, exchange, and wallet
provider (Young, 2015). As the market has matured, most legal users rely on
exchanges to also host their wallets. The relative anonymity to send and receive value
provided by alphanumeric wallets and the possibility that someone may use unhosted
wallets means the most efficient way to curtail illegal use is to regulate currency
exchanges.
Fanusie (2020) has done considerable exploration in cryptocurrency and
regulations. He observes that the primary focus for U.S. regulation is not banning
cryptocurrency use; rather, it focuses on how to regulate value transmission –
essentially, the point of conversion from the non-fiat to fiat world (money service
businesses (MSBs) as discussed earlier). This concept concedes that the current token
environment needs the traditional financial market to be viable. Once token value can
be spent more widely, regulatory expectations will need to change. Fanusie (2020)
believes it may be necessary to treat the transmission of value and the conversion of
value as two different components. It is not possible to regulate the transmission given
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the ubiquity and porousness of cyberspace. In this case, individuals have privacy within
their transactions. However, when individuals want to return their value to the traditional
market, then their privacy expectations may need to change because of regulatory
requirements. For cryptocurrency to go mainstream, it will be necessary for the industry
to embrace more regulation. Regulations were placed on the existing system to limit
fraud and it has largely worked (this is why they sought out other avenues to
electronically transfer value). The fraud did not go away; it just found a new technology
to use. Use of cryptocurrency more broadly requires confidence that transactions are
safe and reliable for conducting everyday business and the regulatory response to
cryptographic currencies should focus on their exploitation to conduct illegal activities.
Concern about potential impacts to financial markets and monetary system should
come later (He et al., 2016; Fanusie, 2020).
Crypto exchanges, and MSBs more broadly, serve as the primary method of
converting token value used or obtained from illegal activities (e.g., darknet purchases,
scams, ransomware, terrorist financing) into fiat currency and their number has steadily
increased since 2019 (Chainalysis, 2020). The Financial Crimes Enforcement Network
(FinCEN) oversees the function of value transmission and exchange, regardless of the
technology used to conduct those practices. Three primary business activities fall under
this umbrella: (1) wallet custodian, (2) point of exchange terminals, and (3) platforms
and applications that facilitate trading and exchanges (Scott, 2020). Organizations
involved in any of these activities are considered MSBs (DeWaal et al., 2019). It is
important to remember that exchanges can exist in any country. Legitimate exchanges
will follow AML and KYC requirements, but they may also have affiliated over-the-
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counter brokers who make an exchange at a set price and are often not subject to the
same KYC requirements (Chainalysis, 2020). FinCEN classifies virtual currency
exchanges as money transmitters, making them beholden to existing regulations (KYC
and AML being most prominent) (Young, 2015). Financial institutions have had to
establish the identity of the initiator and receiver of wire transfers for years. Peer-to-peer
token transactions eliminated the middleman, and the oversight. To open a bank
account, a financial institution asks for multiple forms of identification to prove
individuals are who they say are to comply with KYC rules. For individuals who want to
avoid being identified (because they are involved in illegal activity or they do not have
valid government identification), they are not able to use the financial system. Token-
based transactions provide an alternate financial platform (Fanusie, 2020).
New regulations will require Virtual Asset Service Providers to follow similar rules
when transmitting into and out of token wallets though this poses a challenge when
wallets are not hosted. FinCen initially proposed this regulation in 2013 when the token
economy was in its infancy but did not completely enforce it (Fanusie, 2019). In his
2020 analysis of money transmitter regulation, Andrew Scott summarizes a key point –
the value transmission function is regulated at the state level (though they need to
follow AML and Consumer Financial Protection Bureau guidance). This means, there
are 50 different sets of regulations that an MSB may need to follow. Attempts have been
made to align money transmitter supervision across states to simplify this quagmire.
Scott (2020) identifies four major initiatives summarized in Table 6. Laws, business
practices, even nomenclature can vary across states. The use of money transmitters to
transmit crypto value and the inconsistent regulatory environment create loopholes that
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can be exploited by bad actors and make beneficial industry development more
challenging because innovators need to meet 50 sets of regulations rather than one.
Table 6 - Summary of Selected Money Transmitter Regulatory Initiatives
Initiative Year Description Status
Uniform Law
Commission
2000
Connects all forms of MSBs and establishes
relationship between licensee and outlets and
reporting requirements.
12 states have
signed on
Nationwide Multistate
Licensing System
2008
Establish a national licensing system as the
registry of record. This would not impose
statutory requirements but instead create a
single point of application and registration.
Implemented
Money Transmitter
Regulators
Association Multistate
Agreements
2012
Create uniform practices and standards for
examining and reporting MSB activities. Would
establish a taskforce to examine multi-state
MSBs.
Waiting for
additional
signatures
Conference of State
Bank Supervisors
Money Services
Business Model Law
2017
Drafted a model law that focused on: customer
protection, facilitating coordination among state
agencies and establishing barriers to entry to
dissuade bad actors. Law would also establish
common definitions for industry terms.
Comments
under
consideration
Note: Adapted from Scott, 2020

If individual MSBs are expected to meet all federal codes, they may be required
to rate or evaluate the risk of transferring value from a custodial wallet (known, vetted
source that has been through KYC protocols) to a non-custodial wallet (unknown
source). Ultimately, these transmitters may decide that unless they know the pedigree
or history of the value being exchanged, they will not conduct the transaction because
of significant reporting requirements. This, in turn, will push customers to illegal sites
and decrease the opportunity for financial oversight (Fanusie, 2020). Fanusie also
observes that many of the companies in the token innovation space may not have the
resources or expertise to comply with all regulations. If Starbucks accepts bitcoin, will it
need to verify who the customer is before selling a latte? This simple example illustrates
the significant operating burden placed on the vendor accepting cryptocurrency for a
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transaction. Depending on the government’s intent, this may also be viewed as a
positive action because it decreases the overall utility of token-based currencies
because value convertibility is more onerous than using the existing financial system.
State and federal agencies need to come together and develop a coordinated plan to
address the virtual currency trading market. There is a web of regulations among
federal and state agencies, creating loopholes and confusion (Virtual Currencies, 2018).
A thoughtful regulatory approach promotes innovative uses of fintech products but also
considers unanticipated consequences (Williams, 2016).
Federal Regulations
Multiple federal agencies are responsible for the oversight of digital transactions.
These agencies and their regulations reflect similar overlapping authorities and
responsibilities. The federal regulations that apply to cryptocurrency, and the agencies
that enforce them, are predicated on how the token is being used and what is being
done with the associated value. Not unlike an equity in someone’s stock portfolio,
trading the equity is subject to one set of regulations and the gain (or loss) on that
equity is overseen by another. In February 2018, the Senate Committee on Banking,
Housing and Urban Affairs heard testimony from Security and Exchange Commission
(SEC) chairman Jay Clayton. In the opening remarks, the senators acknowledged that
the committee needed to look closely at regulatory gaps and support the SEC's ability to
“get ahead of the curve,” as it is expected that crypto currency would increase in use. In
particular, they saw a need for more stringent guidelines and serious punishments on
banks and other institutions that exchange cryptocurrency into fiat currency. Providers
of applications that facilitate peer-to-peer exchange either directly or through anonymity-
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enhancing methods are similarly viewed as MSBs, as the regulations are indifferent to
the technology used for the exchange (DeWaal et al., 2019). IRS treats cryptocurrency
as property. Thus, any gain on a cryptocurrency sale, whether the token is legal (the
SEC approved the ICO) or illegal (no approval), is subject to taxes (Illicit Use of Virtual
Currency and the Law Enforcement Response, 2018). Digital assets processed through
money services businesses fall under the regulatory framework of FinCEN. The
exchange of assets related to securities exchange is under the oversight of the SEC
(United States Treasury, 2020). FinCEN guidance released in May 2019 did not
establish any new regulations; rather, it provided clarification on the application of
existing regulations (some of which had not been rigorously enforced since
implementation) to “convertible virtual currencies” (CVC). CVC is the generic term for
nonfiat currencies that can be returned into the regulated financial market (DeWaal et
al., 2019).
There have been efforts for over two decades to bring consistency to the MSB
industry nationally but Congress and FinCEN have not updated the Bank Secrecy Act
(BSA) regulations to address new technologies. This puts the onus on regulators and
law enforcement to apply existing statutes. Though FinCEN did specify that exchangers
and administrators of virtual currencies are subject to BSA regulations, users of virtual
currencies are not (Sykes & Vanatko, 2019). In addition to FinCEN regulations, all
exchanges are expected to meet existing AML and CFT reporting and statutory
obligations. However, AML and CFT regulations are domestically inconsistent, and
internationally, visibility into electronic transactions is less transparent (Illicit Use of
Virtual Currency and the Law Enforcement Response, 2018). In a May 2019 article in
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Forbes, Yaya Fanusie, a CIA analyst turned cryptocurrency expert, wrote that the
Financial Action Task Force (FATF) will begin enforcing cryptocurrency regulations,
challenging the anonymity, and peer-to-peer transactions that have made the tokens so
popular. Until now, FATF had put MSBs on notice that they will be enforcing laws but
had not done so, allowing exchanges to continue moving value between accounts
without strict adherence to AML, CFT, and KYC requirements. That period is coming to
an end. Naturally, some individuals using this technology do so to maintain their
financial privacy and are upset about this change. However, for cryptocurrency to
integrate into the broader financial ecosystem, these are the very steps that need to
take place. Individuals using it to shield transactions will be frustrated but those who
want to provide additional financial tools to a wider audience and decrease transaction
costs should welcome the regulation. It will create a more stable marketplace and boost
adoption (Fanusie, 2019).
In 2018, Congressman Budd introduced the Financial Technology Protection Act
with the intent of uniting industry representatives with agency regulators to discuss best
practices and potential solutions for curtailing illegal activities; however, the act has yet
to be approved (The Future of Money: Digital Currency, 2018). Decentralized
organizational structures allow for a nimbler operation, a desirable characteristic for a
regulatory agency responsible for overseeing a complex, dynamic environment.
However, multiple agencies from different departments are responsible for different
portions of cryptocurrency regulation, creating inconsistencies in enforcement.
Cybercriminals exploit cryptocurrency technology to support terrorism and launder
illegal profits. The regulatory tools available to agencies have not kept up with
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innovations in the fintech space and the increasing use of cryptocurrency has only
highlighted the importance of regulatory consistency.
Multiple federal agencies are involved in cryptocurrency regulation, creating a
similarly confusing enforcement that creates gaps. Table 7 summarizes (and is certainly
not exhaustive) selected agencies and their role in cryptocurrency regulations. Here, as
with the broader regulatory examination, the researcher is not intending to provide an
in-depth review and analysis, but rather highlight that “U.S. law does not provide for
direct, comprehensive Federal oversight of underlying bitcoin or virtual currency spot
markets. As a result, U.S. regulation of virtual currencies has evolved into a
multifaceted, multi-regulatory approach” (Commodity Futures Trading Commission,
2018, p. 1).
The decentralized nature of cryptocurrency (i.e., no mediator is required to
facilitate the transaction) means no external agency can influence the process, put
restrictions on value traded or require reporting of transactions (Dierksmeier & Seele,
2016). Most cryptocurrency users are individuals who obey the law. Often, they are
looking for more privacy with their transactions or curious about the technology
(Bohannon, 2016). Unlike conventional criminal acts where an individual may be caught
for a single crime, having the address of a coin account gives law enforcement the
ability to track a series of potentially illegal exchanges. When value from those
addresses is converted using commercial exchange services, it provides an opportunity
for intervention (Bohannon, 2016). Using this to their advantage, law enforcement has
been successful in closing down some sites facilitating the sale of illegal items.
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Table 7 - Selected Federal Agencies and their Role in Cryptocurrency Regulation
Federal Agency Regulatory Role
Securities and exchange
commission (SEC)
The SEC maintains fair, structured and efficient markets, protects
investors, and encourages the growth of capital. The SEC oversees
security offering, buying, and selling of securities. No cryptocurrency
has registered as a security with the SEC, and therefore, none is
subject to its regulations. However, in line with the mission of consumer
protection, the SEC warns potential investors about the potential for
fraud with these new financial instruments.
Commodity Futures Trading
Commission (CFTC)
The CFTC regulates the derivatives (a financial security created from
an underlying asset group) market. In 2014, the CFTC designated
virtual and cryptocurrency as a commodity and subject to oversight. In
addition to warning customers about fraud, the agency has pursued
illegal futures exchanges.
Federal Deposit Insurance
Corporation (FDIC)
The FDIC maintains the stability in the nation’s financial system by
insuring financial deposits and examining financial institution
soundness. Oversees banks’ holding of cryptoassets and their
insurability.
Internal Revenue Service
(IRS)
The IRS is the tax collection agency for the nation. The IRS considers
any virtual currencies that can be converted into fiat currency as
“convertible.” As such, any transaction (buy, sell goods and services, or
investment holding) using convertible currencies may be subject to tax
laws.
Treasury – Office of
Comptroller of the Currency
(OCC)
The OCC regulates and supervises banks, savings associations, and
branches of foreign banks in the United States. The bureau established
the framework for allowing banks to integrate with stablecoin
infrastructure and serve customer who want access to these products
because of the beneficial characteristics.
Treasury – Financial Crimes
Enforcement Network
(FinCEN)
FinCEN prevents the financial system being used for illicit activities,
money laundering, and promote national security by sharing financial
intelligence. As the name implies, it is enforcing existing Treasury
regulations and investigating activities that support the use of
cryptocurrency for harmful purposes. Crucially, in 2019, the bureau
summarized 20 years of regulations and rule interpretation into a single
document clarifying how they apply to the new fintech environment.
Sources: Clayton, 2017; Commodity Futures Trading Commission, 2018; Federal Deposit Insurance
Corporation, 2021; Internal Revenue Service, April 2, 2021; Office of the Comptroller of the
Currency, 2021; Blanco, 2019

State Regulations
As in the federal environment, state legislators develop laws that provide
guidance to administrators. States can adopt or defer to federal guidelines to simplify
financial business operations and regulatory enforcement. The application of federal
consumer protection laws in addition to legislation within each state is not uniform and
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creates a patchwork environment and inadequate consumer protections (Perkins,
2020).
Table 8 draws on research done by Reese in 2018 to identify a state’s disposition
to cryptocurrency regulation. Only 28% of states have taken a friendly approach to
cryptocurrency regulation, leaving the majority still evaluating options. In this case, it is
not if the environment is friendly or hostile; it is that states are divided on the tax
treatment, transaction reporting, permissibility of smart contracts, accepting
cryptocurrency as payment, licensure requirements, etc., making it a burden for
exchanges that want to conduct legitimate business nationwide (Reese, 2018).
Cryptocurrency exchanges (MSBs) need to become licensed and be regulatorily
compliant in each state where they do business.
Table 8 - State Cryptocurrency Regulatory Environment
Cryptocurrency Regulatory
Environment
States Percent
Friendly
Supportive of
cryptocurrency use
CO, DE, FL, IL, KS, MT, NH, NJ, NV, TX, UT,
VA, VT, WY
28%
Unclear
No consistent
regulatory direction
AK, AL, AZ, CA, ME, NC, ND, NE, OH, OR, PA,
SC, TN, WI
28%
Hostile
Not supportive of
cryptocurrency use
CT, GA, HI, NM, NY, OK, WA, WV 16%
Not Regulated
No cryptocurrency
regulations
AR, IA, ID, IN, KY, LA, MA, MD, MI, MN, MO,
MS, RI, SD
28%
Source: Reese, 2018
While there are differing appetites for cryptocurrency, the uniform commercial
code (UCC) outlines model statutes states should use to govern banking and securities
market transactions. These statutes have been incorporated into the laws of all states to
bring some consistency. Electronic funds transfers are separately governed by the
Electronic Fund Transfer Act of 1978 and Federal Reserve Regulation (Committee on
Payment and Settlement Systems, 2003).
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Summary
This literature review attempts to summarize key points related to the current
cryptocurrency environment, what constitutes economic security at the national and
individual level, and the regulatory environment. The connections between
cryptocurrency, economic security, and the regulatory environment highlight the areas
for greatest exploration. Dierksmeier and Seele (2016) consider the ethical benefits and
harms of cryptocurrency but do not offer a definitive answer to where on the continuum
they fall. For each related use, we need to consider how often it is being used for that
purpose and who is harmed by the use. What follows is a summary of what we know
and additional questions that arose during the examination.
Cryptocurrency
Cryptocurrency and the underlying blockchain technology have opened new
opportunities for financial innovation but it is unclear if these innovations have mass
appeal, how large the crypto market will grow, and what future opportunities for
innovation exist. For a currency to be defined as “money,” it must maintain price stability
(Vigna & Casey, 2015). By this definition, cryptocurrency does not meet this criterion,
yet many individuals see variations of cryptocurrency and broader fintech innovations as
the next leap in this area and do not concern themselves with an academic definition.
As Vigna and Casey explain (2015), the nature of money is a complex system of trust in
which there is a society-wide agreement that symbols and tokens can serve to hold
value and be transferred. Mass-market adoption of an innovation is driven by
convenience, utility, and answering an unmet need. Use is also dependent on
environmental conditions. Political (unstable governments), economic (inflation), and
85
social (access to resources) are all determinants that may influence individual
cryptocurrency use. As a comparison, the internet remained relatively nascent in the
academic world before it became today’s commercial colossus (Digital Currency
Initiative, 2020). Initially, the concept of an algorithmically controlled token economy
may seem disquieting. However, if trust among users increases because no nation state
can adjust (or tilt) the monetary supply to their temporary advantage, that could boost
cooperation and facilitate internal exchange (McKie, 2020). These observations and
unanswered questions are summarized in Table 9.
Table 9 - Summary of Cryptocurrency Observations and Unanswered Questions
Observations Unanswered Questions
• The cryptocurrency market is estimated to be ~$1.7 trillion
(~2% of global GDP) though exact size cannot be
determined because of private coin offerings and significant
market fluctuations
• Less than 1% of the total cryptocurrency market is estimated
to consist of harmful uses that differ significantly from
amounts provided by skeptics
• Primary beneficial uses of cryptocurrency include privacy,
decrease transaction costs, access to financial markets,
investment, and hedge against instability.
• Primary harmful uses include money laundering, illegal
purchases, funding terrorism, ransomware, and financial
fraud.
• Cryptocurrency is not able to replace electronic money for
use in daily transactions
• What are the primary driving
factors in the cryptocurrency
market over the next five
years?
• What are the most beneficial
and harmful uses of
cryptocurrency?
• What percent of the
cryptocurrency market is
beneficial and harmful?

Economic Security
Economic security is the strength and stability of the economic condition at the
national and individual level. Individual security is the ability to maintain a standard of
living, though because that is a subjective measure, insecurity (measured objectively) is
often used to evaluate an individual’s status. This primarily consists of people who are
not able to make enough income to pay living expenses and tolerate a financial shock.
Notably, the Department of Homeland Security Economic Security Assessment (2020)
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has no mention of cryptocurrency or emerging fintech tools. Is this a significant gap
considering the impact a change in value storage may have on national and individual
economic security or recognition that the rhetoric about the impact of cryptocurrency on
national economic security is overblown and the issue is being securitized for political
motivation? It is unclear if economic security truly faces an existential threat as some
would suggest (Buzan et al., 1998). Observations and unanswered questions are
summarized in Table 10.
Table 10 - Summary of Economic Security Observations and Unanswered Questions
Observations Unanswered Questions
• National economic security is the government’s use of
policies and financial tools to minimize economic fluctuations
and maintain price stability through managing the money
supply.
• Individual economic security is the ability to maintain a
standard of living, have access to financial instruments, and
pay expenses.
• Cryptocurrency allows individuals to move value outside of
the government controlled financial system, potentially
decreasing the efficacy of policy instruments though they are
not yet considered a significant threat.
• The U.S. stimulus to decrease the potential of an economic
recession (maintain national economic security) is causing
inflationary pressure, driving some individuals to increase
movement of value to cryptocurrency (maintain individual
economic security)
• Are the necessary regulations
in place to maintain national
and individual economic
security?
• What are the potential
impacts of cryptocurrency use
on economic security?
• Are the impacts positive or
negative and how significant
are they?
• Are the impacts a national
security concern?

Regulations
The current financial regulatory environment is built on decades of modifications
to a slowly evolving industry. Cryptocurrencies and the underlying blockchain
technology have disrupted the industry, leaving legislators and regulators to stretch and
adapt to the new environment. Due to the digital nature of cryptocurrencies wherein
they can be accessed from anywhere at anytime, decreasing transactional friction, they
have a potential reach far beyond any other previous forms of currency. This made the
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sale/purchase of illegal items easier and increased the number of marketplaces in which
to conduct such transactions (Dierksmeier & Seele, 2016; Foley et al., 2018). This will,
likely, cause innovation among criminals to mask their transactions in a way they cannot
be detected. Legislative advancements will likely influence the cryptocurrency market by
bringing structure, which, if tokens are viable for a larger number of mainstream uses,
may increase their value (ElBahrawy et al., 2017; Fanusie, 2019). Still, the volatility of
bitcoin, and the market writ large, shows that the use of crypto tokens is still in the early
stages. However, many signs point to this being a significant market and legislators
need to establish rules of the game before play gets underway (Brooks, 2020).
Alignment of federal and state regulations, based on common nomenclature and
definitions, will establish the framework needed to assign oversight, investigate, and
prosecute harmful uses while creating the stable regulatory environment that
encourages new financial innovation and associated consumer benefits. Regulatory
observations and unanswered questions are summarized in Table 11.
Table 11 - Summary of Regulatory Observations and Unanswered Questions
Observations Unanswered Questions
• Existing financial regulations were developed with an institution-
centric model. Peer-to-peer finance disrupts this paradigm.
• Federal agencies do not agree on the classification and
treatment of cryptocurrencies, which creates an unclear
operating environment for financial innovators.
• Monitoring value exchange across the internet is not feasible so
federal agencies have focused regulatory efforts on MSBs that
convert value between cryptographic and fiat currencies.
• Multiple federal agencies are responsible for oversight of digital
transactions leading to inconsistent policies and enforcement.
• States have their own laws for MSBs and vary in support of
cryptocurrency use, further complicating the operational
environment and, potentially, driving exchanges to operate
abroad, which decreases regulatory enforcement.
• Does the current
regulatory environment
encourage innovation and
contain harmful uses of
cryptocurrency?
• Should existing regulations
be modified or new
regulations created to
address these gaps?
• What regulatory changes
are needed?

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The importance of economic security – nationally and individually – underpins the
nation’s national security. Beneficial and harmful uses of cryptocurrency have been
identified but their direct impact (threat or opportunity) to economic security has not
been explored. Further, can the current policy and regulation environment successfully
address new issues raised by the use of cryptocurrency and, if not, what can be done to
improve the policy and regulation environment to better address these new issues?
These questions drive the primary research.

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Chapter 3: Research Methods
The purpose of this chapter is to outline the research methods used to identify
the impacts of cryptocurrency use on economic security and potential regulatory
changes to mitigate harmful uses. The approach, analytical worldview, research design,
literature review, participant description, research instruments, procedure, and data
analysis are described in this chapter.
Research Questions
This research sought to explore two primary questions:
1. What are the potential implications of cryptocurrency use on economic security?
2. What regulatory changes can be made to mitigate harmful uses of
cryptocurrency and encourage beneficial applications?

Approach
This research is a qualitative mixed-methods analysis of existing literature, laws
and regulations, and expert interviews. There is increasing research interest related to
cryptocurrency use, yet it focuses primarily on the mechanics of token offerings.
Research related to the behaviors of adoption and the social, political, and security
implications is rarer. An explanatory, sequential mixed-methods study with an emphasis
on qualitative methods is appropriate for researching this area (Creswell, 2017;
Cronholm & Hjalmarsson, 2011; Creswell & Plano Clark, 2011; Plano Clark & Ivankova,
2016).
Theoretical Paradigm/Worldview
The researcher will use a constructivist approach to understand the connection
between cryptocurrency and economic security. I will take a pragmatic focus identifying
ways to amplify beneficial interactions and diminish negative interactions through
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regulatory modification. As a homeland security practitioner, the researcher wants to
understand potential impacts and develop solution sets that will mitigate issues before
they manifest. Many discussions about the uses of cryptocurrency hold the positive and
negative uses on equal footing, not considering the frequency of use, magnitude of
transactions, or the scale of the transactions that might tip the scales when looking at
total use. Through the research process, the researcher intends to conduct a qualitative,
risk-based analysis to better describe the aforementioned elements of cryptocurrency
use so discussions and policy development have the proper context. A constructivist
approach explores the complexity of views around a topic with the goal to develop a
meaning of behavior – in this case, cryptocurrency adoption and use (Creswell, 2013).
The risk analysis provides a pragmatist’s perspective on where to allocate the limited
government resources as use of the technology continues to grow in scope and scale
(Creswell, 2017). Understandably, there are multiple evolving perspectives on the topic.
This work is intended to identify prevailing attitudes and reveal their nature (Leedy &
Ormand, 2013). Well informed discussions need to take place now so the proper
regulatory environment can be created to foster positive uses and contain the harmful
ones.
Design
The explanatory, sequential mixed-methods research design utilizes a
combination of methodological approaches to deductively understand drivers of
cryptocurrency adoption and use and inductively identify impacts that use has on
economic security. The design was applied to existing literature, participant survey
responses, and interviews.
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Phenomenological
The environment shaping adoption and use of cryptocurrency was explored
using a phenomenological approach. Cryptocurrency use has increased dramatically
over the last decade, and the researcher wanted to combine a review of the literature
and interviews to understand the perspectives of multiple stakeholders to explain this
behavior. A sample of individuals representing multiple stakeholder perspectives was
interviewed to determine what conditions are contributing to this behavior (Creswell,
2013; Leedy & Ormrod, 2013).
Grounded Theory
In addition to developing an understanding of motivating factors, the researcher
intends to develop a theory for what the potential impacts cryptocurrency use has on
economic security. A grounded theory study allows the researcher to understand
people’s actions and interactions around a particular topic (Leedy & Ormrod, 2013).
This approach requires the researcher to be well versed in behaviors and concepts of
the subject being studied. One component of the literature review was identifying and
cataloging existing domestic regulations and conduct using a qualitative comparison of
documents combined with interview findings to create the body of knowledge for this
exploration. Unlike quantitative research that looks for statistical significance to draw
conclusions, this approach hopes to identify thematic similarities. The application of
grounded theory in the interview coding process required the researcher to move from
observational coding to developing conceptual codes based on aggregated themes
(Bryant, 2019).

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Sequential Mixed Methods
A sequential mixed methods exploration allowed the researcher to capture both
quantitative and qualitative information to study attitudes, behaviors, and implications of
cryptocurrency use. Mixed-methods research is relatively new as a distinct approach
(popularized over the last 30 years) but it allowed the researcher to gather a wider
variety of data for the analysis (Johnson, 2004; Cronholm & Hjalmarsson, 2011;
Creswell, 2017). In sequential mixed-methods applications, the researcher must decide
the order of research approaches. Cronholm and Hjalmarsson (2011) describe a
methodology to guide this process based on three conditions: researchers’ pre-
knowledge of the condition, how well defined the condition is, and if the researchers are
confident they are asking the right questions. In areas of higher uncertainty, the
exploration should begin with a qualitative approach. Based on the researchers’
evaluation of the three conditions (see Table 12), the inquiry began with quantitative
research, followed by qualitative.
Table 12 - Mixed Methods Initial Methodology Selection
Conditions Researcher Confidence
Pre-Knowledge of phenomenon Moderate
Phenomenon condition Somewhat Abstract
Asking right questions Moderate
Begin with...
Qualitative Research Quantitative Research
✓
Adapted from Cronholm and Hjalmarsson (2011)

Bryant (2019) describes the need for researchers to have methodological sensitivity,
effectively recognizing the need to apply different methods, tools, and techniques as the
research process unfolds.
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The Researcher
The researcher has worked professionally for over 25 years in the financial
services, emergency management, and business continuity fields. Master’s degrees in
business administration and security studies, with previous thesis research exploring
the connection between economic, homeland, and national security, provide the
necessary academic background to conduct this detailed research. Further, the
researcher has facilitated over 150 focus groups, dyads, and individual interviews, and
administered large-scale qualitative research projects over the course of his career,
making him well suited to utilize the mixed-methods approach.
Literature Review
The researcher used a defined set of terms to search peer reviewed, general
publication and legal documents for the literature review. Table 13 summarizes the
search terms and phrases used by the researcher when querying the following data
sources:
• Homeland Security Digital Library
• LexusNexus
• LegiScan
• Scopus
• JSTOR
• WorldCat
• ProQuest

Books, book chapters, journal articles, newspapers, government documents,
conference proceedings, and legal summaries from these sources were considered for
their validity to the research.

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Table 13 - Literature Review Search Terms and Phrases
Theme Crypto Currency Economic Security Regulations
Search
Terms
• Cryptographic currency
• Cryptographic harmful
• Cryptographic beneficial
• Digital currency
• Virtual currency
• Digital money
• Economic security
• National economic security
• Personal economic security

• Digital currency
• Digital asset

State and Federal Law Review
Currency exchanges and MSBs are the primary location used to move value
between the fiat and non-fiat economy. However, the value itself (or what it has been
converted into) is subject to other laws and regulations. Both states and the federal
government have proposed and implemented a large number of additional requirements
in the cryptocurrency environment. Sometimes these requirements align, sometimes
not. To understand the broader regulatory environment, the researcher conducted a
qualitative review of state and federal laws utilizing existing summaries from industry
focused websites. On March 20, 2021, the researcher pulled and aggregated
information from marketwatch.com, Bitcoincenternyc.com, and LegiScan.com for 2014–
present. This information was compiled into a new data set designed for discrete
cataloging and comparison of state legislation across states, federal level, and timing.
Search terms used on LegiScan.com include digital currency (207), virtual currency
(127), and crypto currency (18). Searches for digital currency yielded the most results
and included all virtual currency and cryptocurrency results, suggesting legislators used
digital as the most descriptive term for this asset class. Duplicate entries (i.e., same
legislation from multiple years, similar legislation in the House and Senate) were
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removed, narrowing down the data sample to 193 laws, regulations, and guidance
documents. Each was then coded along two metrics:
• Scope (define, tax, property, payment, consumer protection, regulate)
• Intent (supports, limits or neutral to cryptocurrency currency use)

Participants
Study participants were identified and recruited to represent the opinions across
the cryptocurrency-economic security-regulatory problem space. Figure 9 shows
stakeholder groupings and their primary location in the research space.
Figure 9 - Stakeholder Groupings in Research Space

Sample Frame
Similar participants were put into the following stakeholder groups: national
security/law enforcement (NS/LE), regulators/policy makers (R/PM), currency
exchanges/financial institutions (CE/FI) and blockchain analytics (BA). These groups
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were selected based on which groups are using cryptocurrency, those that are
concerned with national or economic security, those developing regulations, and
individuals impacted at the intersection of these topics. Stakeholder groups were also
selected to represent different points in the policy development process (Figure 10).
Figure 10 - Stakeholder Alignment to Public Policy Process

Adapted from Hill & Varone, 2017; Anderson, 2011

Interviewee Recruitment
The researcher used a combination of approaches to identify the initial
interviewee list and then employed a snowball and purposive sampling to solicit
additional participation among underrepresented groups. A non-probability,
accessibility-centered recruitment began by outreaching to personal, academic, and
professional contacts. Following introductory conversations with a convenience sample
to explain the research, determine an appropriate level of expertise and review
stakeholder groups, the researcher invited some individuals to formally participate in the
research. All individuals, participants or not, were also asked to provide introductions to
others who are involved in this area and who would provide relevant insight on the
topics.
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Non-discriminative sampling was intended to decrease some of the inherent bias
in this form of recruitment though by its very nature the sample is biased towards
individuals with whom the researcher is familiar (Etikan et al., 2015). The researcher
also reached out to individuals directly via LinkedIn and industry websites to bolster the
recruitment and target underrepresented stakeholder groups using a purposive
sampling method. Though this method is often characterized as having the potential to
amplify sample bias and the inclusion of non-generalizable opinions, the researcher
took care to seek out individuals who had been on industry roundtables or speaker
panels curated by other industry experts (Sharma, 2017). The combination of
recruitment approaches was successful in meeting the target of 20 total participants.
Interviewee Profile
Twenty individuals, representing four stakeholder groups, completed the survey
and participated in the follow-up interview. Table 14 shows the number of interviews
completed in each sample frame.
Table 14 - Stakeholder Group, Descriptions and Interviewee Count
Stakeholder Group Description Count
National Security / Law
Enforcement (NS/LE)
Individuals responsible for enforcing regulations, pursuing those
who violate laws and studying security impacts.
7
Regulators / Policy
Makers (R/PM)
Individuals developing the regulatory environment and
associated administrative policies that guide the use of
cryptocurrency.
5
Currency Exchange /
Financial Institutions
(CE/FI)
Individuals and organizations navigating existing regulatory
environment while attempting to facilitate legal cryptocurrency
use.
4
Blockchain Analytics
(BA)
Individuals studying the blockchain looking for behavior patterns
and providing insights to clients (i.e., government agencies,
private investors).
4
Total 20

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Table 15 shows stakeholder group, participant ID (used throughout the
research), interviewee name, and organization of the study participants. Nine of the 20
participants asked to have their comments included anonymously due to the nature of
their work or inability to speak as an official of their agency. Comments attributed to
interviewees are done based on participant ID to reflect their primary stakeholder group.
Table 15 - Participant Profile by Stakeholder Group
Stakeholder Group Participant ID Interviewee Organization
NS/LE
NS/LE 1 Anonymous Federal
NS/LE 2 Anonymous Federal
NS/LE 3 Anonymous Federal
NS/LE 4 Ari Baranoff BlueCoat
NS/LE 5 James Daniels BlockTrace
NS/LE 6 Yaya Fanusie Center for New American Security
NS/LE 7 Ed Lowery Exlog
R/PM
R/PM 1 Anonymous Private Sector
R/PM 2 Anonymous Private Sector
R/PM 3 Anonymous Federal
R/PM 4 Neeraj Agrawal Coin Center
R/PM 5 Andrew Eck DiRoma Eck & Co.
CE/FI
CE/FI 1 Anonymous Private Sector
CE/FI 2 Anonymous Private Sector
CE/FI 3 Anonymous Private Sector
CE/FI 4 Marty Stenson Gemini
BA
BA 1 Tate Jaro Google
BA 2 John Jefferies CipherTrace
BA 3 Dmitry Smilyanets Recorded Future
BA 4 Robert Whitaker Blockchain Intelligence Group

The researcher acknowledges that the small interviewee pool obtained via
snowball and purposive sampling methodologies does not allow for statistical inferences
(Sharma, 2017). However, the opinions shared by interviewees do point to several
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common themes that should be considered relevant to explaining the cryptocurrency-
economic security relationship and recommended regulatory environment.
Instruments
Initial instrument was structured to gather quantitative and qualitative information
in a researcher-guided discussion of 90 minutes. A test of the instrument with a
research peer demonstrated that the questions were valid but a significant portion of
time was spent gathering information from fixed response questions rather than
exploring the “why” behind the result. During initial participant recruitment, it also
became clear that respondents would not be able to spend 90 minutes on an interview.
Taken together, the participant experience needed to be reworked while continuing to
gather answers to the central research questions. The goal was to maximize the
interview time to explore “why” and not waste time gathering observational information.
The protocol was reworked to support a sequential mixed-methods methodology
intended to capture respondent opinions (the what) and explore the rationale for those
perspectives (the why), and then re-tested with a new subject, yielding much more
positive results. In following with the sequential mixed-methods decision matrix
described in Table 12, the researcher had moderate pre-knowledge of the condition and
was confident in the questions but the condition (cryptocurrency environment) is
changing rapidly so the research began with quantitative data gathering. An additional
benefit anecdotally shared by participants was that they had time to think about their
responses from the survey and thus provide more robust answers during the follow-up
interview.

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Survey Tool
The first part of the research was a 10-minute attitudinal survey designed to
gather respondent opinions related to the three areas of study. The 21 questions
covered the following topics: the crypto currency market over the last five years and five
years into the future, beneficial and harmful uses of cryptocurrency, and a baseline
definition of economic security, the regulatory environment, and stakeholder groups.
Respondents were given a balance of categorical, Likert, and free comment-based
questions predicated on likely themes sourced from the literature review. Participants
were asked to create a unique identifier to aid response linking between the survey and
interview but to also limit the personally identifiable information exchanged with the
researcher and transcriptionist. Refer to Appendix A for a copy of the survey tool.
Interview Questions
Following the survey, respondents participated in a 50-minute semi-structured
recorded interview that explored the survey responses in greater detail and guided the
completion of two worksheets. Completion of the online survey provided respondents
with an idea of what topics would be discussed in the interview and open-ended
questions were used where possible. The broad questions followed a phenomenological
line of inquiry exploring why participants provided the answers they did and the key
factors contributing to their perspectives. Refer to Appendix B for a copy of the interview
questions and worksheets.
Setting
Participants were encouraged to complete the survey and interview from
comfortable locations free from distractions. Participants completed the survey at a time
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and location of their choosing. Videoconference interviews were typically held in a work
or home location. Participants were located across the nation and in-person interviews
would not have been feasible. In-person meeting restrictions posed by COVID-19 health
protocols may have facilitated wider participation because scheduling and travel were
no longer an issue.
Procedure
The research procedure was designed to support the overall research goal –
obtain the most accurate, candid opinions from subject matter experts in the problem
space. The research was not intended to test the respondent’s knowledge of a subject;
rather, it focused on capturing their opinions on industry direction, relationships among
research elements, and challenges in the regulatory space. The recruitment, survey,
and interview procedure were designed to orient the participant to the research, allay
participation concerns, and ensure a consistent experience.
Recruitment
Participant recruitment was a methodical process involving outreach, follow-up,
introductory discussions, and obtaining commitment to participate. The researcher
developed a communications matrix with sample wording for each recruitment stage
that increased in complexity and detail as candidates interest increased. Initial outreach
with too much information turned off some candidates. Instead, outreach
communications had a broad overview of the research and inquired about their interest
in participating. The follow-up communication had a two-page summary of the research
and offered a phone call to explain. Those who continued to express interest and
demonstrated subject matter expertise were invited to participate in the research.
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During the recruitment phase, the researcher provided potential respondents copies of
the survey and interview questions to allay any fears the respondent had about
participating (several cited concerns about “gotcha” questions intended to surprise and
catch them off guard). The researcher believes sharing the questions ahead of time
helped develop trust with the respondent and posed little, if any, impact on respondent
answers. As described earlier, this group was difficult to recruit and during this process,
the researcher balanced the need for participation with the desired number within each
sample frame. Candidates were asked to speak as a representative of their agencies
but were given the opportunity to speak confidentiality with comments anonymously
attributed to them. Over 250 emails, LinkedIn invitations, and introductions resulted in
55 people expressing some interest in participating in the research. Thirty agreed to
introductory conversations, leading to 20 interviews yielding a 36% participation rate.
Online Survey
Survey links were sent to participants, allowing them to complete their responses
at a time and location suitable to them. The researcher utilized Google Forms to gather
participant responses. Thematically similar questions were shown on the same screen
to mentally focus the participant on particular areas (e.g., define and identify beneficial
uses of cryptocurrency) though nothing prohibited participants from returning to a
previous question and changing their answers. All questions required a response. Upon
completion of the survey, participants sent a note to the researcher that they were
finished and ready to schedule the interview. Refer to Appendix A for a copy of the
survey instrument.

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Interview
The researcher contacted participants to schedule the videoconference interview
and prepared the interview guide following notification of survey completion. The
researcher sent a calendar invitation to the participant containing a Zoom
videoconference link. In preparation for the interview, the researcher imported the
participant’s survey responses into an MS Excel document. Then the responses were
pulled into individual interview sheets that the researcher used to remind the
participants of their initial answers and guide the conversation. The open-ended
questions were selectively worded and arranged to explore the “why” behind the
participants’ answers but were semi-structured in nature, allowing the researcher to
explore unique themes related to the central research questions. Table 16 outlines the
interview experience and describes what actions took place at each step. During the
interview, the researcher took notes related to key participant observations to explore
later in the session. These notes also included analytical insights and themes that could
be included in data analysis. Additionally, after each interview, the researcher noted
areas for improved questioning technique and made adjustments in subsequent
sessions. Participants were provided an audio copy of the interview after the session for
their records.

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Table 16 - Interview Experience
Step Description
Introduction Researcher reviewed interview plan, answered questions about the process,
human-based research requirements and subject anonymity. Recorder then
turned on and subjects were asked to verify they were voluntarily participating
in the research and confirm how their comments would be attributed
Cryptocurrency
Market
Researcher briefly reviewed participants’ survey answers to frame discussion
and explore definitions of beneficial and harmful cryptocurrency. Respondents
were guided through completion of first worksheet evaluating the frequency of
beneficial and harmful cryptocurrency uses.
Economic Security Researcher began discussion exploring participant agreement with national
(macro) and personal (micro) economic security definitions. Respondents were
then guided through completion of second worksheet qualitatively ranking the
impact beneficial and harmful cryptocurrency uses have on national and
personal economic security.
Regulatory
Environment
Researcher reviewed participants’ survey responses to current state of
regulatory environment and then prompted them to expand on areas of
regulatory gaps, perceived impact on economic security, and recommended
areas to address.
Conclusion Researcher thanked interviewees, confirmed how comments would be
attributed, and provided audio recording of interview for their records within 24
hours.

Validity
The process of reviewing and divining meaning from qualitative information
requires interpretation. Researchers unconsciously introduce bias into this process
based on their life experience and hermeneutics. Reasonable steps must be taken to
validate observations using multiple methods and seeking out opposite views if they are
not present to make sure the broader context is understood. The researcher has
conducted over 100 focus groups professionally and drew on those experiences to
employ a qualitative interview technique that remained conversational while limiting
researcher bias. The conversational nature of the interview made it easy for participants
to ask follow-up questions or seek confirmation that their answers were similar to that of
other interviewees. The researcher took great care not to provide any guidance, and
instead turned the question back on the participants and asked them what they thought.
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When clarification of a question was requested, the researcher asked it differently but
within the same theme. Following the first, fifth, and tenth interviews, the researcher
listened to the audio to critically evaluate if the questioning technique remained
unbiased. The researcher also queried the transcriptionist regarding their observations
of the interviews. The transcriptionist felt the researcher remained on script and
employed a consistent technique during the sessions (K. Moon, personal
communication, February 21, 2021).
The researcher triangulated themes across informal conversations, a review of
the literature, survey responses, and formal interviews to validate findings (Leedy &
Ormrod, 2013; Creswell, 2017). Informal interviews with industry experts and a review
of the literature informed the development of the quantitative survey tool. Quantitative
results were validated during the qualitative interview. Research recommendations were
discussed with representatives of the same interviewee stakeholder groups that
participated in the research and compared with emerging themes in periodicals and
news media.
Data Analysis
Data analysis consisted of linking survey responses to qualitative, thematically
coded interview comments. The small sample size does not permit statistically
significant extrapolation to population; rather, the qualitative analysis pulls out
directional themes, observations, and general comparisons between stakeholder
groups.

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Survey and Worksheet Responses
Survey and worksheet responses were processed to facilitate analysis among
categorical, ordinal, and free text responses. Survey questions were converted to
ordinal numbers to permit comparison. Likert scale questions were converted to a 0–4
scale where a “not at all” option was provided. In addition, polarity questions were
converted to a -2 to +2 scale. In this way, general analysis could be performed. Free
responses were identified by stakeholder group and grouped based on theme and
numerically tabulated.
Interview Worksheet Recode
During the first set of interviews, the researcher had challenges accurately
documenting the polarity (i.e., positive or negative) of cryptocurrency’s impact on
economic security so the worksheet was modified to address the issue and initial
responses were recoded. Respondents were having a difficult time providing answers
when asked what the perceived impact beneficial and harmful cryptocurrency uses had
on economic security. Respondents were able to score the magnitude (Not at all →
Extremely on 5-point scale), but they did not have the flexibility to easily designate
polarity. The researcher modified the worksheet following the eighth interviewee to a 5-
point scale from Very Negative  → Very Positive to accurately capture respondent
comments. Subsequent respondents had a much easier time understanding the
worksheet question and completing the task, validating the change. To include
responses from the initial interviewees into the new format, the researcher recoded the
responses to the new format by reviewing notes and listening to intent in the audio
recordings. In “Scale Recoding in Sociological Research,” Abascal et al. (2019)
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acknowledge the need for researchers to periodically recode data and present a
methodological approach for validating the recoding process. Recoding, or data
transformation as it is also known, should not compromise the original data so the
researcher should validate the new results. It is not uncommon for a researcher to
recode to make results easier to interpret and for practical data analysis purposes.
(Tien, 2008). Unfortunately, the sample size of the current research is too small to
permit factorial analysis of the comparative results as described by Abascal et al.
However, using their conceptual framework, the researcher compared the recoded
results with those of the respondents that used the modified scale and they are
qualitatively similar.
Interview Thematic Coding
Interview recordings were transcribed into text documents and then thematically
coded for analysis. Through this process, the researcher employed the grounded theory
approach to data analysis and theory development. Both open and axial coding were
employed as initial themes were identified and interconnections were explored (Leedy &
Ormrod, 2013). The code deck was developed by applying a constant comparison
methodology to the first three transcripts and applying the resulting codes to the
remaining 17 transcripts. Qualitative information transformation, effectively grouping a
body of knowledge into categories, is a standard practice in social science research.
Categorization brings structure to an initially disorganized, chaotic combination of
responses, observations, explanations, and assumptions. The categories and sub-
categories used in the initial deductive process were:

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• Cryptocurrency – outlook, challenges,
• Economic security – national, individual, threat
• Regulations – aligned, misaligned, gap

Constant comparison is an iterative process then applied to inductively observe themes
appearing in the data (Dye et al., 2000). Also referred to as Kaleidoscope methodology,
the researcher performs an initial pass of the data and identifies themes (codes). Then
the same data is approached from a different analytical lens to check for parity. Based
on the initial groupings and secondary analysis, codes are confirmed or altered to better
capture themes. Table 17 shows the resulting code deck.
Table 17 - Code Deck
Cryptocurrency
(36)
Economic Security
(9)
Regulations
(11)
CCGrowthBenf
CCGrowthHarm
CCMktAdoption
CCMktOutlook
CCMktSizeConfidence
CCMktSizeSplit
CCMktL5
CCMktN5_Education
CCMktN5_FinInnovation
CCMktN5_GovReg
CCMktN5_InstitutAdopt
CCMktN5_mainstream
CCMktN5_Other
CCDefine_BenfHarm
CCAttrib_Decentralized
CCAttrib_Efficient
CCAttrib_SecurePriv
CCAttrib_Transparent
CCBenf_AccFinSvs
CCBenf_DecCost
CCBenf_HedgeInstab
CCBenf_Investment
CCBenf_SimpleTrxn
CCHarm_AvoidLaw
CCHarm_ConsumerPro
CCHarm_cybercrime
CCHarm_DestabGov
CCHarm_EnvImp
CCHarm_Fraud
CCHarm_FundCrim
CCHarm_IllegPurc
CCHarm_MktVolatility
CCHarm_MonLndr
CCHarm_Terror

ESDef_Both
ESDef_IndES
ESDef_NatES
ESFinInnov_Neg
ESFinInnov_Neu
ESFinInnov_Pos
ESIndES_BenfHarm
ESNatES_BenfHarm
ESTrust

Gov_PubPrivPart
GovAdoption
GovStrategyEngage
RegChange_ApplyExisting
RegChange_Consistency
RegChange_DefStatus
RegChange_MoreKnow
RegChange_Separate
RegChange_SuppInnov
RegStateFed

The remaining interview transcripts were coded using the above rubric as described in
multiple qualitative methodological sources (Creswell, 2013; Thomas, 2014).
Coding Process
A combination of machine-assisted and manual coding was used to tag interview
comments. Transcripts were loaded into ATLAS.ti 8 and auto-coded using the code-
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deck. With any machine-assisted coding, there are going to be errors. The researcher
used auto coding to find passages related to the analysis then reviewed the context of
participants’ comments and re-coded as necessary to develop a more accurate data
set. The auto-code analysis was done at the sentence level. If a code received fewer
than five records (across documents), it was eliminated.
Survey-Interview Link
Survey questions and associated free responses were linked to interview
responses to create targeted datasets around the three research areas and two
research questions. Each datapoint and observation in the individual datasets was
attributed to a primary stakeholder group to allow comparisons among groups.
Risk Calculation
Determining the risk of a natural hazard is commonly calculated by multiplying
three factors: the frequency of an incident taking place, the predicted severity of the
incident when it occurs, and the overall population that will be affected by the incident.
This calculation can be similarly adapted and applied to this context. Throughout this
examination, participants have been asked questions relating to the frequency of
cryptocurrency uses, how negative or positive the use is, and the use’s impact on
economic security. Bringing those three elements together and putting them into an
evaluation framework allows us to better understand the likely threat or opportunity they
pose to economic security. Risk can be positive or negative. The word has the
pejorative connotation of negativity, and that risk should be minimized. As the research
shows, there is negative risk (threat) and positive risk (opportunity). Both should be
considered when looking at the overall impact of cryptocurrency on economic security.
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Table 18 shows the application of the risk formula and what questions were asked in the
survey and interview to generate the data. Numerical survey responses were applied to
the risk formula and risk profiles were created for each beneficial and harmful use of
cryptocurrency. Risk scores were broken out for each stakeholder group to allow for a
qualitative comparison of attitudes.
Table 18 - Cryptocurrency Qualitative Risk Calculation Formula
Risk = Frequency * Severity * Impact
Opportunity or
Threat of
Cryptocurrency
Use
For the beneficial
and harmful uses
you identified, how
often are these uses
employed?
How
beneficial/harmful
are the following
cryptocurrency
uses?
What level of impact
do you think the
beneficial/ harmful
use has on national/
individual economic
security?

Conclusion
Employing this methodology enabled the researcher to gather a rich
understanding of the existing literature and regulatory environment and combine it with
stakeholder opinions and behavioral explanations. These findings describe where the
cryptocurrency market is going, current and potential future impacts on economic
security, and how the regulatory environment can adapt to contain harmful uses while
encouraging beneficial ones.

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Chapter 4: Findings
Twenty stakeholders shared their opinions on cryptocurrency, economic security,
and the related regulatory environment. Cryptocurrency is used in a wide range of
beneficial and harmful applications but current market activity centers around
institutional financers making large investments but they are not translating into
mainstream adoption. National and individual economic security are impacted differently
by cryptocurrency applications that leave respondents with a slightly negative overall
outlook but when factoring in market size, benefits significantly outpace harms. For
those benefits to be evenly distributed and to encourage essential innovation, the
regulatory environment must adapt existing policies, develop new frameworks, and
constantly evaluate the efficacy of these positions if the United States is going to
maintain economic supremacy. This section explores each of these points in greater
detail and helps to focus the overall discussion of the cryptocurrency – economic
security relationship and the regulatory environment needed to support innovation and
consumer protection.
Cryptocurrency
The significant changes in the cryptocurrency market over the last five years are
likely to be matched by a similar transformation in the next five years, though the nature
of those changes is likely to differ. In the last five years, it was the ascendance and
recognition of cryptocurrency as a revolution in the financial market. The next five years
will focus on adoption and movement into the financial mainstream but there are
significant hurdles to that vision. Adoption will rely on increased education, consistent
regulation, and broader financial market adoption. The following analysis captures
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stakeholder opinions on the market, future adoption, and cryptocurrency attributes and
uses that will drive this change.
Market
All respondents felt the market had undergone significant change in last five
years, citing mainstream awareness, the ICO craze, improved functionality, and
increased legitimacy as the primary drivers. As new uses appear, the adoption curve
expands and the industry remains in the early adoption stage as nascent technologies
and use cases meet customer demand.
Amidst the positivity, an air of uncertainty continues. There remain significant
impediments to cryptocurrency use, such as the current lack of practical uses, the
continued ease criminals have exploiting uninformed investors, increased trackability
(i.e., loss of privacy), and ongoing market volatility driven by unstable asset value
(NS/LE 6; R/PM 4; BA 4). The spectacular 2017 run up in crypto valuation and the
subsequent crash in 2018, combined with an initial interest associated with bad actors,
stigmatized cryptocurrencies as “semi-scammy” (CE/FI 4; BA 1). The same utility
derived for legitimate use also supports the activities of wrongdoers (NS/LE 1). Many
people see the conceptual benefit of cryptocurrency use but for that vision to
materialize, security will need to improve, efficiencies demonstrated, and illicit use
pushed out (R/PM 5; CE/FI 1). NS/LE 4 agrees and sees a steady migration to token
currencies as they become widely recognized as reliable and stable. Institutional
adoption has increased market size, and as one BA stakeholder observed, the criminal
uses are not likely increasing at the same rate. Effectively, the percent of the overall
cryptocurrency market associated with criminal activity is decreasing (BA 3). BA 1
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believes there is a migration underway – one that is moving the market away from
illegal uses, but not towards providing utility; rather, it is moving towards speculation
and turning a profit on realized gains. Bitcoin demand is then driven by speculation
because there is no real utility, creating a “bubble” scenario. This pushes mass
acceptance on the adoption curve further into the future. Even with the uncertainty in
mind, respondents anticipate significant cryptocurrency market change in the next five
years (Figure 11).
Figure 11 - Cryptocurrency Market Change over Next Five Years

Question: In the next five years, how do you see the cryptocurrency
market changing?

Naturally, currency exchanges and financial institutions are the most bullish, but
all stakeholders see big changes ahead. Respondents cited increased consumer
education, government regulation, and institutional adoption leading to expanded
mainstream cryptocurrency use as the primary drivers. Though, as we discuss these
drivers in greater detail, it is important not to consider the cryptocurrency market as one
homogenous user block. Each of the drivers will resonate differently among user
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segments and lead to different impacts in the increasingly decentralized cryptocurrency
ecosystem (R/PM 1).
Size. Looking towards the future, it is only natural to wonder how much larger the
market will get and if this is sustained growth or a speculative bubble. The
cryptocurrency market (measured by market capitalization) continues to fluctuate
dramatically, driven primarily by the significant increase in the dominant token bitcoin
but the overall trend is upwards. Asset managers, macro investors, and companies are
now adding bitcoin to their portfolios, seeing it as an emerging opportunity and store of
value (Treece, 2021). There is a general sense for market size as outlined in the
literature review but there is low confidence in the reliability of the estimate and how
market size should be measured. Respondents were asked if there is a reliable
estimate of cryptocurrency market size (Table 19), 60 percent said no. While this is a
majority, it was not a clear affirmation among the entire group. Those who felt there was
a reliable estimate often cited reports from blockchain analytics firms – the same firms
of which the “no” respondents were skeptical. As stated by NS/LE 2, and shared by
others, “the scope of how big...I’m not even sure how to answer that. I couldn’t even
answer it in money or, I don’t know if we’re talking billions or trillions.”
Table 19 - Reliable Estimate of Cryptocurrency Market Size
Stakeholder Group Yes No
All 40% 60%
NS/LE 10% 25%
R/PM 10% 15%
CE/FI 10% 10%
BA 10% 10%
Question: Is there a reliable estimate of market size?
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Respondents were then asked what an appropriate metric to measure market
size would be. Here too there was no definitive answer. The most common cited were
market capitalization (what much of the literature uses), trading volume, and number of
unique users. Each does present a valid way to look at the cryptocurrency market, but
they also have drawbacks – mostly through overestimation. Market capitalization may
be overstated because of volatility, trading volume focuses primarily on hosted wallets,
and users are overstated because individuals can have multiple accounts (or in the
case of criminals, hundreds) (NS/LE 3). One quarter of respondents said they do not
know what metric to use, the majority of which are NS/LE stakeholders (CE/FI 1; NS/LE
2; NS/LE 4; NS/LE 6; NS/LE 7). Having a reliable estimate of market size allows for a
more critical evaluation of the scale of beneficial and harmful uses.
Growth. Each new application of cryptocurrency and blockchain technology
generates yet more novel ways for implementation but mainstream adoption will remain
elusive until there is improved education, government regulation, and broader
institutional adoption. Some investors may think they know where the industry is on the
technology adoption curve by drawing on historical examples, but it is difficult to make
that determination when you are in it and do not have the benefit of historical
perspective.
In the last few years, there has been an evolutionary change in the payment
space using these instruments for transactions, but that is not enough to generate
widespread adoption (R/PM 2). Transactions in the current financial system are
worthwhile because people can exchange money in a safe and secure manner – that is
the benchmark cryptocurrency needs to meet (BA 1). A general litmus test for
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cryptocurrency functionality is the ability to buy a $3 cup of coffee. If the transaction is
on par or easier to do with cryptocurrency than current methods, then there is a
practical use case (R/PM 4). Cryptocurrency use has not taken off as a mainstream
payment instrument because the industry is still struggling with developing customer
trust and overcoming the stickiness of the existing payment system (R/PM 2). If
someone needs cash for a non-electronic transaction, they can go to an ATM machine
and make the required withdrawal. The same cannot be said for cryptocurrency (though
there is one in the Safeway near the researcher’s house).
Token volatility (i.e., rapid change in value) makes retailers reluctant to accept
cryptocurrency. Additionally, they must invest in updating point of sale technology – a
step they are unlikely to take until they know there is demand for this payment type.
Right now, it is a novelty but there are some signs of integration into the mainstream
(R/PM 2; R/PM 3). That $3 coffee, paid for in bitcoin, could become a $15 cup if bitcoin
quickly increased in value, making a consumer reluctant to spend. That same cup could
also be $1 if bitcoin dropped in value, making the retailer reluctant to accept it for
payment. Use for the purchase of a car (in March 2021, Tesla announced customers
can purchase a vehicle with cryptocurrency) or a home is fraught with even greater
potential for loss. While respondents see mainstream adoption as a key driver, current
tokens do not support that environment (NS/LE 6). A NS/LE respondent suggested that
to accelerate the use of cryptocurrency, employers could pay their workers in crypto
rather than fiat currency to drive use. Though they also acknowledged it is an unlikely
use case because “I don’t know that people would want to be paid a thousand dollars
today and then tomorrow it’s eight hundred” (NS/LE 3). As cryptocurrency expands in
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the institutional space, more uses will be developed. That expansion will affect more
people, some of whom will not even realize they are using cryptocurrency (BA 3).
Finally, and not discussed in detail here, there is the issue with transaction
reconciliation. Currently, computational verification (mining) is required, which is time
and resource intensive. A faster (consensus-based) protocol needs to be adopted
(Daniel Bout, personal communication, May 22, 2021).
Percent Beneficial or Harmful. Dispelling preconceived notions about the
primary use of cryptocurrency is important to ensure regulators are not creating an
overly restrictive environment, yet there is no definitive summary of use cases and their
percent of the market from which to make policy judgements. Early adopters of
cryptocurrency sought it out for the privacy it provided when conducting illegal
transactions, but the market has transitioned significantly since that time. When asked
to identify what percent of the market constituted beneficial and harmful uses of
cryptocurrency, the majority put beneficial at more than 90 percent. However, many
interviewees acknowledged they were not very confident in their estimate and there was
no central authority they could rely on (CE/FI 1; NS/LE 4; NS/LE 7; R/PM 3). NS/LE 5
was particularly candid, stating, “I’m not confident at all. I would have preferred to
answer I have no clue.” Though respondents may not have been able to provide a fact-
based opinion on market use, many felt the best data on cryptocurrency use comes
from blockchain analytics companies (CE/FI 2, R/PM 5). The “big three” include
Chainalysis, CipherTrace, and Elliptic but more continue to emerge (CE/FI 3; R/PM 1).
Each company is applying its own proprietary methodology to evaluate the different
token chains and make determinations about what is beneficial and what is harmful.
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Here too, the analysis cannot be validated because of trade secrets. Some accounts
are affiliated with dark web marketplaces – a clear connection to illegal activity, but most
are not (NS/LE 6). Analyzing the blockchain does not confirm the specific use – only
projections of likely use based on previous transactions into and out of the numbered
account. In effect, the blockchain analysis companies are using behavioral analysis to
predict the percentage used for beneficial and harmful purposes. One NS/LE
stakeholder confirmed the general approach but was skeptical of the accuracy, stating:
I also see those same transactions. I’m assuming that they’re [analytics
companies], looking at a transfer from one unknown entity to another as a legal,
you know, or for legal use transfer when I know from my own investigation that
it’s, it’s for an illegal purpose. I think that there’s a lot more that gets just by
default placed into legal transactions than actually is. (NS/LE 3)

It is difficult to say if specific transactions can be directly tied to illicit activity and there
may be analytical obstacles but when considering the overall volume at major
exchanges and their regulatory reporting compliance it appears to be a tiny proportion
of the total cryptocurrency market (CE/FI 1; CE/FI 3; BA 1; BA 2).
Interestingly, several respondents made the distinction between harmful,
beneficial, and market trading. In this way, they define harmful uses as those that
support illegal activities, beneficial as providing transactional value, and market trading
is just speculation – neither good nor bad (R/PM 4). With this added category, they
divide the market as “50-percent beneficial, 48 being neutral, so kind of the speculation,
and then 2-percent harmful” (CE/FI 2). Another NS/LE stakeholder believes that a
significant portion of the market and trading volume falls into this neutral category,
particularly because there is not a large market of regular transactions (i.e., buy that cup
of coffee) taking place (NS/LE 3). NS/LE 1 observed that individuals who want to exploit
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cryptocurrency for illegal use probably already have and there is not likely to be a new
surge of illegal users; they are already well aware of the technology. Following this
logic, new users are likely to get in for beneficial (or speculative purposes). While the
researcher is uncertain of methodology, for the purposes of this study, a preponderance
of evidence from the analytics companies strongly suggests the overwhelming majority
of transactions are not harmful.
Cryptocurrency Uses
A primary goal of the research was to identify beneficial and harmful uses of
cryptocurrency and study their interactions with economic security. The exploration into
cryptocurrency began by asking respondents to define beneficial and harmful uses of
cryptocurrency and then identify their top three in each category. Table 20 summarizes
responses.
Table 20 - Thematic Summaries of Beneficial and Harmful Cryptocurrency Uses
Use Themes
Beneficial
• Societal benefit
• Peer-to-peer
• Global reach
• Efficient
• Inclusion
Harmful
• Illicit use
• Harm society
• Facilitate criminal acts
• Avoid laws
Question: How do you define a beneficial/harmful use
of cryptocurrency?

Participants were asked what factors they considered when making their
evaluation of beneficial and harmful use to tease out broader definitional themes. There
are clearly uses intended to facilitate illegal actions but the categorization of beneficial
or harmful often was determined by the user’s perspective. Beneficial uses of
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cryptocurrency balance privacy, consumer protection, and accountability (BA 3, CE/FI
1). They improve existing financial transactions by decreasing costs, increasing
simplicity, improving efficiency, and access to services within the existing regulatory
framework (BA 2; CE/FI 2; CE/FI 3; NS/LE 1; NS/LE 3). Harmful uses center around
avoidance of regulation and exploitation of others (CE/FI 2; NS/LE 5; R/PM 4). Some
respondents felt defining benefit and harm depended on who is using cryptocurrency
and for what purpose. A benefit is something “that’s good for society, good for
individuals, but that’s very subjective. What’s good for one group of people is going to
be different for another group of people” (NS/LE 2). It is difficult to give a specific
answer, because of the diverse nature of use cases and subjectivity of benefit and
harm, though some parameters would be helpful to frame the discussion and future
regulation (CE/FI 4; R/PM 1). The researcher observed respondents conflating
attributes with positive uses. Cryptocurrency uses are separate from attributes because
they are agnostic of intention, which is reflected in the interviewee comments. In
response, it was added as a third category to the analysis.
Attributes. Each of the cryptocurrency attributes in Table 21 describes
technological characteristics. Whether employed for positive or negative intent is
predicated on the programmer.
Table 21 - Top Cryptocurrency Attributes
Attribute Themes
Efficient quick, easy, cross-border, programmable applications
Secure private, permanent
Transparent documentation, ledger, supply chain
Decentralized borderless, digital finance, permissionless
Question: What are the three most beneficial cryptocurrency uses?

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Efficient. The removal of unnecessary intermediaries and steps required to
move value from one individual to another. Transactions take less time to reconcile
(faster), do not require permissions, can be denominated at less than one cent, and can
be done globally (i.e., cross-border) without currency conversion (CE/FI 1; CE/FI 4;
NS/LE 1; NS/LE 5; NS/LE 6). Cryptocurrency allows individuals to securely and
privately hold their digital value, initiate irrevocable transfers, and keep their transaction
history private (BA 1; NS/LE 5; NS/LE 6).
Secure. Helps owner avoid government control of personal value and potential
seizure. Additionally, transactions can take place without interference (CE/FI 4). While
these concerns may not be an issue in the United States, they are in many other
countries (CE/FI 2; R/PM 4). Permanence can also have drawbacks, such as the
removal of market value because it is locked in private keys that have been lost (BA 4).
Transparent. The blockchain publicly documents every transaction and
distributes a copy of the transaction ledger creating a chain of custody that anyone can
view and study (CE/FI 4; NS/LE 7; R/PM 3). This availability also allows for
transparency and transaction validation by anyone who wants to study a ledger,
permitting logistical tracking and supply chain verification (BA 1; R/PM 3).
Decentralized. Removing intermediaries decentralizes transactions and
increases flexibility and simplicity but addresses the trust gap through technology (CE/FI
1, CE/FI 4; NS/LE 4; R/PM 1). It also decreases government interference and
involvement in transactions between individuals (NS/LE 7). Decentralization also
creates a redundant and resilient system less susceptible to attacks and cyber threats
(R/PM).
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Beneficial Uses. Respondents identified hedge against instability, decreased
cost, access to financial services, and transaction flexibility as the most beneficial uses
of cryptocurrency that contribute to financial freedom and opportunity. Table 22
identifies themes that fall into these categories.
Table 22 - Most Frequently Cited Beneficial Cryptocurrency Uses
Use Themes
Hedge Against
Instability
store of value, currency devaluation, government
instability, outside traditional finance
Decreased Cost transaction cost, inexpensive value transfer
Access to Financial
Services
financial inclusion, access to banking, open to anyone
Transaction Flexibility
different payment method, flexibility, purchase goods,
micropayments, fungible
Question: What are the three most beneficial cryptocurrency uses?

Hedge Against Instability. Government central banks adjust the money supply
and interest rates to maintain system stability, encourage purchasing or saving, and
respond to economic shocks. Instability can come from a variety of sources including
government mismanagement of currency valuation (e.g., Venezuela hyperinflation) or
national monetary policies (e.g., the United States creating trillions of dollars of value for
COVID-19 stimulus and infrastructure spending). While the cause may be different, the
consequence is the same – devaluing existing currency in circulation. Institutional
investors, and some retail, are looking for a more secure way to store their currency and
maintain value. Many people “are afraid of the Fed, you know, printing more money and
devaluing the USD, which some people argue that it’s already showing itself in the stock
market” (CE/FI 2). Many individuals feel the impact of these devaluations when they pay
for consumer staples (e.g., gas, food, rent). Cryptocurrency provides a way for
individuals to store their savings and preserve the value (CE/FI 1). On a much more
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significant scale, corporations with billions of dollars on a balance sheet see significant
changes in value, making cryptocurrency an attractive alternate investment.
No one can manipulate the supply of Bitcoin...you just have a kind of insurance
policy on the whole financial system, you know, going awry, and I think a lot of
people are starting to use Bitcoin as this digital gold kind of alternative, so, and
seeing it as insurance against government instability. (CE/FI 4)

CE/FI 3 is not sure if cryptocurrency will be an effective store of value in the long term
but at the present time feels:
it helps to have an additional store of value you can be confident in.” R/PM 4
sees the ability to move fiat value into cryptocurrency as a check against
‘reckless government spending and it puts the pressure on our policymakers to
rein in the inflation or reckless spending. It’s existing as a check I think is a good
thing in the world.

If people do not trust the financial system, are living under authoritarian regimes,
are refugees fleeing, cryptocurrency provides a way for them to take their savings with
them (NS/LE 1). “[Cryptocurrency] is being used in places like Lebanon and things like
that where the currency is more overtly collapsing. Nigeria as well, are two particular
examples” (R/PM 4). NS/LE 5 cited a recent example, “Myanmar just had a potential
government coup where the military came in, so who knows what’s going to happen
with their government infrastructure. So that’s where it hedges against government
instability.” BA 4 agrees saying:
people are leaving fiat currencies for cryptocurrencies to invest, for investment
and a hedge against devaluation. We saw that in Venezuela, we saw it in
Argentina in the early days of Bitcoin, so I think it’s happening much more
regularly today given some of the things we see going on like, like the massive
amount of COVID relief we’re having to pump in the economy. People are getting
out of the dollar and trying to save value inside of cryptocurrency.

As a counterpoint to using cryptocurrency as an instability hedge, BA 1 points out, “It’s
hard to imagine a government that’s more unstable than, than like the cryptocurrency
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market.” NS/LE 6 believes that the hedge against instability use case is talked about
more than it is actually used for that purpose. R/PM 2 said “we’re seeing it more as an
investment and not really people running away from, you know, other government
assets.” R/PM 4 also differentiated between present and future risk of runaway inflation
believing the purchase of bitcoin as a hedge is “more of a check against a potential
future problem than, than any type of like immediate risk to the U.S.”
Decreased Cost. Electronic transactions of fiat value are often a multi-step
process involving point of sale, processers, transmitters, and multiple financial
institutions. Use of cryptocurrency decreases some of these costs. Each organization
adds on a small fee to cover its expenses and generate profit. When conducting
international exchanges, there are additional expenses. NS/LE 5 observes:
There isn’t a significant cost associated when you’re in the currency [exchanging
cryptocurrency] itself, versus if you’re going to use a credit card transaction. With
credit cards you’re talking 2–5% charge on that transaction. Whereas, with crypto
you’re not going to have that cost associated with it because the underlying
mechanism of how the transaction occurs is effectively all automated.

NS/LE3 uses a different example to make a similar point:
You see gas stations offer a discount if you pay cash versus credit. So I think the
merchants would want to receive in crypto and they would incentivize the users
to do so. And then if a user already has crypto on their phone then I would see
flipflopping with credit cards.

Exchanging value directly (peer-to-peer) eliminates those fees. Anyone who is regularly
using cryptocurrencies is benefitting from decreased costs to transfer value (BA 3;
CE/FI 1). The largest impediment to widespread DeFi is scalability challenges that
currently manifest in additional cost (CE/FI 4). The ability to process transactions is a
function of computational reconciliation (mining) capacity. As transaction volume
increases and capacity works to catch up, it costs more to have transactions processed.
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While decreased costs are one of the benefits frequently cited, the cost differential is not
yet a significant driver for use nor is it clear that the decrease in transaction costs will be
passed along to the customer (the perceived benefit) rather than bolstering the profit
margin of intermediaries that may still be part of the transaction process (actual benefit).
Access to Financial Services. A portion of the population cannot access
financial services (or cannot access with reasonable terms) because of exclusionary
banking practices, controlling governments, societal norms, or being perceived as high
risk. Cryptocurrency provides equal access to everyone. “Most of us in the U.S. take
[financial system access] for granted and it really should be more of a fundamental right.
There are billions of people in the world who just don’t have access, so they use cash”
(CE/FI 1). Banks exclude some people as part of their de-risking model, which leaves
gaps in service. Cryptocurrency removes control from the banks that challenges their
business model (CE/FI 2). R/PM 4 makes the case that some groups operating in legal
grey areas, such as sex workers and recreational marijuana producers, are at increased
risk of violence because they are forced to operate using cash. One regulator said, “if
cryptocurrencies could be used as an instrument for transactions, I think there’s really
great benefit in terms of reducing barriers to access for consumers who maybe, don’t
have bank accounts or have access to credit card lines or debit card lines” (R/PM 2).
The technical complexity of purchasing cryptocurrency creates certain hurdles while
removing others (NS/LE 5). Access to financial services presumes the individual has the
knowledge and technical savvy to understand the new products and the possibility for
loss. CE/FI 3 expresses some caution with unfettered financial system access saying:
I’m torn because on the one hand it seems like a positive if people are able to
access more financial services, but on the other hand what about consumer
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protection or investor protection, that kind of thing. I could see [cryptocurrency]
having a destabilizing effect if people were suddenly able to rush into a new form
of risky investment.

In the United States, access to financial services is not a widespread use case, but it is
gaining traction (BA 4). Internationally, it may be more challenging. NS/LE 1 used a
hypothetical example to demonstrate how a company may need assistance in web
design but cannot access groups of individuals with the skills because there is no way
to pay them. There may not be a local bank, or the financial system is unreliable;
cryptocurrency bypasses that hurdle. In a related example, NS/LE 5 states:
there are countries still that don’t allow women to open bank accounts, so that
means that they can’t operate businesses. Well, how does someone that wants
to do that in a country that doesn’t allow them to do that operate a legal
business? Well, crypto opens up that space.

Transaction Flexibility. Each of the previous benefits relies on the simplicity of
transactions across the cryptocurrency sphere and interoperability among the different
currencies. The ability to conduct transactions from anywhere a cellular signal exists
gives 24/7 access to the financial system. BA 4 describes a situation benefitting
individuals who do not have physical access to banks but do have a cellular connection:
If I’m sitting in Central Africa where I don’t have basic contact with a bank, but I
might have a digital device where I can at least reach a cell tower and get data, I
can engage in this market if I want to, I can engage in a unit of value that I can
then trade to the guy next to me. I can be involved where I’m holding value,
trading value, and sometimes even making value.

This ease of conducting transactions as a routine occurrence allows individuals
anywhere in the world with some expertise to contribute to the global economy – that’s
a significant benefit (BA 4; NS/LE 1). International transactions are often conducted via
wire transfer at great cost and administrative hurdles. “Once you’ve sent a wire transfer
and then once you’ve sent a Bitcoin transaction, you never want to send a wire transfer
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again. It’s way better, it’s just, and so I know at least in the cryptocurrency industry this
is being used a lot for people to send money around very quickly” (R/PM 4).
Cryptocurrency transactions are another tool for individuals to process payments and
having multiple tools is a positive for buyers and sellers alike (CE/FI 2).
Concerns remain that individuals are using cryptocurrency for harmful uses but,
as R/PM 3 observes, “more than anything else, and rather than trying to buy drugs or
guns, it seems like the majority are just trying to make money.” Use of cryptocurrency
and the financial opportunities it creates by decreasing cost and access barriers are
empowering. A currency platform developer said it this way:
the people who have the hardest time accessing the financial system are, from a
bank’s perspective, high risk individuals and therefore the banks will either not
give them access or they’ll just charge them higher and higher fees. This kind of
backwards. People who have less, have to pay the most to access the financial
system. If there are ways, and I think there are, to use the blockchain technology
and minimize that, it’s so enabling. (CE/FI 1)

Harmful Uses. Respondents identified money laundering, illegal purchases,
avoiding laws, funding terrorism, and fraud as the most harmful uses of cryptocurrency.
Table 23 summarizes respondent themes associated with these uses.
Table 23 - Most Frequently Cited Harmful Cryptocurrency Uses
Use Themes
Money Laundering obfuscate income source, illegal activity proceeds
Illegal Purchases dark web, drugs, exploitative media, human trafficking
Avoiding Laws tax law, anti-money laundering, sanctions
Funding Terrorism funding terrorist activities, purchase materials
Fraud investment scams
Question: What are the three most harmful cryptocurrency uses?

Many of the illegal activities taking place are doing so without cryptocurrency;
however, cryptocurrency just makes them easier to carry out and it expected that bad
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actors are going to exploit the technology (NS/LE 6). There is “tremendous usage for
crypto and digital currencies in the underworld and in facilitating crime and fraud and all
sorts of cybersecurity issues” (NS/LE 4).
Money Laundering. Criminals use money laundering to conceal the source, use,
and destination of value associated with illegal activity. Using an exchange (typically
unlicensed or in a country with lax laws) willing to transition cryptocurrency value to fiat
funds without knowledge of value source supports this illegal activity (CE/FI 3). “In most
of what we’ve witnessed from the standpoint of money laundering and illicit group
finance, the activity relies on [unlicensed] criminal exchanges first and foremost” (NS/LE
1). Money laundering continues to take place in the current cash financial system and,
in some ways, is just as hard to trace. NS/LE 5 believes the use of cryptocurrency for
money laundering is at a moderate level and likely to increase because of transaction
anonymity and fewer people are involved in the “cleaning” process. R/PM 1 sees the
opposite happening:
There’s this popular belief held by very smart and very sophisticated people that
crypto is primarily used for money laundering, and it’s just blatantly factually
inaccurate. The percentage of money laundering that is done through crypto is
vanishingly small, much, much smaller in both an aggregate dollar basis, as well
as a percentage basis, than occurs in cash.

Illegal Purchases. Individuals use cryptocurrency to limit tracking of dark web
economic activity including purchasing drugs, weapons, exploitative media, and
services for hire. Drug purchases are “far and away the most common one” but
weapons proliferation and the ability to purchase weapons systems components is also
an issue (CE/FI 3; R/PM 4; R/PM 5). However, blockchain forensics has helped
decrease the use of cryptocurrency for illegal market purchases (BA 4; NS/LE 4). BA 2
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describes a case where his firm has seen an increase in the purchase of exploitative
media (children, human trafficking, etc.) but by tracking usage via blockchain analytics:
It used to be more of a regular activity but now it’s a little less due to a lot of
companies like ours working with the Anti-Human Trafficking Intelligence
Initiative to actually share openly amongst the community these Bitcoin
addresses that are used to trade exploitative material and human trafficking.

Criminal use of payments systems is more static than they are made out to be. Cash is
still the most prevalent; cryptocurrency just provides another way of buying (NS/LE 1).
Avoiding Laws. KYC, AML, Travel Rule, securities regulations and tax codes
are some of the statutes and laws designed to reduce fraud in the fiat banking system
by requiring MSBs to know the source of the value they custody and transmit. Use of
cryptocurrency, and its peer-to-peer transaction capabilities, combined with unhosted
wallets, bypasses financial intermediaries and is one of the reasons people seek it out
(NS/LE 3; R/PM 3). Financial intermediaries are responsible for reporting value
transfers in accordance with statutes and laws. Peer-to-peer transactions help to
bypass reporting and criminals exploit this by advertising on the dark web that they are
willing to exchange cryptocurrency for cash to avoid detection and banking laws. NS/LE
5 describes a platform specifically set up to:
allow those that had crypto to exchange for cash. They would show up at a
coffee shop and one would slide over the cash, they would do the exchange of
the crypto itself. There’s a lot more legitimate ways to do that. I’d go down to my
bank, deposit it into my bank account and then transfer that money over to my,
cryptocurrency exchange account.

Anonymized cryptocurrencies like Monero, Dash, and ZCoin are designed to be
encrypted when the transaction is posted to the blockchain so they “were created
specifically to avoid the tracing capability” (CE/FI 4; NS/LE 5).
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Funding Terrorism. Funding terrorism is often identified as a use of
cryptocurrency and examples do exist; however, frequently saying it happens, does not
mean it happens frequently. This rhetoric stokes fears and creates misperceptions. The
use of cryptocurrency to fund terrorism is not happening at scale because terrorists
want to avoid the potential for detection when the value is moved between the virtual
and fiat financial systems (BA 2; NS/LE 7). Blockchain analysts and Currency Exchange
respondents share similar perspectives. “I think it’s the main fear, that terrorists will be
funded through Bitcoins or other cryptocurrency but there’s not that much terrorism that
we can see right now” (BA 3). “I think the view, certainly from U.S. regulators, is that
[the use of cryptocurrency by terrorists] is high, but I haven’t seen statistics that show
that. There certainly are examples and so, if there’s one example, then people fear that
it’s like the mechanism of choice for a terrorist” (CE/FI 1).
Fraud. Cryptocurrency fraud is primary related to the release of new tokens,
attracting investors, getting the value to increase, and then pulling the funds out (known
as a “rug pull”) leaving other investors with a worthless investment. Misinformation
abounds and there are few protections, so individuals are experimenting with a high
volatility commodity and getting ripped off but have little recourse (BA 1; NS/LE 3; R/PM
3). “Fraud in cyber is huge and it’s growing, it’s trillions of dollars worldwide” (BA 3).
“There’s this whole network of low-quality cryptocurrencies out there, and there’s a lot of
people just trading them back and forth because of the game that is trading” (R/PM 4).
It’s a new form of Ponzi scheme; “the later you’re in, you’re generating the funds for
everybody else because you’re driving the price up. I view it as harmful because it’s like
this fancy thing that people don’t really understand and there’s not really consumer
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protections” (BA 1). “I am concerned that so much of the value is speculation, which is
like high-end gambling, but then our financial system [laughter] has a lot of that built into
the, the market anyway” (NS/LE 6).
Adoption
Mainstream adoption is predicated on a change in behavior, and behavior
change comes from an increased understanding of the new technology’s capabilities
and simplicity of use. For cryptocurrency to go mainstream, there needs to be utility for
individuals and be as simple or better than what they currently use for transactions –
cash or swipe of a credit card. ‘It’s no different than what the Diners Club did in the 50s
when they came out with their credit card, of, ‘Oh, hey, nobody’s ever going to use a
piece of plastic to pay for something.’ But then they found it was an easier way to pay
and adoption increased” (NS/LE 5). The original vision behind blockchain and bitcoin
was to solve the double-spending issue without requiring a middleman. This is the
innovation internet money provides – (almost) frictionless transfer of value for “things
like bill payment, paying college tuition, books for my kids. I think payments both at a
retail level and at a settlement level will be, will be critical and be big drivers” (BA 2).
Establishing trust with a new process takes time, often starting small and building
as comfort with the new way is developed:
eBay didn’t start out selling cars and boats, it started with relatively trivial items.
Now people without hesitation will, will buy a car on eBay or expensive jewelry,
expensive watches, whatever. So bitcoin and, and other cryptocurrencies, need
to do the same thing. Allow people to pay five dollars, to pay fifty dollars, to pay a
hundred dollars until they get to the point where there’s a regular, expected, you
know, payment and transaction that is uninhibited by some kind of strange,
immature financial system or payment system. (NS/LE 1)

I think some of these benefits have gone from being theoretical in the early days
of Bitcoin to more real now as there’s more sort of on and offramps into
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cryptocurrency around the world, places that these things can be cashed out.
(CE/FI 3)

Adoption across customer segments will be inconsistent. Someone who is not a
technology native will likely have issues navigating the current cryptocurrency
environment – be it the device they use to access, understanding the application, lack of
trust in the process, or the utility once they have some value converted to a token. We
need to get past that (CE/FI 1; NS/LE 3). Other generations that are more digital natives
will not have the same reservations:
When you grow up, a dollar is a dollar and it’s broken down by quarters and
pennies. But it’s harder for the generations coming up now where they aren’t
bound by dollars. Certain generations, you know, the younger ones, are much
more comfortable on electronics than we ever will be, so I think there’s a lot of
benefit, [adoption is] going to happen. (NS/LE 7)

Mainstream media continues to document the rise in cryptocurrencies, drawing
traditional investors (as opposed to early adopters) into the fintech sphere. “You have
people who would not necessarily have been asking you about [cryptocurrency], like
your grandparents, so I think that can only lead to more and more adoption” (NS/LE 3).
Pinpointing, even estimating, the cryptocurrency industry’s location on the
technology adoption curve is a challenge because the future continues to evolve. Only
in hindsight will we be able to determine where we were in 2021. Each new application
of cryptocurrency and blockchain technology generates yet more novel ways for
implementation, but mainstream adoption will remain elusive until there is improved
education, government regulation, and broader institutional use.
Consumer Education. Consumer education across demographic groups will
improve understanding of the technology, associated risks, and adoption. Individuals
and retailers need to learn more about the technology so they understand the
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technological underpinnings and how it can help them transact business. For many
years, financial education involved parents talking with their children about chores,
allowances, and putting money in savings accounts. Trust in established financial
institutions was shaken following the recession in the 70’s, financial meltdowns in 2008,
and 2012 recession. Cryptocurrency and DeFi are not incremental changes to the
existing system; they are revolutionary. For most, cryptocurrency is still an unknown
financial tool and consumer education by cryptocurrency advocates needs to clearly
explain the attributes of cryptocurrency, the utility it provides, the risks, and dispel myths
about criminal activity (BA 3). Differences among comfort with technology, consumer
trust in financial systems, and vendor investment in new payment technologies need to
be addressed as elements of consumer education. It took many years for credit cards to
become accepted both by vendors and the general public in the 1970s, because
everyone was accustomed to using cash. Cryptocurrency will require a similar process
of mental association and assimilation (NS/LE 3; NS/LE 7). As individuals, governments
and regulators understand the technology better, there will be fewer people falling for
scams and more thoughtful government regulation (BA 3; CE/FI 1). Retailers need to
see more utility in transacting business via tokens and understand how it adds value to
their customers, decreases costs, and save them time. Above all, familiarity, other
people using it, and others accepting it for payment will cause cryptocurrency use to
spread. “It seems to follow a standard technological adoption [model]” (R/PM 3). Once
that happens, crypto adoption will continue to grow and build into a long-term trend
(R/PM 1).
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Government Regulation. Many respondents cited government regulation as a
significant driver of cryptocurrency’s future. Creating a consistent environment where
investors and financial innovators know how the government will treat tokens and
associated profit, allows them to plan and work within the established framework (CE/FI
1). Regulation creates a more stable user environment, encourages development and
decreases volatility. BA 1 recalls regulatory tightening in the 1970s and feels the same
may be needed now:
In the 70s it was a free-for-all, like you could get bank accounts with nothing, you
just show up and money laundering [became] a big problem...then the banks
faced regulation, enforcement, and the U.S. government forced other countries to
establish similar policies. That’s the kind of effort that I think is required to get
cryptocurrency into a place where it could be...mainstream or used effectively as
a financial instrument.

Regulations acknowledge cryptocurrency and give it legitimacy (BA 3). Adoption by
companies and MSBs at a small scale would allow all participants to understand the
function, complexities, and regulatory challenges that arise with cryptocurrency,
essentially functioning as a “training ground for future regulation and open the eyes of
[policy makers] who are responsible for our currency policy” (NS/LE 4). Many
respondents believe the current regulatory environment does not do enough to
encourage beneficial development and contain harmful uses, effectively contributing to
the current volatile environment.
Institutional Adoption. Financial firms, companies, and governments are
adding cryptocurrency to their balance sheet, signaling to others that there is a
favorable risk environment around the financial innovation. Large firms have the
resources to investigate, understand the impacts, evaluate utility, and determine if
entering the cryptocurrency space will have a positive return on investment. Visa, JP
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Morgan, PayPal, Mass Mutual, Chase and others have made the decision to purchase
cryptocurrency and explore services they can provide to their customers (BA 2; CE/FI 1;
NS/LE 4). Cryptocurrency is now being seen as part of a diversified portfolio:
I think [institutional adoption] is going to start with Bitcoin...institutions have
started to open up to the real technology under, that underlies Bitcoin itself, and,
and are starting to appreciate the value in owning a non-sovereign, apolitical,
finite supply type asset. (CE/FI 4)

The sentiment was echoed by another respondent in the financial space:
Institutional adoption will be the primary force legitimizing blockchain and
cryptocurrency. I think recently there’ve been announcements that Deutsche
Bank and other large, regulated entities are now launching prime brokerage
services for crypto and custody services for crypto, and I think as more
companies, as more regulated institutions launch these services this is really a
signal to, the rest of corporate America, that this thing is real. (CE/FI 2)

The initial sense of distrust seems to be waning and the tide is turning as larger
companies and MSBs do not think of cryptocurrency as an exotic financial tool and are
building robust compliance departments (CE/FI 3; NS/LE 1). Even small and mid-size
companies are putting cryptocurrency on their balance sheet as shared by one of the
respondents. “As a company we have bitcoins on our balance sheet, and that is more of
an investment than, anything else and it’s working well for us right now” (BA 4). “With all
the institutions getting in now, it’s taken on less of a day trader feel and more of a store
of value feel as we’re seeing, you know, major corporations using it to shore up their
corporate treasury” (BA 2). What started out as retail investment – proving
cryptocurrency was viable – has motivated large companies to purchase bitcoin or
investing in the infrastructure so they can offer cryptocurrency related services. “It just
feels like it’s reaching a tipping point now where a lot of like big institutional money is, is
getting involved in one way or another” (CE/FI 3). Adoption at large firms is also
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creating demand for those firms to offer services to their customers and make it easy for
them to purchase cryptocurrencies. As NS/LE 6 describes, institutional customers also
need help understanding how cryptocurrency can be used as part of their broader
financial portfolio:
MicroStrategy had a conference last week where one of the sessions was Bitcoin
for Corporations. They’re arguing that large corporations should actually start
investing in Bitcoin. So where five years ago you had a few individuals, now you
actually have publicly traded companies like Tesla, like Visa, pushing to get into
the cryptocurrency holding space.

The government, seen primarily as a regulator, is also a large institution and
NS/LE 4 believes when the private sector makes a significant entry in the space, the
government will have to follow. Some respondents see public sector use tied to allowing
payments to the government in cryptocurrency (e.g., property taxes), purchasing
cryptocurrency to help manage volatility, and signaling the intent to support innovations
in the fintech space (BA 3; CE/FI 2; NS/LE 7). BA 3 sees a close connection between
owning and the ability to regulate bitcoin, suggesting the U.S. Federal government:
should own a lot and control it. Holding a large number of Bitcoins in Federal
Reserve will allow them to keep the price fluctuations low, that will bring stability
to the market because if they hold, for example, hundred thousand of Bitcoins,
they will be able to sell when it’s growing, to stabilize it and buy it.

NS/LE 7 and others agree that if the U.S. government purchases a significant stake in
cryptocurrency, it will signal trust in the technology and encourage development and
use which will make the United States a center of innovation and help maintain its
position in global finance (CE/FI 1; CE/FI 3; NS/LE 7; R/PM 4).
Economic Security
The second major area of research is economic security. Much has been
discussed in the literature review and in the previous section about the beneficial and
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harmful uses of cryptocurrency and how frequently cryptocurrency is used. This section
explores the impacts of cryptocurrency use on national and individual economic
security. This research bridges these three components together using a qualitative risk
analysis and identifies threats and opportunities to guide regulatory efforts.
Respondents were asked about their perceptions of cryptocurrency as a financial
innovation, definitions for national and individual economic security, and the impact
cryptocurrency uses will have on national and individual economic security.
Financial Innovation
Across all stakeholder groups, respondents rated cryptocurrency as positive or
very positive as a financial innovation (Figure 12) that could boost economic security.
Figure 12 - Cryptocurrency as Financial Innovation

Question: How would you rate cryptocurrency as a financial innovation?
Cryptocurrency and decentralized financial tools are more flexible than traditional
banks and allow for transformational development of new financial tools. BA 3 captures
the optimism that many respondents share saying:
it’s an evolution of technologies. We had horses and now we have Teslas that
drive on electricity. Same with currency, we had gold coins, then we had paper
money, then we had numbers somewhere in bank databases, and now finally we
have something else, which is Bitcoin.
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Experimentation in the space will change how financial services are delivered with the
intention of reducing transactional friction but more direct application and utility is
needed to fully realize the benefits of value transfer (NS/LE 3; NS/LE 6). Positive
innovation will require the community of players to consider the application of their
creations, and as these positive uses increase, “you will begin to marginalize the other,
the more negative use cases” (R/PM 2). Cryptocurrency has great promise to help
overcome hurdles to financial inclusion by providing more options for financial control
and democratizing financial access, which will be very beneficial for both national and
individual economic security (CE/FI 1; CE/FI 2). The right conditions and controls are
needed to support product innovation, create growth, and integrate the new tools into
traditional financial institutions (BA 2; NS/LE 4). With the right regulatory foundation,
cryptocurrency will have “significant beneficial uses moving forward. I could see this as
being the next financial thing that could support entire governments” (NS/LE 5).
Not all respondents had the same level of optimism primarily because the market
is still in its infancy and new uses are appearing all the time. Other countries are
experimenting, and criminals are looking for ways to exploit cryptocurrency so “it’s hard
to say how it’s going to play out depending upon which regulations come into play and if
it’s a good thing or a bad thing” (NS/LE 5). NS/LE 2 believes that for all the talk about
decreased transactions costs, in some cases, it is still less expensive to transfer value
in the existing financial system but acknowledges that “cryptocurrency I think is here to
stay, it’s not going anywhere, I think it’s only going to continue to grow and be more
influential in our future but we need to regulate it to see where it will go.” In the short
term, both CE/FI 3 and Baranoff have concerns that cryptocurrency will be more of a
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negative thing. BA 1 has the most bearish view seeing cryptocurrency as “optimized
and designed for harmful use. That’s what has driven the innovation, and continues to
drive the innovation, as we see more anonymization and making it difficult to trace
transactions.”
Overall Impact on Economic Security
Respondents were asked to describe the impact of beneficial and harmful
cryptocurrency uses, how frequently those uses take place, and their impact on national
and individual economic security. Using the established risk calculation methodology
described in the previous chapter, their responses to those questions show there is the
perception of a slight overall threat to overall economic security (Figure 13).
Figure 13 - Risk of Cryptocurrency Use on Economic Security

Source: Researcher’s calculations

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National security and law enforcement respondents view cryptocurrency use as
more negative than other respondents, regulators, and policy makers the most positive;
though, in both cases, their perceived level of risk rises only to the level of “somewhat.”
National Economic Security
Stakeholders see an overall negative risk (threat) of cryptocurrency uses on
national economic security. Table 24 captures national economic security risk by
stakeholder group.
Table 24 - Risk of Cryptocurrency Use on National Economic Security

Source: Researcher’s calculations

As discussed in the methods chapter, respondents were asked how frequently
cryptocurrency use was employed, how beneficial or harmful the use is, and the impact
Privacy
Hedge
Against
instability
Decrease
Fin Sys
Costs
All Avoid Law s
Money
Laundering
Illegal
Purchases
Fund
Terrorism
All Overall
Freq 2.7 2.2 2.3 2.3 2.6 2.5 2.5 1.6 2.3 2.3
Severity 2.6 2.7 2.5 2.6 3.2 3.1 3.2 3.3 3.2 2.9
Impact 0.1 0.3 1.0 0.6 -1.3 -1.5 -0.8 -1.5 -1.2 -0.3
Risk 0.7 1.8 5.5 3.5 -10.2 -11.3 -6.4 -7.7 -8.9 -2.1
Freq 2.8 1.7 2.3 2.2 2.6 2.7 2.7 1.8 2.5 2.3
Severity 3.0 2.7 2.7 2.8 3.3 3.6 3.4 3.1 3.3 3.1
Impact 0.1 0.4 1.0 0.6 -1.9 -1.7 -1.0 -1.9 -1.5 -0.5
Risk 0.8 1.9 6.2 3.4 -15.7 -15.9 -9.3 -10.7 -12.6 -3.5
Freq 1.0 3.1 2.6 2.9 2.3 2.0 2.3 1.3 1.9 2.4
Severity 2.5 3.3 3.5 3.1 2.5 2.3 2.8 2.8 2.6 2.8
Impact 0.1 0.3 0.5 0.4 -1.3 -0.5 -0.5 -1.5 -1.0 -0.3
Risk 0.3 2.5 4.6 3.3 -7.0 -2.3 -3.1 -5.2 -4.9 -2.1
Freq 1.0 1.8 2.3 2.0 3.0 1.0 2.3 1.3 2.2 2.1
Severity 2.6 2.6 2.2 2.5 3.0 2.8 2.8 3.4 3.0 2.7
Impact 2.0 0.6 1.4 1.1 -0.4 -0.1 -0.6 -1.0 -0.7 0.2
Risk 5.2 2.8 7.1 5.3 -3.6 -0.3 -3.8 -4.3 -4.3 1.2
Freq 4.0 2.5 1.8 2.3 2.5 2.5 2.8 2.0 2.4 2.4
Severity 2.0 2.3 1.3 1.8 3.8 3.5 3.8 4.0 3.8 2.8
Impact -1.0 -0.3 1.0 0.2 -1.3 -1.7 -1.0 -1.4 -1.3 -0.5
Risk -8.0 -1.4 2.2 1.0 -11.7 -14.6 -10.3 -11.0 -11.9 -3.6
CurrEx/
FinInst
(CE/FI)
Reg/ PolMkr
(R/PM)
BCAnalytics
(BA)
Benefits Harms
All
NatSec/
LawEnf
(NS/LE)
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of that use on national and individual economic security. Qualitative responses were
converted to ordinal numbers, averaged among stakeholder groups, and multiplied
together (Frequency * Severity * Impact) to calculate risk. Individual risk metrics were
calculated for each stakeholder group and all respondents together.
Figure 14 graphically shows overall risk perception of cryptocurrency on national
economic security by stakeholder group. NS/LE and BA respondents expressed the
largest concern about cryptocurrency use.
Figure 14 - Risk of Cryptocurrency Use on National Economic Security

Source: Researcher’s calculations

Their role prosecuting individuals and ferreting out negative uses may predispose
them to an overly negative view of cryptocurrency use. Somewhat surprisingly, CE/FI
respondents also found an overall threat with cryptocurrency use likely coming from the
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lack of regulatory environment that promotes positive uses, though their positive and
negative perceptions were in a closer range suggesting less polarization of opinion.
R/PM were the only group to show an overall positive opinion on cryptocurrency’s
impact on national economic security and had the highest view of beneficial uses. This
group is closest to “front end” of the policy process and may see positive intent. Figure
15 visually disaggregates the risk perceptions of stakeholders into specific beneficial
and harmful uses (Table 24 shows data numerically).
Figure 15 - Risk of Selected Cryptocurrency Uses on National Economic Security

Source: Researcher’s calculations

Exploring the individual beneficial uses, we see more parity among all
stakeholder groups, all of whom believe they are neutral to somewhat positive with the
outlier being blockchain analysts who find privacy being a threat (not surprising given
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their business depends on the ability to trace value exchange even if only by
anonymous account number). All groups see decreasing financial system costs as the
primary opportunity. NS/LE view the harmful uses as the largest threat, followed by BA
– as shown in the overall results. All harmful uses are viewed with similarly severity,
they primarily differ among frequency of use and impact. NS/LE view illegal purchases
and funding of terrorism as less of a threat than money laundering and avoiding laws.
R/PM and CE/FI are overall less concerned about the threat posed by negative
cryptocurrency uses. CE/FI are most concerned with avoiding laws.
The benefits are positive though not significantly – respondents said there is not
a direct connection between some of the harmful uses and national economic security
but if individual economic security increases, then national economic security will
because it is the aggregate of individual economic health.

Individual Economic Security
Stakeholders see an overall positive risk (opportunity) of cryptocurrency uses on
individual economic security. Table 25 captures individual economic security risk by
stakeholder group.
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Table 25 - Risk of Cryptocurrency Use on Individual Economic Security

Source: Researcher’s calculations

Figure 16 shows overall risk perception of cryptocurrency on individual economic
security by all respondents and stakeholder groups. Scores among all stakeholder
groups are higher for individual economic security than national economic security,
suggesting cryptocurrency use is an opportunity for individuals but a threat for the
nation. However, NS/LE stakeholders continue to see cryptocurrency use as an overall
threat. CE/FI see the greatest opportunity for cryptocurrency use, which is expected as
they are strong supporters of adoption and integration into the financial system.
Privacy
Hedge
Against
instability
Decrease
Fin Sys
Costs
All Avoid Law s
Money
Laundering
Illegal
Purchases
Fund
Terrorism
All Overall
Freq 2.7 2.2 2.3 2.3 2.6 2.5 2.5 1.6 2.3 2.3
Severity 2.6 2.7 2.5 2.6 3.2 3.1 3.2 3.3 3.2 2.9
Impact 1.3 1.1 1.2 1.2 -0.7 -1.0 -0.7 -1.0 -0.8 0.2
Risk 9.2 6.3 6.6 6.8 -5.3 -7.8 -5.8 -5.4 -6.1 1.1
Freq 2.8 1.7 2.3 2.2 2.6 2.7 2.7 1.8 2.5 2.3
Severity 3.0 2.7 2.7 2.8 3.3 3.6 3.4 3.1 3.3 3.1
Impact 1.3 0.7 1.0 0.9 -0.9 -1.5 -1.1 -1.6 -1.3 -0.2
Risk 10.3 3.2 6.2 5.8 -7.2 -14.3 -10.6 -9.1 -10.9 -1.4
Freq 1.0 3.1 2.6 2.9 2.3 2.0 2.3 1.3 1.9 2.4
Severity 2.5 3.3 3.5 3.1 2.5 2.3 2.8 2.8 2.6 2.8
Impact 1.0 1.9 1.3 1.6 -0.8 0.0 -0.9 -0.8 -0.7 0.4
Risk 2.5 19.0 11.5 13.9 -4.2 0.0 -5.4 -2.6 -3.4 3.0
Freq 1.0 1.8 2.3 2.0 3.0 1.0 2.3 1.3 2.2 2.1
Severity 2.6 2.6 2.2 2.5 3.0 2.8 2.8 3.4 3.0 2.7
Impact 2.0 1.2 1.2 1.3 -0.2 -0.1 -0.2 -0.8 -0.4 0.4
Risk 5.2 5.6 6.1 6.1 -1.8 -0.3 -1.3 -3.4 -2.6 2.5
Freq 4.0 2.5 1.8 2.3 2.5 2.5 2.8 2.0 2.4 2.4
Severity 2.0 2.3 1.3 1.8 3.8 3.5 3.8 4.0 3.8 2.8
Impact 1.0 0.8 1.5 1.1 -0.8 -0.7 -0.5 -0.6 -0.6 0.2
Risk 8.0 4.2 3.3 4.8 -7.0 -5.8 -5.2 -5.0 -5.8 1.6
CurrEx/
FinInst
(CE/FI)
Reg/ PolMkr
(R/PM)
BCAnalytics
(BA)
Benefits Harms
All
NatSec/
LawEnf
(NS/LE)
145
Figure 16 - Risk of Cryptocurrency Use on Individual Economic Security

Source: Researcher’s calculations

Risk breakouts for individual uses in Figure 17 show a generally positive view of
cryptocurrency use on individual economic security. NS/LE still have concerns about
cryptocurrency, which are shared with BA stakeholders. The other stakeholder groups
see a nearly neutral impact, particularly among CE/FI who see cryptocurrency as a
good hedge against instability. R/PM may not individually differentiate among beneficial
uses, but rather see them as part of the broader cryptocurrency environment.
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Figure 17 - Risk of Selected Cryptocurrency Uses on Individual Economic Security

Source: Researcher’s calculations

Regulations
The third area of study is the cryptocurrency regulatory environment. Regulations
are intended to maintain a stable financial environment that forms the foundation for
national and individual economic security. Respondents believe there is not enough
cryptocurrency regulation, neither to encourage beneficial uses nor discourage harmful
ones. The National Security Strategy identifies the goal of ensuring economic rules do
not stifle U.S. economic security. Policy makers and legislators need to support positive
developments in the fintech space, or the nation will put itself at a disadvantage and fall
behind competing nations (Biden, 2021). Ensuring digital inclusivity will require
governments to mitigate potential cryptocurrency risks without stifling technological
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innovation. This section summarizes respondents’ views on the current level of
regulation, alignment of federal and state laws, what regulatory change is needed, and
two important factors to consider when making changes.
Level of Regulation
Overall, respondents said the level of cryptocurrency regulation was not enough.
Figure 18 shows the varying opinions related to overall regulation across stakeholder
groups with the notable exception that all CE/FI stakeholders felt the environment was
too inconsistent.
Figure 18 - Cryptocurrency Regulation in the United States

Question: How would you describe the level of cryptocurrency regulation
in the US?

Critics believe existing laws and regulations do not provide appropriate customer
protections, and if cryptocurrency becomes a widely used, it could disrupt central bank
monetary policy (Perkins, 2020). Rather than take a strict approach and see the system
as something to be controlled, regulators and regulations need to be adaptable. They
should look at what the system intends to accomplish and build an environment that
supports the end state (Guida, 2020).
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Figure 19 shows an overall slight disagreement that regulations encourage
beneficial uses, with CE/FI stakeholders disagreeing the most.
Figure 19 - Regulation Encourage Beneficial Cryptocurrency Uses

Question: What level of agreement do you have with the following
statement: The current regulatory environment encourages
beneficial uses/development of cryptocurrency?

Lack of regulatory framework and clear oversight responsibilities create too much
uncertainty for new product investors, effectively limiting innovation because return
cannot be determined. NS/LE 6 makes the case as he describes a new business
developing a product to bridge the gap between legal ownership and digital ownership
using a contract based on code:
That was the key to them unlocking some really innovative businesses ideas
around investing and financing. After about a year they basically stopped and
pivoted because when they met with the SEC they were told based on existing
regulations this new concept was not considered a security and outside their
purview.

Figure 20 shows respondents have a neutral opinion that current regulation
discourages harmful uses.
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Figure 20 - Regulation Discourages Harmful Cryptocurrency Uses

Question: What level of agreement do you have with the following
statement: The current regulatory environment discourages
harmful uses/development of cryptocurrency?

Naturally, R/PM feel slightly more positive that boundaries put in place provide
the necessary constraints. Perhaps, because they feel the overall regulatory
environment is too inconsistent, CE/FI do not believe enough is being done to
discourage harmful uses. Regulations have been developed in response to previous
issues in the financial system, such as ensuring banks have enough reserves to pay
depositors, KYC, and required record keeping. “There’s reasons that we put those in
place. We should be doing the same thing here” (R/PM 3). Moving into the
decentralized environment presents new challenges that can impact national and
individual economic security. “You have all this high dollar amount activity that was
formerly heavily regulated and now you have no effective way of regulating it when it’s
all happening in a decentralized way. I think that’s going to be a major challenge” (CE/FI
3).
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This regulatory environment runs counter to the National Security Strategy and
sets up a curious decision – support the development of financial products that make it
more difficult for law enforcement to track illegal use or create a strong regulatory
environment that may stifle innovation. R/PM 4 sums it up this way:
We are at a crossroads where there will be less data available to law
enforcement. As cryptocurrency networks become more prominent, we need to
decide are we going to approach this in a way where we try to create new norms
that allow for more data collection or are we going to decide as a society that the
tradeoffs, perhaps a little bit less visibility is worth the autonomy that
cryptocurrency allows us.

As we consider what regulatory changes are needed, there will be a natural polarization
between the secrecy provided by cryptocurrency and the need for transaction
awareness to prevent harmful uses. Perhaps they are not on opposite ends of the same
continuum but instead two variables among many that need to be considered when
creating the cryptocurrency regulatory future.
Federal and State Alignment
States have signaled different levels of support for cryptocurrency development
and use. Uniform federal laws, adopted by states, would create a more consistent
regulatory environment. Most state regulators are not pressuring cryptocurrency
businesses to follow banking regulations and consider negative impacts of new
products the way federal regulators are (NS/LE 4). Wyoming has a strong interest in
supporting cryptocurrency and some states are looking at creating safe havens with
favorable tax treatments. However, many others are taking a wait and see approach
and following the IRS guidance. California and New York are taking a more
conservative approach (R/PM 5). Such inconsistencies make it difficult for MSBs
required to register in each state they do business in and conduct transactions. Some
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states have laws that support crypto use, while others have laws that would not work
well at all. CE/FI 3 gives an example of a potential inconsistency across states:
For example, there’s a state that says you have to have cash deposits on hand
equal to the value of all your customer Bitcoin deposits, which would mean that if
you’re a company that has $50 billion worth of Bitcoin you need that cash on
hand. That isn’t feasible.

As described earlier, if the federal government is too restrictive on cryptocurrency,
companies will go to other countries. Here too, if a state is too restrictive, companies will
move to other locations with more favorable regulatory environments (BA 4). To better
understand the regulatory environment at the federal and state level, 193 laws,
regulations, and guidance documents were studied as described in the previous
chapter.
Federal Law Analysis. Of the 29 federal laws examined, the majority focused on
applying existing financial regulations to the cryptocurrency and fintech environment.
The next group focused on requesting additional research (6) and consumer protection
(4). Tax treatment (3) and defining terms (2) were the smallest group. Looking at these
laws for legislative intent, most were supportive (14) or neutral (11). Only four were
directly focused on limiting cryptocurrency use and those were directly targeting human
trafficking, money laundering, and gambling transactions. In a 2020 review of
legislation, Fanusie observes that businesses should invest their effort in working
through policy and compliance issues created by the new technology. Twenty-one
potential laws are in committee being evaluated and debated by members. Legislation
provides the broad context for government operation but depending on how the laws
are written, regulatory agencies are given narrow or wide latitude to implement those
requirements. Additional analysis at the agency level would likely identify a much larger
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set of actions designed to modify and apply existing legislation to the new financial
environment.
State Law Analysis. Of the state laws examined, the majority also focused on
applying existing financial regulations to the cryptocurrency and fintech environment.
Forty-eight percent of the legislation was regulatorily focused; of that, half was
supporting cryptocurrency use. The remaining legislation focused on definitions (16%),
taxation (16%), status as property (8%), and requests for research (8%). Only 3% of
legislation applied to consumer protection. Overall, 36% of legislation was found to be
favorable to cryptocurrency use, 38% neutral, and 26% limiting. There was only a
handful of legislation proposed from 2014–2019; almost half of the new legislation was
proposed in the last two years. The majority of 2020 legislation is in committee, and
2021 is on the floor for initial review. A qualitative comparison among states indicates
one third have maintained the same regulatory environment. Of the two thirds that
changed (a majority of which were not regulated before), half leaned more hostile to
cryptocurrency and half became more supportive. This suggests that as the industry
continues to mature, and state legislatures become more familiar with the benefits and
impacts, they are able to more clearly indicate receptivity to cryptocurrency use.
Government officials recognize there are benefits to faster, more secure payment
mechanisms. The rails of the existing financial system have not been substantively
updated in decades. This is an opportunity for regulators to step in and provide a
consistent regulatory framework or a fintech charter that would make life easier for
enterprising custodial services and allow cryptocurrency businesses to be guided at the
national level (CE/FI 1; CE/FI 2; NS/LE 4). “In the U.S. I would say homogeneous laws
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are needed so it’s not left to each state to come up with their own regulations” (BA 2).
Comprehensive legislation under an existing federal agency could be adopted by states,
serving as a better model than 50 agencies starting from scratch (CE/FI 3, 2021).
Regulatory Change
When discussing regulatory change, respondents all agreed on the need to
establish clear definitions and regulatory guidance but differed on whether the current
regulatory environment is up to the task or if a new regulatory framework for the digital
environment is necessary. No matter the approach, consistency across federal and
state agencies and enforceability are important concerns to keep in mind. Table 26
summarizes the most frequently recommended regulatory changes.
Table 26 - Most Frequently Recommended Regulatory Change
Change Themes
Define status unclear standing, classify cryptocurrency
Apply existing
regulations
consistency, stronger “KYC” laws, use framework
Create new framework
new financial instrument, existing regulations do not
apply
Question: What regulatory changes should be made?

NS/LE 5 believes the regulatory environment will be the primary driver behind
cryptocurrency development and how it is used in legal and illegal transactions. “By not
having good regulation around a transaction opens up a significant number of issues in
relating to, using it for legal purposes, following up on it from a law enforcement
perspective, and enforcing regulations on transactions that occur.” Education is a critical
component for appropriate regulation. A regulator commented:
The regulators certainly don’t have a technical background. I don’t think that they
have the knowledge to deal with [cryptocurrency], I think people don’t really
understand it and I think as it becomes more profitable, they will start getting
taken advantage of.” (R/PM 3)
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R/PM 5 says congressional members are becoming more aware of the industry but
need to increase their familiarity with the complexities and impact of cryptocurrency use.
CE/FI 3 has observed some progress by government officials stating:
I think maybe there are certain federal agencies or regulators who have, really
kind of dove in headfirst, but there’s been a lag. I think it’s going to take some
time for that level of expertise to be consistent across agencies, and that level of
engagement to be consistent.

R/PM 2 suggests providing:
more hands-on experience with these technologies for the regulators so that
when they are looking at regulating [cryptocurrency] they’re doing it from the
perspective of really knowing the potential benefits but looking at how to
minimize the, the costs, or the risks.

Regulations need to be fixed in the right way and it is not just a government issue
to address (CE/FI 2). Regulation is inconsistent because there is not a strong legal
framework around cryptocurrency. With an industry changing so rapidly, regulators will
need to be flexible, regularly survey the industry to see where there are areas of
concern and instability, and take necessary steps to address them (R/PM 2). For
business to gain legitimacy and customer trust, they too will need to identify malicious
use and implement restrictions on their platforms (BA 3). Members of the SEC, OCC,
FinCEN, the Federal Reserve, and other agencies all have a stake in crypto and need
to address issues around taxation, classification, and coin offerings (R/PM 5). Stenson
summarized the impact of a lack of clear regulatory guidance in this way:
There need to be more clarity and consistency from regulators so that
businesses are comfortable operating here and not living in fear that regulators
are going to crack down, make them shut down their business. More consistency
and clarity for businesses in particular would be probably the most helpful piece.
(CE/FI 4)

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CE/FI 2 embraces the benefits of operating in the unknown saying, “Creative
entrepreneurs can work with uncertainty, but they can’t break the law overtly. So I would
rather be in this limbo state where no one really knows the answer rather than having
bad, bad answers.”
Clear Definitions. Establishing clear regulations begins by describing what
needs to be regulated, what framework applies to their use, and applying those
regulations consistently across agencies. As mentioned in the introduction, there are
inconsistent definitions for digital assets. Once the assets are described and
differentiated, then their characteristics help determine what set of regulations they are
subject to. CE/FI 2 uses a simple example highlights the challenge if bitcoin is classified
as a security:
When I go to buy a cup of coffee, am I then being taxed on the appreciation of
that asset as I’m making that purchase? It’s crazy that you would have to pay
gains on your Bitcoin every time you buy a coffee. That just severely inhibits its
usage for payments.

Put more simply, it would be like buying groceries with stock (BA 1). As it stands, there
is inconsistency across the regulatory bodies for how individuals can and cannot access
these financial tools (CE/FI 4). The biggest point of clarity needed is “how you treat
these assets when they appear they could be securities and should there be more
wiggle room than we are currently giving some of the innovators who are developing
businesses around cryptocurrency tokens” (NS/LE 6). CE/FI 1’s organization is building
a platform for cryptocurrency use and wants to understand the regulatory constraints
they need to work within:
giving financial institutions and regulated entities more clarity as to how the
government views it, like ‘is it a security, is it a commodity, is it a currency, is it
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something else, and what are the obligations that those institutions have’ would
help determine the right regulatory model.

CE/FI 2 describes additional challenges faced with using smart contracts, another new
product created in the distributed finance environment:
right now there is a big question mark around the legality of a lot of DeFi projects
where software developers create a smart contract controlled by no one and it
does a lot of things that financial institutions do but it doesn’t have the protections
of financial institutions. Given the nature of a lot of cryptocurrencies where they
start off centralized and then they become decentralized, there should be a clear
way for the recategorization of certain cryptocurrencies from securities to
commodities.

Once definitions have been agreed on, federal (and state) agencies need to adopt and
apply them consistently. Stated by CE/FI 3, but echoed by NS/LE 5, inconsistency
across regulatory bodies further complicates new DeFi or cryptocurrency centered
product development:
At various times in the last five years you’ve had one agency saying, for our
purposes it’s property and another agency saying for our purposes it’s money. I
think that it’s difficult for users and kind of hampers growth because people don’t
really want to get too involved or invested in something that they don’t know, how
it’s going to affect them or how is the IRS going to look at it.

Apply Existing Laws. The existing regulatory framework was developed
incrementally over decades to prohibit illegal activities and protect customers using a
network of trusted intermediaries. MSBs have detailed knowledge of reporting
requirements, which allows them to create new products that fit within existing
frameworks. That legal cannon may be difficult to apply in a new financial environment
where intermediaries, who are the subject of much regulation, have been eliminated.
MSBs, banks, financial institutions, and other agents are subject to a series of
regulations when holding and transferring value for customers. When people open an
account at Citi Group or Bank of America and deposit money, the bank asks for a
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driver’s license or other identification in an effort to “KYC.” It is not perfect but there are
some basic controls in place; there is no reason cryptocurrency firms should be treated,
and regulated, any differently (R/PM 3; NS/LE 4). There are already regulations in place
for fiat-based transactions so NS/LE 5 wonders why they cannot be modified for the
new environment:
how cash is treated, how wires are treated, how money is moved in and out of
the country. The issue is that cryptocurrency regulation has not caught up with
that. And one good example of that is the funds transfer rule which basically
requires that when money is moved via wire from one bank to another, the
sending bank has got to include in that wire who it came from, the bank account
it came from, who it’s going to and what account it’s going to.

R/PM 1, reflecting on their own sphere of influence believes:
regulators have taken the easy way out, which is to just say, ‘we already have
these rules and so we’re just going to extend them to apply to this new thing’. I
understand why they do that, it’s sort of the path of least resistance, but it has
very harmful consequences in terms of realizing the benefits of innovation and
remaining competitive.

R/PM 4 does not believe new rules are needed, stating, “I think that the existing rules
will be flexible enough with some minor modifications.” This is a perspective shared by
CE/FI 2 who said, “for things like cryptocurrencies, the commodities law regime under
the CFTC is sufficient. And for tokens that are overtly securities, then I think securities
laws should apply.” However, some believe applying the existing regulations is too
burdensome and impractical. If knowledge of the value’s source is a requirement, then
will anyone selling physical goods and accepting cryptocurrency for payment be
required to submit the token ID of the account used to pay for it (R/PM 3)? BA 4 put it
more pointedly:
If regulation stays the same and we don’t have this ridiculous Travel Rule coming
in where they’re policing private wallets and VASPs and we allow the market to
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mature, it’ll be fine. But if you take traditional AML [Anti Money Laundering] rules
and say, ‘We’re going to apply it to crypto’, I think you’re missing the point.

Taking the middle ground, policy makers can craft incremental rules that reflect the
capabilities and the potential (BA 2). CE/FI 3 believes:
we’re going to see new legislation and new regulations put together to address
this stuff, but we have decades and decade’s worth of complicated regulation
that’s fairly applicable, so that we’re just going to have to find a way to sort of do
that. My biggest concern is on the consistency and clarity across agencies.

Create New Framework. Other respondents believe current regulations are not
up to the task and developing a new framework is a better approach. Regulators need
to understand the new environment, identify what activities are taking place, and focus
on decreasing harmful uses. The existing regulatory framework is not designed to deal
with virtual assets. “It’s not necessarily that the regulators aren’t doing what they’re
supposed to do, because I think they are. I think the technology was designed and built
to specifically avoid regulation” (NS/LE 5). As an example:
criminals run transactions through tumblers and mixers to completely obfuscate
who the senders and receivers are. That causes a lot of challenges because
regulations for financial organizations are predicated on knowing the source of
the value being transferred into a customer’s account. (CE/FI 1)

Regulators should “stop trying to place cryptocurrencies in the same regulatory
box designed for traditional fiat currencies. Carefully consider the crypto industry and
how crypto works then structure regulation around them based on the true principles of
the market” (BA 4). Appling FinCen requirements like the Travel Rule and SEC
requirements would become overly burdensome (BA 1). Unnecessary processes and
frameworks that do not add value in the new cryptocurrency environment but are part of
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a legacy framework, place undue burdens on the exchange system and market players
(R/PM 2). R/PM 1 believes developing a new regulatory framework starts with:
a commitment to recognize that this thing [cryptocurrency] is new and different,
and I’m not sure regulators have been willing to do that to this point. If you accept
that, I think then you can say how should it be regulated instead of just trying to
shove it into the existing regulatory structure.

NS/LE 3 believes one way to cut down on illegal activity is to make it more difficult to
sell privacy coins – those designed specifically to mask the owner – but concedes, “It’s
still going to happen, it’s going to get pushed underground, but it’s not going to be as
easy as going to an exchange, opening an account, and sending them money to buy a
privacy coin.” R/PM 5 sees a new regulatory approach as the best course of action and
is optimistic to see FinCen hosting a fintech symposium with the private sector. “I think
new regulations specific to financial innovation are what we need as opposed to just
trying to tailor what we currently have. I don’t think crypto and fintech can, can really fit
in that one, one size fits all approach.” NS/LE 6 sees the bigger challenge faced by a
complex national economy and the difficult decision to turn away from years of
established financial regulation. “I understand the bind and that’s probably why they’ve
done what they have done. Because the U.S. has probably the most sophisticated and
important securities market in the world, they shouldn’t change things willy-nilly.”
Regulatory Considerations
No matter the regulatory approach, respondents felt that successful policy and
regulatory development should include elements that aid in enforceability and
encourage financial innovation.
Enforceability. Whether adopting existing regulations or developing new ones, a
continuing hurdle for any cryptocurrency regulation is enforceability. The internet, and
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any functionality contained therein, can be accessed from anywhere on the globe there
is a cellular signal. Regulatory jurisdiction often coincides with physical boundaries. This
puts regulators at odds with the sphere they are trying to regulate. Most regulators have
focused their efforts on the businesses providing transaction and custodial services
rather than the cryptocurrency owners but even here, the businesses need to be in the
United States, or a cooperating country, to enforce laws.
BA 1 is skeptical that any cryptocurrency regulation can be effective due to the
distributed nature and ubiquity of the internet. “The way we’ve done regulation currently
is we’re regulating the traditional financial system in order to, by proxy, regulate the
cryptocurrency market, and that is much, much harder because of how easy it is to do
these international transactions.” Other countries may not have, or only loosely enforce,
cryptocurrency regulations, making them an attractive location to host exchanges.
Effective regulation is enforceable regulation; KYC needs to happen on both sides of
the transaction. BA 1 continues:
You have to build incentives into the regulation to hold the right parties
accountable. For example, if an exchanger knew that they would have to refund
any fraudulent transactions that went out, or criminal transactions, they would be
incentivized to ensure that every transaction was legitimate on both ends, which
is difficult.

BA 4, NS/LE 2, NS/LE 4, R/PM 2, and others believe overregulating is going to push
exchange activity to areas where regulations are unenforceable. Regulators will need to
develop the right level of oversight that makes it desirable for exchanges to operate in
the United States, or other country with similar financial oversight, and willing to
appropriately monitor the activities of their clients so harmful cryptocurrency use can be
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kept to a minimum. Illegal activity utilizing cryptocurrency is going to continue; therefore,
the focus should be on containment, not elimination.
Support for Innovation. No matter the regulatory changes put in place, a nearly
universal theme among respondents was the importance of supporting innovation.
Cryptocurrency, and more broadly digital finance, is seen as the next evolution of the
value exchange system. Other nations are taking aggressive steps in this area. For the
United States to maintain its global economic role, it needs to support innovation even
though there are likely to be “a lot of challenges for governments to actually embrace
the use of this technology. It’s not like everything’s terrible, it’s just that you can improve
upon it using new technology” (CE/FI 1).
Answering the question “what is the right level of cryptocurrency regulation” has
been discussed for a decade. So far, regulatory agencies have issued little guidance
and mostly taken a wait and see stance, which is important for fostering innovation but it
also creates uncertainty. The government has also been trying to track down where
cryptocurrency is supporting illegal uses and providing more guidance in those areas
(R/PM 2). A non-regulated environment will encourage this type of innovation – good
and bad; however, there is likely to be more innovation on the beneficial side if there is
government support (NS/LE 7; R/PM 3). R/PM 1 cites the approach the government
took with the internet 30 years ago as a model for cryptocurrency:
I think wisely at the time we took a more hands-off approach, we let the internet
develop naturally and grow, and as a result for the last thirty years the United
States has been the dominant beneficiary of that technology. We do not appear
to be taking the same approach with respect to blockchain and I think that that’s
a very unfortunate, unfortunate choice. You know, we’re so zealously protecting
our consumers that we’re going to end up harming them in the long run as we
protect them from the benefits and not just the risks.

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NS/LE 6 describes a regulatory environment that allows for experimentation among
innovators where they do not have to worry about the regulatory classification of new
tools; instead the tools are developed, used for a period of years, studied, and then the
right set of regulations will be applied. This gives them the time and space to see if the
proof of concept is really viable. Some will make it, others will not but they should not
have to worry as much about regulations as they try it out. This type of “sand box”
environment would create fertile ground for domestic financial institutions to setup
experimental banking and payment systems (NS/LE 1). CE/FI 2 returns to the smart
contact use case as an example were a space for experimentation and regulatory
discussion would be helpful:
Smart contracts are getting increasingly sophisticated. There are decentralized
autonomous organizations, which is basically a company but it’s all decentralized
and it’s on a smart contract on Ethereum. There needs to be a way for
decentralized autonomous organizations to be recognized as legal corporate
entities so that they can pay employees, pay contractors, get insurance. I think
having that type of thing would be really, really groundbreaking.

If regulators put up restrictions without understanding how cryptocurrency can be used,
they are stifling innovation (CE/FI 1). If service providers are regulated so heavily from
the outset, they may see more opportunity developing peer-to-peer features, increasing
illegal uses, and making enforcement more challenging (BA 4). The current state is:
disincentivizing innovation from happening on our soil and allowing people
overseas, countries, primarily in Asia, to take advantage of this by being more
favorable to this technology. I would urge regulators to consider how to quickly
be more consistent and favorable in their regulatory approach so that we can
incent the best entrepreneurs in the world just like we had with the internet boom.
(CE/FI 4)

BA 2 agrees with CE/FI 4 and together feel it is imperative to continue innovating to
maintain the dominance of the U.S. dollar as the world reserve currency. Regulators
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need to learn to live with cryptocurrency. Regulate it lightly, mitigate negative uses, but
let innovation continue to grow (NS/LE 2).
Summary
Industry stakeholders shared their perspectives on the state of the
cryptocurrency market, impact of cryptocurrency uses on national and individual
economic security, and the regulatory environment. They remain optimistic about
growth but cite government regulation as the lynchpin for realizing potential benefits.
Their slightly negative perspective on economic security is driven by the uncertain
regulatory environment. The lingering perception that cryptocurrency is primarily used
for harmful purposes is driving the negative regulatory outlook. Educating regulators
and the public about these fallacies, demonstrating the market potential of beneficial
uses, and delivering on those promises are needed to move cryptocurrency into
mainstream use.
Cryptocurrency
The financial innovation enabled by blockchain technology, and manifested in
cryptocurrency, is compared by many respondents to the creation of the internet and
the transformational impact it will have. Many acknowledged that cryptocurrency is still
in an infancy stage and while uses have been identified, the opportunity for much
broader applications exist. New use cases arise weekly, pushing the boundaries of
Nakamoto’s initial vision, and only constrained by what can be conceived. Like the
internet, cryptocurrency and DeFi will see increased value as the technology’s potential
becomes better understood, frameworks for expansion are identified, beneficial uses
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are exploited, and harmful ones are contained. Table 27 summarizes research findings
and implications related to cryptocurrency.
Table 27 - Summary of Cryptocurrency Research Findings and Implications
Findings Implications
• There is consensus on general market size but no
agreement on a specific methodology to consistently
calculate
• Harmful uses exist but are overexaggerated and represent a
very small amount of the total market
• There is a positive outlook for continued market growth,
heavily favoring non-harmful uses
• Third classification of use was identified – speculative
investment
• Cryptocurrency attributes should be discussed separately
from uses because they describe inherent characteristics
• Beneficial cryptocurrency uses support financial freedom
and opportunity
• Harmful cryptocurrency uses differently enable existing
illegal activities
• Asset managers, large institutions, and companies using
cryptocurrency as investment are increasing its legitimacy
• Mainstream adoption requires consumer education,
government regulation, transactional utility, improved
security, and decrease in illegal use
• New tokens that do not rely on computational validation are
needed to support faster transaction throughput
• No government consensus on
size of industry and description
of cryptocurrency uses
• Market growth favors non-
harmful uses
• Industry controls needed to
manage speculative
investment
• Encourage innovation that
supports individual benefits
• Infrastructure does not exist to
support daily transactions
• Institutions have established
cryptocurrency as viable value
store
• Mainstream adoption will
remain sluggish until ease of
cryptocurrency use is same as
cash or credit card

Economic Security
Participants see cryptocurrency as a positive financial innovation that may have a
transformational impact on the financial industry. A qualitative risk analysis of
cryptocurrency uses on national and individual economic security shows that
respondents have a slightly negative outlook overall, who perceive a greater risk to
national security than an opportunity to boost individual security. Table 28 summarizes
research findings and implications related to economic security.

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Table 28 - Summary of Economic Security Research Findings and Implications
Findings Implications
• All respondents view cryptocurrency as a positive or very
positive financial innovation
• Overall, cryptocurrency viewed as slight threat to economic
security
o Regulators/policy makers and currency exchanges/
financial institutions see more opportunity
o National security/law enforcement and Blockchain
Analytic respondents see a threat
• There is a perceived threat to national economic security
o The largest threat is money laundering
o The largest benefit is decreased financial system
costs
• There is a perceived opportunity for individual economic
security
o The greatest benefit is privacy and control
• Cryptocurrency is used to facilitate illegal activities, but cash
continues to be the primary method used
• Stakeholders support
cryptocurrency innovation
• Risk of cryptocurrency use
differs between national and
individual level
• Focus on minimizing
consequences of harmful uses
• Exploit opportunities to use
cryptocurrency benefits to
support individual security
• Change narrative about
cryptocurrency usage for
illegal activities by comparing
to cash

Regulations
The current cryptocurrency regulatory environment does not provide the
consistent regulatory framework necessary to encourage innovation and contain
harmful cryptocurrency uses. Adaptable regulations that allow for financial product
development while providing guidance on token classification will give businesses the
framework they need to experiment with new products and evaluate investment risk.
There are mixed perspectives whether current regulations can be adapted to fintech
products or if new frameworks are better suited to address concerns in the emerging
market. No matter the legal basis, enforceability, support for innovation, and
consistency among state and federal agencies are primary factors to evaluate the
success of any change. Table 29 summarizes research findings and implications related
to the regulatory environment.

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Table 29 - Summary of Regulatory Research Findings and Implications
Findings Implications
• The level of cryptocurrency legislation is not enough
o Existing legislation does not encourage beneficial
uses
o Respondents neither agree nor disagree that existing
legislation discourages harmful uses
• National security strategy supports development of new
financial products but must be balanced with security
concerns
• Differences in federal and state regulations discourage
financial innovation
• Of the federal and state laws examined, the majority focus
on applying existing regulations to the new DeFi environment
o Legislative intent is primary favorable at federal level
o State legislation is nearly divided into tertials among
favorable, neutral, and limiting
o The majority of legislation studied was proposed in
the last two years
• Businesses should focus more effort on policy compliance
issues
• Respondents agreed that clear definitions and consistent
treatment across regulatory agencies is essential
• Differences in opinion about preferred regulatory approach –
application of existing versus creating new framework
• Majority of existing legislation is focused on MSBs
• Whatever regulations are applied must be enforceable and
support financial innovation
• Uncertain regulatory
environment stifles innovation
• New regulations developed
without private sector input
• Public private partnerships are
necessary to create legislative
framework around
cryptocurrency
• As the cryptocurrency industry
matures (and new benefits and
harms are identified), federal
and state agencies use that
information to guide regulations
rather than develop regulations
first
• Legal alignment across federal
and state agencies (with
deference to federal) will aid
new financial product
development
• Regulatory success should be
evaluated on decreasing
negative impacts of
cryptocurrency use and
increasing financial products
that fall within regulatory
frameworks

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Chapter 5: Analysis
Cryptocurrency is stuck at a utility plateau. It solved the double-spending problem
and was then exploited primarily for negative uses where it stagnated for almost a
decade. Now, with skyrocketing valuations driving get-rich quick schemes, awareness is
increasing, new scams are proliferating, and innovators are creating new decentralized
financial products to meet emerging needs. There are glimmers of the expansive
positive opportunity that awaits. However, practical implementation – the ability for
individuals to conduct everyday transactions – remains in its infancy.
The purpose of this phenomenological-based research is to understand the
potential implications of cryptocurrency use on economic security and identify regulatory
changes that decrease identified harmful impacts. This section begins by drawing on
the literature review, research findings, and implications to generate several conclusions
that bring clarity around the two research questions:
• What are the potential impacts of cryptocurrency use on economic security?
• What regulatory changes can be made to mitigate harmful impacts of
cryptocurrency use on economic security?

The research then identifies three primary recommendations to encourage fintech
innovation and protect economic security:
1. Develop a national strategy to align federal and state government efforts;
2. Establish public private partnerships that engage stakeholders in education and
policy formulation;
3. Outline a consistent policy agenda that allows for experimentation and is part of
an international effort.
The cryptocurrency, economic security, and regulatory environments are intertwined
(like any complex system) and there is not a 1-1 relationship between the research
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conclusions, research questions, and recommendations. Figure 21 links research
conclusions to the research questions (indicated with Xs) and to recommendations (via
the letters following each recommendation).
Figure 21 - Research Questions, Conclusions, and Recommendations

Each day there are reports in the media about new valuations, innovative
products, policies being considered, and challenges faced. With an industry changing
as quickly as fintech, “there’s a shelf life on these answers” (NS/LE 1). Significant
disruptions are coming to the financial industry as decentralized financial technologies
continue to expand. They challenge the institution-centric model by directly connecting
individuals. These research recommendations will only be as effective as their
implementation. This research does not contemplate the individual steps needed to
implement each; however, it does provide a stakeholder analysis, discussion of political
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context, review of policy design considerations, and logic model pertinent to their
implementation. The chapter concludes with a discussion on research limitations and
areas for further research.
Research Conclusions
Regulators need to balance the context and recency effect of negative reports
with a sober look forward at what possibilities exist for cryptocurrency technology and
put a framework in place that seeks less to contain the ills of the past but rather to
create the financial highway for the future. Economic security is the strength and
stability of economic conditions. At the national level, it is economic growth and
maintaining a stable economy through policy and monetary supply management; for
individuals, it is the ability to cover expenses, maintain financial resilience, and have
access to financial markets (Buzan et al., 1998; Medyanik & Deyneka, 2019). Among
the purposes of government are: taxation, regulation, provision of information, outlining
the structure of private rights, and creation of economic activity frameworks (Bardache
& Patashnik, 2016). The threat to economic security from cryptocurrency does not come
from a loss to an individual or group but comes from a lack of adherence to the rules
and systems (if they exist) that govern the environment (Buzan et al., 1998; Karimi,
2015). The world of DeFi, cryptocurrency, and the conclusions from this research, cross
through all these areas and challenge existing paradigms.
Potential Impacts of Cryptocurrency Use on Economic Security
Cryptocurrency is a positive financial innovation with an overstated negative
impact on economic security. Institutional adoption signals viability as an investment
class, helping to drive interest, but broader market adoption will not occur until fungibility
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with cash transactions is achieved. The market is further unsteadied by an unclear
regulatory environment not adapting rapidly enough or providing the needed framework
to support innovation.
Harmful Uses are Overexaggerated. Cryptocurrency began as an alternative to
the intermediary controlled exchange of value. Criminals were among the earliest
adopters, using it to mask their purchases from dark web sites, fund illegal activities,
and avoid regulations. New users are individuals who want to use tools for legal
purposes (R/PM 1). Unfortunately, the narrative that cryptocurrency funds all manner of
illegal activity and should be stopped has remained. NS/LE 5 believes that the
“underlying nature of cryptocurrency is negative, that’s why it was born. It was designed
to avoid tracking.” In 2019, Treasury Secretary Mnuchin said cryptocurrencies pose a
national security threat because they have facilitated billions of dollars in ransomware
attacks, tax evasion, drug purchases, and human trafficking (Bambrough, 2019). Both
points are factually correct, but they also mischaracterize the amount of illegal activity
taking place as a portion of the entire industry. As R/PM 1 observes:
the risks that you always hear about are money laundering and terrorist finance,
the big two. That’s what everyone falls back on, but the extent to which that
actually occurs is so exceedingly small that it’s a red herring argument and what
it really amounts to is that the people that say those things just don’t like crypto
because it’s new and different and scary, or they have other entrenched interests
not to like it.

Cryptocurrency is a significant disruptor to the existing financial market and
interrelated social and political systems. As the research showed, less than 1% of total
cryptocurrency transactions are thought to support illegal activity. Repeating statements
that place the risks out of context securitize the issue and are a form of politicization
(Buzan et al., 1998). Cryptocurrency’s impact on national economic security is not
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perceived as an issue, though as we will see in the recommendations, there are still
national security threats that may arise from other nations embracing blockchain-based
currencies.
Market Growth Favors Beneficial Uses. Blockchain centered DeFi is creating
new contract instruments, financial products, and access to markets. Stable and long-
lasting market growth will come when these products reach new customer segments not
previously part of the financial ecosystem. Belief is breaking down that government and
financial institutions are looking out for individual benefits. This concern helps drive the
creation of new instruments to facilitate economic independence. Harmful uses will
continue but they will become a smaller portion of the market overall. “As retail adoption
increases the percentage of activity attributable to criminal activity decreases. Perhaps
the earliest of early adopters were criminals, but their rates of doing criminal things has
stayed approximately static while the population of law-abiding users grows
exponentially” (R/PM 1). Innovation will focus on unmet needs and customized financial
products rather than requiring scalability for mass market profitability.
Speculation Contributes to Negative Outlook. Media coverage of
cryptocurrency has focused on the volatility of token prices, the new bitcoin billionaires,
institutional adoption, market disruption, and the coming wave of DeFi. The bull market
has increased cryptocurrency awareness and helped institutions feel comfortable with it
as a financial product, but people who are not familiar with trading in this new
environment may be more vulnerable (CE/FI 2). The rapid rise in valuations, not unlike
those of the 2000s dot com bubble, can make investing in the new market seem like a
no-brainer. Buy some cryptocurrency (bitcoin is too expensive so I will buy something
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cheap that will appreciate more), wait for the market to go way up and then sell for a
profit. What could go wrong? Unfortunately, in the unregulated environment, new tokens
are offered with no oversight, lax security, and no recourse for stolen funds. R/PM 3 is
“concerned with bubbles. You know, people thinking it’s worth more than it is and then
the explosion.” The stories of “losing everything” to a scam further taint cryptocurrency’s
utility and play into the ever-present narrative of cryptocurrency being a tool that poses
a threat to security.
Impact as Financial Innovation. Ninety percent of respondents see
cryptocurrency as a neutral to positive financial innovation. Respondents in the neutral
category acknowledge harmful uses that exist, but believe the technology is evolving
and will turn to more beneficial uses – they are not sure what those uses are yet but
believe that is the overall industry direction. Many respondents used metaphors that
describe cryptocurrency as the next evolution in the financial system. They do not see
cryptocurrency going away; instead, it will become part of the existing financial system.
This is the fintech revolution described by Newfeld in Cryptocurrency: Redefining the
Future of Finance (2020). The most frequently cited reasons for the positive outlook
(financial inclusion, efficient transactions, and decreased cost), focus on benefits to
individual security. Beneficial uses are not a given; stakeholders must work together to
ensure that the necessary guidelines support positive innovation.
Institutional Investment Validates Cryptocurrency. Institutional adoption
provides the legitimacy and validation cryptocurrency and the broader fintech market
need for more mainstream adoption. Investment firms, corporations, and some
governments taking large financial positions send a signal that this is a viable means of
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value storage. This is not just a domestic phenomenon; international organizations are
also taking large stakes as they see potential political uncertainty in their own countries.
“It feels like the industry is reaching a tipping point where institutional money is signaling
this is the future” (CE/FI 3). Demand creates demand and these investments have
paved the way for new investors to want some of the action, which leads to speculation
issues.
Mass Adoption Not Likely Until Fungible with Cash. Fungibility is the ease of
substitution between two things to do a similar activity. Purchasing a cup of coffee or
sending remittances to family members is a routine activity with cash but it can be
cumbersome with cryptocurrency. Further, with the explosion of cryptocurrency types,
what if the customer does not have their value stored in the same type as the vendor is
accepting? Both are examples of adoption hurdles that must be addressed if someone
is going to switch from cash to cryptocurrency for their daily transactions. The dollar is
the legal tender authorized by the U.S. government to settle debts. Use of a single
denomination, rather than community currencies, is what encouraged geographic
expansion and trade as described in the introduction. Multiple tokens may be a
regressive step back to an era when people could only exchange with others who had
the same denominations. Some blockchain-backed protocols are addressing the issue
of cross-token exchange, but the litmus for adoption still remains – can the transaction
happen as or more easily than using cash or credit card (electronic money).
Underutilized Benefits. Hedge against instability, access to the financial market,
decreased costs, and transaction efficiency are all benefits touted by fintech innovators.
So where are these benefits and who is using them? New financial products are being
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created but consumers are not using them because there are gaps in functionality,
education, and access. Individuals new to the space hear the media reports and
understand this is the beginning of a revolution but still lack the knowledge to
understand how it will help them. They may not have money to invest and (hopefully)
profit from the change in market. They have practical use cases in mind – they need to
remit money to family, do not have access to a bank for simple financial transactions, or
do not want a cheaper way to store value. In the new market, consumers are not sure
who to trust and what products will meet their needs. The concept of exchanging fiat
currency, or the electronic representation of currency, is easier to grasp than an
algorithmically controlled, decentralized currency. Trust in the new system needs to be
established and that starts with education from a trusted advisor or social network.
Internet connectivity provides access to these new financial services but discomfort in
the technical operation remains a barrier. When evaluating utility of the new technology
and deciding if they should switch, people make a comparison with what they currently
do. If it is not easier to do the same thing (i.e., switching cost is high), none of the
benefits will be realized.
Technological Changes in Market Are Underway. The initial programming
assumptions used to develop cryptocurrency are changing. Transaction verification,
token programming, and market integration are each going through an evolution.
Blockchai- based tokens that require computational verification for transactions are time
and energy intensive. Bitcoin, and others like it, were not programmed to handle high
volumes of transactions, which makes them a limiter of market growth and decreases
their utility for individual economic security (R/PM 4). Other protocols like Ethereum or
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Stellar are designed to handle higher volumes by reconciling transactions by
consensus. In this way, the cryptocurrency market will split into base tokens and
transactional tokens. New tokens will likely be programmed for one of two purposes,
integration into the broader financial services ecosystem with the intention of meeting
regulatory guidelines and those that emphasize privacy and secrecy with the intent of
facilitating illegal activity. Each course has obvious economic security impacts and steps
should be taken to contain harmful uses. All the discussion of cryptocurrency also belies
the fact that 98% of the world economy is still in fiat currency. The cryptocurrency
market is growing and will likely form a symbiotic (as opposed to parasitic) relationship
with the fiat economy. “I think cryptocurrency is going to be in parallel with fiat. I don’t
see it replacing the dollar, I see it as being complementary” (R/PM 5). This perspective
is shared by most respondents and may dispel one significant national economic
security concern that central banks will lose policy influence of the money supply.
Current Cryptocurrency Impact on Economic Security Is Neutral.
Respondents were asked to qualitatively evaluate the perceived risk (both threat and
opportunity) of selected harmful and beneficial uses of cryptocurrency to national and
individual economic security. Taken in total, there was a slight bias towards threat but
effectively the result is neutral. Critically important is no group felt there was a significant
threat from cryptocurrency use. Drawing on earlier comments, this may be attributed to
the emerging and developing nature of the cryptocurrency market. For all the discussion
of what cryptocurrency “is” and the benefits it brings, it is still vaporware to most
consumers. In its present form, it is still too abstract to see specific impacts (risk or
opportunity) to economic security.
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Cryptocurrency Is Large Opportunity for Individuals and Small Threat to
the Nation. Risk evaluations were made with the assumption that market size for
harmful and beneficial uses were similar. If we link the risk calculation to market size
estimates the picture changes considerably. Based on recent estimates of a $1.7T
cryptocurrency market cap and over 99% of cryptocurrency being used for market
investment or beneficial transactions, the regulatory focus becomes clear – create an
environment that supports innovation. Cryptocurrency has a greater potential for impact
on the individual level, and that impact is largely positive, outweighing any potential
negative effects on a more national or systemic level (CE/FI 3). That is not to say that
there is no national impact; rather, it is very small and can be mitigated with monitoring
and policy intervention. Large institutions took note of these opportunities and others
are beginning to follow.
What Regulatory Changes Can Be Made
The financial industry regulatory environment exists to protect investors, outline
private rights, and create a framework for economic activity. The research indicates that
the regulatory environment has not kept pace with changes in the fintech space, leaving
customers vulnerable and slowing innovation. The problem is exacerbated by lack of
regulatory adaptation, conflicting laws, lack of alignment between the public and private
sectors, and misdirected enforcement.
Regulatory Environment Needs to Adapt More Quickly. Policy and regulatory
development are typically a slow, deliberate process ideally informed by data of a well-
documented issue. Fintech and cryptocurrency are none of those things. When double-
spending was solved and intermediaries were no longer needed, financial innovations
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flooded out leaving regulators to catch up. “[Government] is not in tune with the speed
of market change and regulatory adaption is far behind” (NS/LE 4). Regulatory change
needs to serve two constituents – those who are innovating and those who are
operating under the existing framework. Quick changes in existing policy to appease
one group, may cause unintended consequences to those already operating, and thus
create a new set of challenges. “If cryptocurrencies get adopted quickly, without the
necessary regulatory framework there could be an impact on economic security
because of the lack of checks and balances” (NS/LE 4). If the government feels the
industry is advancing too quickly and it cannot keep up, there may be a tendency to
overregulate and pull things back, which would increase a global competitiveness gap
and hurt national economic security (R/PM 1). Some legislation has been proposed in
the U.S. House of Representatives to provide more regulatory clarity. H.R. 1414
expands the FinCEN mandate to protect against all forms of terrorism, focus on virtual
currency, and partner with tribal nations (2019–2020). H.R. 528 seeks to support
blockchain innovation by not requiring licensing and registration for non-controlling
developers (2019–2020). Frustration with the pace of regulatory change may manifest
in the desire to “throw it all out” and begin anew, but a more balanced approach would
serve the industry better.
Create Closer Public-Private Alignment. Developing appropriate regulations
that support national and individual economic security around an emerging industry
requires knowledge and expertise from all stakeholders. New financial innovations
represent a convergence across utility, telecommunications, banking, and consumer
protection sectors. Regulators need to understand conceptual innovations in the
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industry and unmet needs. Innovators need to understand how agencies might apply
existing regulations. Together, they can identify areas not currently covered and partner
on regulatory approaches. Agencies working together is much easier when designing or
establishing a framework in an area where precedent does not already exist (Guida,
2020). Regulators need to be caught up on technology and what is happening in the
ecosystem. Intersectional policymaking is essential and easy to talk about but much
more difficult to implement. “The key is really going to be how educated the regulators
are in this space. If you have regulators who really understand, who can provide
guidance and not formal guiderails, that’s going to protect future mishaps” (R/PM 2).
Above all, it is a partnership. Public and private actors need to work together to develop
future regulations. R/PM 5 summarizes it this way:
[Regulators] need to hear from industry. There needs to be a lot of public
comment periods before they put rules into place, taskforces with private sector,
just making sure regulators hear from all sides as they put regulations around
this new technology because being at the early stages, it’s going to have long
lasting impact on the regulation of this entire industry.

Focus on Consequence Management. Internet ubiquity allows cryptocurrency
exchanges to operate anywhere. Regulations that significantly restrict operations serve
to push these exchanges to areas that have more relaxed environments, often to the
detriment of customer protections and encouraging use for illegal activity. There is a
balance between enough regulation and the right regulation to maintain customer
protection and keep businesses operating in an area where laws can be applied. No
illegal activity can be completely eliminated (i.e., war on drugs, war on terrorism). Using
cryptocurrency for illegal activities is a tactic and it will be employed in a myriad of
forms. Many of the same illegal activities have been going on for years using fiat
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currency, so the platform may have changed but the purpose has not. Governments
need to decrease the use of the tactic as a viable tool. Government agencies should
focus on containment rather than elimination of illegal cryptocurrency use (9/11
Commission, 2004). Targeting the cause of illegal uses will require significant effort
without yielding commensurate benefit. In this way, illegal uses of cryptocurrency
cannot be stopped but steps must be taken to limit its utility for those purposes
(Southers, 2019). Efforts should continue to focus on the consequence of moving virtual
currency into fiat currency and not following established financial industry practices.
Apply Existing Regulations and Supplement with New. Creating an entirely
new system of regulations while incorporating the fintech innovations may be a “bridge
too far.”. Developing and applying new regulations to an emerging and fluctuating
market makes it very challenging to evaluate policy effectiveness. When issues arise,
policy analysts will have a hard time determining if the policy intervention needs
adjustment or if the industry changed. If established regulations can be applied to an
emerging market, it provides an analytical anchor. Respondents felt the largest
regulatory gap was identifying how existing regulations would be applied to the new
environment. Facing an unclear regulatory environment, the markets are gravitating
towards crypto being classified as a security and developing new products under that
assumption (BA 4). For all that is touted about the revolution of fintech, the conceptual
process is not all that different. Millennia people have been exchanging objects that
represent value to facilitate trade: rocks, shells, coins, paper, and now electronic tokens.
The process has changed but the purpose has not, so much of the legal cannon can be
applied or adapted. However, regulators need to recognize where new standards are
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necessary. The AML/CFT legal framework has made the United States a global leader
combatting illegal finance, but it must continue to adapt to innovations in the financial
markets. Money exchanges and banking entities are the primary organizations bound
by compliance practices intended to limit the illegal use of funds (United States
Treasury, 2020). In the distributed finance environment, those intermediaries are going
away, so existing regulations will have nothing to attach to (R/PM1). Obviously, this will
require a new regulatory approach and developing options requires engaging with
organizations doing the innovation.
Recommendations
It is difficult to compare tangible harmful cryptocurrency uses to promised
beneficial ones, evaluate risk to economic security, and determine a course of action.
Following a data-driven approach, harmful uses can be quantified more easily to
support the need to more closely regulate the DeFi market.
It is easy for regulators to point to the negative use cases as justification for
tighter regulation because there are few positive use cases to be held out as a
counterpoint (De, 2021). Yet, there are tremendous opportunities for individuals who
want to extract themselves from the central banking system and increase equity and
equality to financial products. Earlier research shows only 1% of uses are negative,
harmful, or illegal, and the primary use of cryptocurrency at this time is market
speculation. The overall finding is little can be done to mitigate the use of cryptos for
illegal purposes, so policy makers should focus their efforts on exploiting the benefits.
Following a prospectus approach that promises significant opportunities if innovation is
allowed to proceed, regulators should follow a light-touch approach.
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Innovative financial products built on blockchain technology are entering the
mainstream financial services space and likely to significantly increase in the years
ahead. “It’s still a very new technology and I believe that blockchain technology will
revolutionize the sort of economic systems that we use every day in a similar way that
the internet did in the 90’s” (R/PM 1). CE/FI 4 summarizes it this way:
It’s just like the internet at the turn of the century. It changed the way that
humans interact and share information across the world. I think cryptocurrency
and blockchain technology will radically change the way that humans interact
with value and share value across the world.

Passively watching cryptocurrency development, or worse, ignoring the inroads it is
making, will be done at our own peril. Cliché though it is, the United States needs to
embrace the change and engage more fully; otherwise, regulators may be (if not
already are) too late to bring meaningful guidance to the industry.
Understanding the impact of cryptocurrency on economic security and what
steps should be taken to encourage innovation and contain harmful uses weaves
between these two areas and forms links, creating a complex, interconnected system
(Meadows, 2008). Changes in one area via policy or framework to achieve a desired
outcome may not have the intended effect. The following recommendations are
provided within the broader goal of supporting innovation, maintaining economic
strength, and protecting customers. Figure 21 links the earlier research conclusions with
the following recommendations.
Develop National Strategy
The United States needs to develop a national strategy that clearly states our
intention in the area and creates the boundaries that favor innovation. Some of our
economic adversaries are taking a much stronger position in cryptocurrency and we are
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at risk of losing our position in the global financial market (NS/LE 1). Current national
security doctrine is focused more on physical security and more emphasis should be
placed on economic security (Hurwitz, 2017). Unless the United States sets fintech as a
priority, we will lose our financial advantage in the world. If economic strength is one of
the national security levers, and it decreases, then our leaders may need to rely more
heavily on statecraft and military strength for influence – each with their own impacts.
“Others around the world are looking to increase their competitive position versus the
U.S. and in terms of a national policy, we are literally doing nothing” (R/PM1). Though it
may be slow going, once a coordinated effort is underway, the government can
eventually catch up to the industry but it is unclear what industry advantages may be
lost in the interim (NS/LE 4). It is time to get going.
Identify Lead Agency. National strategies need a lead agency that establishes a
clear operational environment, prioritizes efforts, and aligns regulations across the
governmental enterprise. This agency would not necessarily take on all aspects of
managing the DeFi environment; rather, they coordinate the efforts. Decentralized
organizational structures allow for nimbler daily operation, a desirable characteristic for
a regulatory agency responsible for overseeing a complex, dynamic environment
(Southers, 2019). However, having multiple agencies from different departments being
responsible for different portions of cryptocurrency regulation will create inconsistencies
in enforcement. The Department of Homeland Security (DHS) was created in response
to the 9/11 attacks with the responsibility of developing a coordinated and
comprehensive national strategy to safeguard the country against terrorism
(Department of Homeland Security, 2015). Unlike DHS, the lead agency need not bring
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all others under the same control, but to coordinate the activities of multiple agencies.
The lead agency would also be afforded the appropriate authority commensurate with
these new responsibilities so they have the political leverage to course correct agencies
when needed.
National Accounting of Market Profile. Provision of information is an essential
function of government. Developing a standard process for measuring market size (hard
though it is), growth, and categorization of uses (e.g., harmful, speculation, beneficial) is
needed as part of the national strategy to bring consistency to market evaluation, policy
development, and legislative decisions. Private sector partners should help to validate
findings but not serve as the primary source for the information. Methodological rigor
and clearly stated assumptions are essential for consistency across agencies and levels
of government.
Innovation and Integration. The transformative impact of DeFi will be significant
with unimaginable future use cases. It is essential to encourage this innovation and look
for opportunities to integrate these benefits into the financial system more broadly.
“Decentralized finance projects can offer flexibility in a compliant way that would be very
helpful [to law enforcement]” (CE/FI 1). Globally, countries are making inroads in this
area and the United States must remain among the vanguard if we are going to retain
our dominant position in the international financial system. Other countries have stated
their intent to replace the U.S. dollar as the world reserve currency. R/PM 1 believes the
United States is falling behind on the development and integration of this new
technology:
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Transactions around the world, even if they don’t involve the U.S. or a U.S.
entity, are denominated in U.S. dollars and flow through the U.S. financial
system. That gives us tremendous power and leverage to sort of impose our will
on other countries. I would argue we have lost our first mover advantage and
continuing to fall further behind.
Our economic competitors have been quicker to recognize the benefits of the
blockchain and we need to regain our footing. The United States has had a significant
advantage in the internet age because it “didn’t take a heavy [regulatory] hand and stifle
the development of the internet early on” (R/PM 1). “If you consider a world in which
everyone can do business with a billion people, but the U.S. doesn’t, that is not
particularly attractive from a national economic security standpoint” (NS/LE 1). Federal
and state agencies need to coalesce around a common strategy to ensure the United
States remains an innovator.
Identify National Security Impacts. The nation's economic security is a key
component of our national security. National security is derived from our economic
stability, diplomatic influence, and military strength (Karimi, 2015; Bren et al., 2019).
National security has traditionally focused on defense and physical protection but it
should also include policies that promote the state and economic resilience (Ronis,
2011). President Obama raised the importance of economic issues by including them as
one component of national security policy evaluation (Hurwitz, 2017). Further, President
Biden’s 2021 Interim National Security Strategic Guidance makes clear the connection
between security and prosperity: "At the Center of our National Security Strategy, our
policies must reflect a basic truth: in today's world, economic security is national
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security. And the strength of the American middle class...is a long-standing American
advantage" (p. 15).
Economic security at the national and individual level are characterized by the
strength and stability of the economic condition. The creation of cryptocurrency and the
perceived shift in control from financial institutions to individuals, holds the prospect for
a shift in power dynamics and reducing the stability of the economic system. Yet, we
have seen that the use of cryptocurrency is beneficial for individual economic security
and stakeholders do not foresee significant impact to national economic security at the
current time. Cryptocurrency takes away some control at the national level and transfers
it to the individual level, creating a financial environment that needs regulatory
boundaries to minimize negative impacts and boost beneficial ones.
For national security leaders, security comes from stability, and stability comes
from consistency. National security policy is designed to maintain the status quo and is
biased against significant change (Daniel Bout, personal communication, May 22,
2021). Agencies in the security space may have a hard time seeing the benefits of
cryptocurrency use and chose instead to focus on the harms. This is reflected by the
threat-leaning perceptions of the NS/LE study participants. In their view, U.S. economic
strength is closely linked to national security and the ability of the United States to
project power globally.
National economic health depends on individual economic health; the whole is
the sum of the parts. A weak economy will reduce our ability to forge partnerships
globally (Hurwitz, 2017). Looking towards the future, NS/LE 2 believes “national
economic security is going to continue to be more and more of a problem as crypto
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becomes more relevant, and especially when, when nations start using crypto more.”
So, it is essential that national security be a consideration when developing a national
cryptocurrency strategy.
Establish Closer Public Private Partnerships
In this emerging market, partnerships between the public and private sector will
be essential. Each can serve as a navigator for others in areas of innovation and policy
development. Curiously, there was only one mention by the participants in this study of
a public private partnership to develop a workable regulatory environment. This is
surprising because public private partnerships have become an indispensable part of
regulatory development and implementation (Pagdadis et al., 2008). Regulators need to
understand industry innovations. Unless these groups work together, innovation will be
stifled, customer protections will be inadequate, and the financial innovation needed to
keep the United States a dominant player in the global economy may become more
elusive.
Education. Close partnerships begin with education. Knowledge exchange
among stakeholders helps each understand operating frameworks, constraints, and
areas being explored. Government officials need to understand areas being explored by
innovators, such as what unmet needs exist, how products are being designed to meet
those needs, what the technological innovations underpinning those products are, and
what vulnerabilities exist. Media coverage of harmful uses of cryptocurrency reinforces
negative stigmas in regulators’ minds. They need to understand the broader set of use
cases to see the “big picture.” Innovators need to understand regulatory concerns,
reporting requirements, and enforcement challenges. Policy makers, regulators, and law
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enforcement face significant challenges adapting and enforcing existing laws in the new
environment. Some of these could be mitigated in product design – cryptocurrency is
programmable money after all. R/PM 5 is optimistic that legislators are starting to
increase their knowledge on the topic:
Fortunately, there are strong signs at the federal level that legislators are
becoming more educated and understand the implications of [their] decisions.
Senator Lummis is going to establish a senate caucus on financial innovation,
Chairwoman Maxine Waters and Ranking Member McHenry are also very
interested in FinTech and crypto specifically.

The public needs to understand the new technology and how it will make their
lives easier. Knowledge of the technological underpinnings of cryptocurrency is a hurdle
to mainstream adoption. For many individuals, they simply do not understand what
cryptocurrency is and are therefore hesitant to use it in any way. People who choose to
invest and jump right in without a solid understanding of the industry, may not
understand the pitfalls, so they are vulnerable to scams and cyber-attacks (CE/FI 1;
R/PM 3). They need to understand who is reputable in the industry, what checks and
balances exist, and how they can limit their exposure. Developing trust in the new
system by all stakeholders is what will drive acceptance (CE/FI 2; NS/LE 7).
Identify Minimum Security Standards. Underlying any broad cryptocurrency
adoption is going to be minimum operational security standards. With an interconnected
web of financial instruments, if any one component has security vulnerabilities, others
built on top of it will inherit those vulnerabilities. The 2008 financial meltdown was
exacerbated by poorly underwritten loans aggregated together into higher-rated
financial instruments. The same can happen with DeFi products built on each other. The
financial services sector is considered a critical infrastructure sector by DHS. Particular
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care should be taken to set minimum standards for token security that comply with
existing KYC, AML, Travel Rule, CFT, etc., and laws and regulations. These will be
developed as a component of the public private partnership. Other infrastructure sectors
(i.e., energy) have successfully lobbied to not have government set standards for
operations; rather, they have agreed to set voluntary standards. Recent hacks on water
supplies, energy, and fuel distribution have demonstrated this is not a viable course.
Instead, standards should be developed jointly that provide the security needed but
balance flexibility. R/PM 4 offers a note of caution in regulatory development:
We’re sort of at a crossroads as a society where we need to think about how
much we value privacy and knowledge of financial transactions. The status quo
is that law enforcement has access to transaction information if you use a third
party to do something and that can go away.
BA 3 sees a future where regulators (or other government agencies) can attribute value
movement among parties and believes that will discourage criminal use:
As soon as government control is up to the level of where they can see that
Person A purchased Bitcoin and transferred to Person B, when they can attribute
wallets to personality, then I would say the government will be able to control it
and it’s going to be more safe and there’ll be less criminal use for cryptocurrency.
Industry Monitoring. The government alone cannot lead monitoring and
enforcement of distributed exchanges in the new virtual environment. This needs to be
a “whole community effort” among users, product providers, and government
representatives to develop security focused financial products and monitor industry
behavior. Negative cryptocurrency use cases dominate the media. If future customers
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continue to perceive DeFi as unsafe, they are not likely to investigate and adopt new
financial products. As a token is developed, there are design choices that can be made
to offer some level of privacy for small transactions but capture account numbers of
parties involved in larger transactions (BA 2). For example, perhaps only transactions
over a certain amount and frequency (hypothetically $250 and two per day – similar to
ATM restrictions) are tracked to help law enforcement in this new environment. An
institution centered financial system relies on intermediaries to report observed illegal
activities. When anyone can set up a financial product or contract with no oversight,
there is greater opportunity for illegal use. Government is not typically known for having
cutting-edge knowledge of new technology, so all stakeholders in the space need to be
responsible for monitoring and reporting illegal activity. Fortunately, there are signs that
government agencies are setting up frameworks to engage the private sector in this
effort. H.R.56, the Financial Technology Protection Act, has passed the House and, if
enacted, would create a public and private sector taskforce to study crypto and illicit use
of crypto, and it would also establish an innovation fund that would give grants in
support of going after illicit cryptocurrency use (R/PM 5). Additionally, many NS/LE and
BA respondents indicated they are partnering with representatives in each other’s field
to trace illegal uses and decrease criminal activity. Such collaborations are a tangible
example of how agencies should work together to create a safe distributed financial
environment.
Implement Policy Agenda
Guided by a national strategy and private sector engagement, a policy agenda
must be outlined and implemented to guide tactical efforts. Financial industry
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regulations have not adequately adapted to innovations in the fintech space. The
creation of cryptocurrency and its use in unregulated cyberspace poses a particular
challenge. “In thirty years, all of us will be using some form of digitized currency and
regulation, or the attempt to regulate, is the foundation for this growth” (NS/LE 4).
Companies need a defined and consistently applied regulatory environment. The scope
and scale of this effort is similar to the paradigm shift caused by the internet. At that
time, existing regulations were applied and new ones created to address novel
situations. Stakeholders in the cryptocurrency space need to hold fast to the guiding
principles of focusing on regulatory enforceability, managing consequences,
consistently applying regulations, allowing for innovation, and participating
internationally as they chart the path for the future. “We’re continuing to fall further
behind other countries. We’re so zealously protecting our consumers that we’re going to
end up harming them in the long run as we protect them from the benefits and not just
the risks” (R/PM 1). For NS/LE 7, the broader question of “does crypto really work when
there’s a regulatory framework put over it,” highlights the importance of developing a
balanced public policy.
Regulatory Enforceability. Laws and regulations are only as good as their
enforcement, or the threat of enforcement. Regulation of virtual currency markets is
complicated by the transnational reach of these unregulated enterprises and inability to
enforce laws in an online (i.e., virtual) space (He et al., 2016). A critical point of policy
development will be evaluating if it can be enforced. Gathering evidence, proving
damages, identifying impacted parties and, if necessary, extraditing an individual all
take time and resources. Any legislation to support development and advancement in a
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new industry should also provide the necessary boundaries to ensure compliance and
protection of the public interest (Digital Currency, 2015–2016). The right level of
oversight is needed to keep MSBs compliant with regulatory frameworks and within the
jurisdiction of those regulations.
Focus on Consequence Management. Policies are a tool that can be used to
curtail or direct activities. In some circumstances, direct regulation may not be the most
effective way to address the issue. Instead, a mix of approaches should be utilized to
the extent they influence the outcome in the desired way. As revealed in the discussion
about inconsistent regulation, there is no consensus on how to deal with cryptocurrency.
The ubiquity of the internet allows all people to (virtually) visit any location and transfer
their value where regulations are more permissive. Trying to enforce elimination would
be a fool’s errand and a waste of resources. Rather, a more prudent approach is
containment and consequence management. This is a similar philosophy found in how
the national U.S. government changed the goal of addressing terrorism. Terrorism is a
tool used for political or ideological gain. Initial operational assumptions were that a “war
on terrorism” could be won; however, through years of attempting, no definitive victory
has been achieved. The new goal, though not explicitly said, is for the containment of
terrorism and reliance on partnerships for enforcing policies (Aggour, 2009).
Cryptocurrency is a tool used by criminals to support their illegal activities but it is also
used by individuals to increase their financial freedom. Knowing that illegal
cryptocurrency use cannot be stopped, it will be more important to contain and mitigate
the impacts of harmful and illegal uses rather than try and prohibit them.
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Develop and Consistently Apply Regulations. Regulatory organizations within
the United States should adopt a unified model that fully integrates agencies, aligns
resources, and streamlines authority and responsibility. When evaluating the benefits of
modifying existing laws or developing new ones, it is important to consider what is being
regulated. The process of value exchange has taken place for hundreds of years. In the
past decade, the internet and invention of cryptocurrency has given rise to a new
medium in which currency exchange can take place. The intent of the body of legislation
and regulation is to guide the legal exchange of value among different fiat currencies.
While cryptographic currencies are unregulated, conceptually, they still behave in the
same way as a foreign currency. In this way, it would be more efficient to modify
existing laws where possible and create new ones to address new issues. Regulation of
the cryptocurrency market requires state, federal, and international organizations to be
nimble (Virtual Currencies, 2018). Many governments are drafting legislation on the
classification, treatment, and taxation of cryptocurrency assets (Saiedi et al., 2020). The
U.S. regulatory environment can adapt to cryptocurrency use in a sensible way. Giving
clear regulatory direction will establish equal footing across jurisdictions, drive product
development, and increase cryptocurrency adoption (NS/LE 5; CE/FI 1; R/PM 3).
Create Framework for Experimentation. The strength of the United States in
the global economy comes in part from the innovation fostered within the private sector.
Respondents frequently cited the internet as an example where innovation was fostered
and then the technology was incorporated into existing uses. The light regulatory touch
initially allowed innovative ideas to come forth and then regulation followed. The Food
and Drug Administration has a clear process for pharmaceutical companies to develop,
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test, and seek approval for new drugs. This framework (though there are criticisms)
gives companies a roadmap for innovation and allows them to make a cost-benefit
analysis of bringing new products to market. This concept can serve as a roadmap for
the DeFi industry. Unfortunately:
at the moment there are a lot of institutions that don’t see enough clarity as to
how it’s going to be regulated and what their obligations are, and therefore just
aren’t comfortable, and don’t have the risk tolerance to take on using it, (CE/FI 1)

Regulators should establish a process for fintech companies to develop new products
and test them with governing bodies to understand how they will be categorized and
treated under existing laws (or if new regulations may be needed).
Lead Internationally. The United States needs to reassert itself in international
regulatory development efforts. The United States and Europe have some of the most
developed financial standards in the BSA, but other global partners need to be engaged
and regulate DeFi with the same level of scrutiny (Future of Money, 2018). Interaction
between nations should follow a collaborative model where nations maintain
independent roles but adhere to a common set of strategies and share information.
Beneficiaries of international institutions are not just the member nation states, but the
individuals, businesses, and households connected to the global economy. We cannot
just look at U.S. policies in a vacuum (Hasham et al., 2019; Posen, 2018; R/PM 1).
Concern for the rise and impact of cryptocurrency is not shared equally. After their 2019
meeting in Japan, G20 finance ministers released a communique that summarized their
discussions in key policy areas. They believe virtual cryptoassets do not currently
present a threat to global financial stability and the economy. However, they commit
themselves to adhere to AML and CFT (Japanese Ministry of Finance, 2019). Without a
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broad coalition of support, illegal activity anywhere will undermine efforts everywhere.
As countries explore their cryptocurrency regulatory stance, they should not be
adversarial to other global partners; otherwise, everyone loses. The United States
should create a “geoeconomic directorate” that explores economic policy connection to
national security and recognize its importance in global policy. This would allow for the
increased influence of economic policy and consideration of key issues – in this case,
cryptocurrency regulations (Hurwitz, 2017).
Implementation
The impact of implementing policies designed to control parts of a complex
system need to be carefully studied to determine if the desired outcomes and impacts
are being observed or if there are unintended consequences. Extensive analysis, policy
development, program implementation, and evaluation are needed to guide the efforts
to achieve the desired outcome (Fink, 2015). When changing complex systems, it is
often difficult to predict the exact output because of emergent properties (Taleb, 2012).
In this case, the likelihood of successfully implementing a change in a tightly coupled,
unstructured system across the federal government and 50 states (and ultimately, other
countries of the world) is unlikely. Though a significant hurdle, it is not unsurmountable.
To guide the implementation of recommendations, an understanding of the DeFi
adoption curve, stakeholder analysis, evaluation of political context, feasibility study,
and logic model are provided.
Cryptocurrency Adoption
Returning to Everett’s adoption curve described in Chapter 1, the strength of
innovation, communications channels, and social systems have an impact on the time it
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takes to move from early adopters to later adopters and reach market saturation.
Estimating the DeFi adoption curve (of which cryptocurrency is a subset) is important
because it will provide a guide on how much time stakeholders have to scope and
implement the recommendations. Several interviewees cited internet adoption as a
parallel to cryptocurrency. An analysis by Raoul Pal (Figure 22) shows the current and
forecasted number of cryptocurrency users and internet users.
Figure 22 - Cryptocurrency and Internet Adoption Curve (Log Scale)

Source: Pal, 2021

Based on his analysis, there will be one billion cryptocurrency users nearly five
years sooner than there were one billion internet users. Cryptocurrency addresses the
issue of intermediary driven transactions, with high fees and low flexibility. Its benefits
are shared widely by social media (thank you internet) and reports regularly appear in
mass media. Affinity groups, investment clubs, and Reddit forums all reinforce the
acceptability of using cryptocurrency. Everett’s three elements of adoption are all
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working together to create a steep innovation timeline. This suggests policymakers have
a short window of time to develop the regulatory structure required.
Stakeholder Analysis
Stakeholder analysis is a procedural tool used to identify and describe actors,
their interests, intentions, and interactions. Target groups (those developing the policy,
those enforcing the policy, and those impacted by the policy change) often do not
behave as initially expected when policy changes are conceived. It is imperative to
understand their motivations and drives and contemplate how they are likely to react to
the change (Sandfort & Moulton, 2014). Figure 23 returns us to a series of transactions
between Pete, Sue, and Victoria.
Figure 23 - Stakeholders in Crypto Currency to Fiat Currency Transaction

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Here, Pete would like to learn piano, so Sue teaches him to play Pachebel’s
Cannon beautifully. He is excited and pays her in bitcoin because Sue does not have a
traditional bank account. After many years of teaching, Sue has saved up money for the
down payment on a home. She wants to take the bitcoin she has been paid and buy a
car from Victoria. To do that, she needs to exchange her cryptocurrency for dollars (fiat)
and complete the purchase. Where this transaction differs from the one identified in
Figure 2 is the legal use of a non-fiat currency. Combining our two scenarios (illegal and
legal use of cryptocurrency) and expanding to consider all the regulatory agencies, we
can identify a wide range of stakeholders relevant to these transactions. To simplify the
analysis, they can be grouped into categories:
1. Regulators / Policy
Makers
Federal Reserve, Treasury Department, tax agencies, state
agencies, Department of Commerce, Office of the Comptroller
of the Currency, FinCEN, international agencies;
2. Currency Exchanges /
Financial Institutions
Exchanges, banks, platform developers
3. National Security / Law
Enforcement
Department of Homeland Security, Federal Bureau of
Investigation, U.S. Secret Service, local authorities;
4. Blockchain Analysis Private sector ledger forensics
5. Beneficial users Un(der) banked, currency traders, not for profit, aid agencies
6. Harmful users Terrorists, organized crime, drug traffickers, illegal gambling

Table 30 summarizes the primary stakeholder groups, their involvement in
cryptocurrency use, and their interests in the issue. The analytical framework is adapted
from Varvasovszky and Brugha (2000).

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Table 30 - Cryptocurrency Stakeholder Characteristics
Stakeholders
Characteristics
11

Involvement in Issue
Interest in
Issue
Influence/
Power
Position
Issue Impact
on
stakeholder
Regulators /
Policy Makers
Set policy for ensuring stable
financial system including
identification of illegal activities.
Develop additional guidelines
needed to implement policies.
Medium High Supportive Low
Currency
Exchanges /
Financial
Institutions
Perform conversion of value
between cryptocurrency and
fiat currency. Act as custodian
of virtual and fiat value. Create
platforms for cryptocurrency
use.
High
Low –
Medium
Opposed High
National
Security / Law
Enforcement
Monitor financial transactions
and identify those that exceed
guidelines or appear to
facilitate illegal activities.
High Low
Non-
mobilized
Medium –
High
Blockchain
Analysis
Forensic evaluation of
blockchains to explore transfer
of value among accounts.
High Low Supportive Medium
Beneficial
Users
Use cryptographic currencies
to conduct legal transactions
for convenience, currency
speculation, or distrust with
existing financial system.
Medium Low
Non-
mobilized
High
Harmful Users Use cryptographic currencies
to facilitate illegal activities
because they do not want their
transactions monitored by
regulatory or law enforcement
agencies.
Medium
– High
None Opposed High
Analytical framework from Varvasovszky and Brugha, 2000

Exchanges, financial institutions, national security, and law enforcement have the
greatest interest in the issue because they are the targets for and enforcers of
regulations. However, none has significant influence over the regulatory process. Illegal

11
Involvement in issue generally describes the stakeholder’s relationship to the issue. Interest is their
current attention to the issue, and influence summarizes what amount of input the stakeholder has
concerning the activity (i.e., any legislation, regulatory policy, or guidance related to cryptocurrency or
FinTech development). Position projects the likely receptivity the stakeholder will have to the proposed
change. Issue impact characterizes how significantly the stakeholder will be impacted by the policy
change. Varvasovszky and Brugha (2000) provide a detailed description of each characteristic in their
article, “How to do (or not to do) a Stakeholder Analysis” found in Health and Policy Planning.
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cryptocurrency users purposefully use this medium to keep their transactions secret and
so will dislike any changes – though they have no voice to protest the changes. Legal
users may similarly dislike the additional regulation because they may lead to more
expensive transactions and intrusion in their private financial exchanges (the very
reason they like the anonymity of cryptocurrency).
The analysis in Table 30 provides general stakeholder perspectives related to
cryptocurrency regulation. For each proposed cryptocurrency regulation (e.g., requiring
KYC for transactions, categorization as security or commodity, blockchain anonymity,
etc.), stakeholder perspectives will change based on perceived impact. There is no
single view of reality or, in this case, the benefits and challenges of cryptocurrency use
(Ingram et al., 2007). Stakeholder groups coalesce around perceived relationships and
support for or against proposed changes. In a theoretical example, NS/LE and legal
users may both support KYC regulations but differ on the amount of value that can be
converted between cryptographic into fiat in a single transaction. For each proposed
cryptocurrency regulatory change, interviews with structured questions should be used
to frame issues, identify stakeholder characteristics, and identify perceived challenges
with current and proposed policies (Varvarovsky & Brugha, 2000).
Political Context
Like other contentious issues, modifications to fiscal policy will generate
significant interest. As described in the findings, criminals and terrorists use
cryptocurrency to support their illegal activities but this is a very small portion of the
global economy. Initially, policy makers felt that the wide range of regulations already in
effect (e.g., AML, financial crimes enforcement, combating the financing of terrorism,
200
KYC and BSA) provided the basis needed to prosecute criminals, but additional
guidelines are needed to create the required innovation and product development
framework. Thus, it is unclear whether the effort and political capital needed to
implement wholesale change is forthcoming but there are increased signs of interest as
described in the policy agenda section.
The target audiences for this research are the same stakeholders identified
above. These individuals have a significant interest in the future of cryptocurrency and
need to tackle these large issues now, before the United States falls behind its global
competitors. When evaluating the aforementioned recommendations, it is essential to
consider who makes up the winning coalition (essentials), key supporters (influentials),
and the nominal selectorate (interchangeables) as shown in Table 31 (De Mesquita &
Smith, 2011).
Table 31 - Decision Groups for Implementing Political Change
Decision Group Description
Essentials
Decision makers whose
support is required for
policy success
Representatives of multi-lateral economic agencies (e.g., OCC, FinCen, SEC),
elected U.S. officials on Senate and House commerce committees, Chair of
Federal Reserve, Secretary of Commerce, Secretary of Treasury
Influentials
Supporters who
execute policy and
benefit from political
decisions
Leaders of large U.S. financial institutions. These individuals are guiding the
existing financial system and looking for ways to get involved in the
cryptocurrency market and integrate it with their current service offerings. They
fear being overtaken by the new technology so may take steps to slow its
growth at the expense of national security.
Interchangeables
People with an opinion
on the decision
These are consumers and inventors of new financial tools who are advocating
for change but uncertain about the impact and challenges associated with
disintermediation. Financial professionals may lose their jobs, companies may
close, and brokerage and equity professionals may face changes in income.
Others may advocate for change, as it will increase market access, create new
industries, and allow for the personal choice to decouple from the current
financial system.

In complex systems where some outcomes and impacts are unknowable (i.e.,
impact of cryptocurrency on the financial system), policy makers may show resistance
201
to change (Meadows, 2008). Outcomes are perceived as unknowable because at the
individual level, systems are too complex to understand. Facing overwhelming
information, decision makers do nothing for fear of adverse impacts, leading towards
nominal (if any) change.
In their 2011 book, The Dictator’s Handbook, Bruce Bueno de Mesquita and
Alastair Smith discuss how any change to existing policy will have winners and losers.
Each recommendation will impact stakeholder groups differently and members may
take steps to advocate or derail them based on their view of how they will be impacted.
Table 32 applies this concept to indicate who is rewarded and punished by the three
recommendations identified above.
Table 32 - Groups Rewarded and Punished by Recommendation Implementation
Recommendation Rewards Punishes
Develop National
Strategy
The public benefits from having a
cohesive long-term vision for the nation.
Government departments and agencies
have a single goal that they can use to
align their strategic plans.
Agencies whose functions will be
deemed “less relevant” to achieving
the overall national goal and see their
budgets decline. Also, individuals who
use the lack of a unifying goal to
advance their own agenda.
Closer Public
Private
Partnerships
Financial institutions and industry
representatives developing fintech
products. Allows them to educate
policymakers on industry developments,
preferred protocols, and regulatory
challenges. Policymakers expand
knowledge of new products and law
enforcement gain understanding of how
to track illegal activity exploiting new
platforms.
Financial organizations pushing non-
standard protocols or “leading edge”
products that may be difficult to
regulate. Individuals exploiting lack of
regulatory coordination.
Outline Policy
Agenda
Department responsible for tracking and
studying cryptocurrency industry (likely
Treasury). This gives them new
responsibilities associated with new
financial space. This will give them
regulatory leadership across several
government agencies.
Any agency that now must rely on
Treasury for data and analytics
related to fintech market. FinTech
companies that prefer to “play in the
grey” and exploit unregulated
elements of financial system. This
may decrease their first mover
advantage.

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Policy Design
In “Hints for Crafting Alternative Policies,” Peter May (1981) writes that many
initial policy analyses do not involve envisioning novel situations and then adapting
policies to them; rather, they solve for a single issue instead of the complex
environment that likely exists. The financial system is a complicated network of actors,
policies, connections, and influences and there is no feasible way to stop the use of
cryptocurrency because the internet gives anyone the opportunity to conduct
transactions (legal and illegal) in areas most favorable to this behavior. In this way, May
acknowledges that no single policy is likely to meet all the necessary factors for
success. Any cryptocurrency policy development should consider these four
recommendations:
1. Adopt clear definitions
Federal agencies should develop and adopt clear and consist
terms describing decentralized transactions and how they will
be treated regulatorily.
2. Establish a consistent
regulatory environment
Federal agencies should encourage and incentivize state
governments to enact similar policies to limit the ability to
convert non-fiat into fiat currency.
3. Focus on containment
New policies must place more emphasis on the points of entry
and exit from the real into the virtual currency world.
4. Pursue international
cooperation
The United States should encourage other governments and
global financial institutions to support similar legislation and
treatment of decentralized financial products.

The first three must be implemented concurrently if any change is going to take
place in the United States. They define the problem, set common standards, and focus
on containment. However, with the fintech space changing so quickly, policy
development needs to quickly adapt to emergent issues. Currently, the focus is on
returning value into the fiat system. As cryptocurrency use for daily transactions
increases, there will a potential decrease in need to bring value into the fiat world,
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reducing a primary opportunity for regulation and law enforcement intervention. With
successful execution, it will set a precedent for other nations to follow.
Logic Model
Large programs are a complex system of elements structured and connected in a
way to produce a pattern of behavior. Yet, a system’s behavior cannot be known only by
studying the elements of that system – you must also explore the interactions between
the elements (Meadows, 2008). A logic model is a tool that graphically depicts and
shows relationships between resources and activities and anticipated outputs,
outcomes, and program impacts related to implementing a new policy (Program
Performance and Evaluation Office, 2018). Economists use analytical rigor to predict
policy impacts, but the models cannot adequately capture the complexities of the
broader economic system and often fall short of describing real-world effects (King,
2016). This is where a logic model proves helpful.
Figure 24 shows a logic model that incorporates research recommendations into
a broader framework that identifies inputs and aligns them with activities, outputs, and
outcomes that will (hopefully) lead to the desired impact; in this case, the United States
remaining a global financial leader and minimizing the national security impacts of
harmful cryptocurrency uses. The inputs and activities focus on gathering data and
adapting existing financial policy solutions to support innovation by creating a clear
policy environment. The immediate outputs are creating the framework and oversight
body, clearly applying laws and identifying a security standard. The outcomes and
impacts are where we hope to see an increase in financial system access and
transaction efficiency with the United States remaining a global financial leader, paired
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with minimizing national security impacts of illegal cryptocurrency use. Much of this
success will be contingent on a consistently enforced regulatory environment. (Sandford
& Moulton, 2014). Regular monitoring of the outputs, outcomes, and impacts is needed
to ensure the intended policies are being implemented as envisioned.
Figure 24 - Logic Model for Creating Regulatory Environment that Supports Financial
Innovation and Contains Harmful Cryptocurrency Uses

Limitations and Further Research
Every day across media platforms, there are new articles and reports about the
success of cryptocurrency, its pending demise, the stratospheric rise, new financial
products, technical vulnerabilities, and inability to conduct daily transactions. Each of
these highlights the challenge of conducting research in a rapidly evolving field. Further,
scoping the research in the complex global financial system presents obvious “what
about” issues. The research attempts to balance breadth and depth of the
cryptocurrency payment phenomenon though both directions can use more attention.
Finally, research findings are based on a small convenience sample available for
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interviews during the COVID-19 pandemic. Investigation into other topics with broader
quantitative or qualitative samples would bring additional validity to the research.
The focus of the research is on the domestic impact of cryptocurrency adoption
on national and individual economic security. As noted above, there were several
limitations in the research. Combined with the dynamic market and global nature of
cryptocurrency operations, there are many additional topics that could be explored –
some of which are discussed in the research but could use deeper analysis, and others
that were not touched on. The opportunities are summarized in Table 33.
Table 33 - Areas for Future Research
Topic Description
Market
Comparison
Deeper dive into overall market size, portion used for illegal, speculative, and legal
use, and change over time. What are the recommended metrics for national
measurement, what agency should be responsible, and how can the private sector
assist?
Cryptocurrency
Adoption
A short exploration of cryptocurrency adoption as a new technology was provided as
part of the introduction though understanding the underlying factors and their influence
on adoption may help policymakers understand the likely “place” in the broader
financial environment. What adoption hurdles exist, what is the estimated “breakout”
timeline, and what policies need to be in place before this happens?
Quantitative
Risk Model
Develop quantitative risk model using market comparison metrics and predicted
adoption rates. Evaluate how accurate findings from this research are when compared
to quantitative metrics. This would be among the initial activities of the department
responsible for managing the government’s national cryptocurrency strategy.
Central Bank
Digital
Currency
(CBDC)
Federal Reserve Chairman Powell issued press release that the central bank is
exploring use of CBDC. Over 80% of global central banks are exploring the release of
a CBDC. In the United States, this is driven by the desire to maintain a geopolitical
influence, ensure financial inclusion, move into the modern digital financial world, and
uphold social values (Brummer, 2020). BC4 believes the first country to come out with
CBDC will lead market. If it is the United States, it will strengthen our position as the
world reserve currency. If not, there is further erosion of our position. Should the
United States create a CBDC and what are the domestic and international risks
associated with the decision?
Stablecoins Stablecoins are a digital twin of fiat currency but the flexibility that comes with
decentralized, blockchain-based transaction reconciliation. If the government
transitioned to a cryptocurrency tied to the USD, there would likely be a significant
increase in adoption and continued use as global denomination (NS/LE 7). What does
the conversation to a USD-based stablecoin look like and what risks exist?
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Topic Description
Global
Reserve
Currency
The U.S. dollar is the global reserve currency and used to denominate multi-country
transactions. This function of the dollar gives the United States tremendous leverage
in global affairs as the dollar’s value can change based on interest rates and liquidity
controlled by the U.S. Treasury. If a cryptocurrency became the global reserve
currency, what geopolitical impacts would that have on the international balance of
power?
Decentralized
Finance
DeFi is an informal set of decentralized protocols used by individuals to create their
own financial services (e.g., loans, collateralized debt, derivatives, etc.). This market is
entirely deregulated and has no AML, KYC, or other financial monitoring protocols
programmed into them. What potential impacts on the financial system exist if
individuals can provide unregulated financial products to anyone on the globe?
National
Security
National security is supported by national economic security. As stated earlier, direct
impact to national economic security is currently low. However, what broader national
security issues arise from the use of cryptocurrency (many of which are identified in
this “further research” section)? How likely are they and how can the risk be
mitigated?
International
Regulations
An inherent challenge with an internet-based technology is global regulation. As U.S.
regulators develop the policy framework environment, it may move activities we want
to monitor elsewhere. Laws and enforcement are inconsistent internationally, allowing
criminals to transact business in the most favorable environment. Some countries do
not believe cryptocurrency constitutes a risk to the global markets so they are more
likely to develop their own regulations rather than collaborate on a broader standard,
which would be detrimental to the international security interest (Martin, 2017; Pieters,
2018). Post-World War II, the United States led efforts to establish the foundations
and administrative institutions to support global economic growth at the Bretton
Woods Convention. What is the current level of international cryptocurrency regulation
and what steps are required for the development and enforcement of common
financial policies and operational norms?
Domestic
Regulatory
Environment
The regulatory analysis by state in this research was only cursory. This area is
expansive and needs to be charted out to understand the complexity of interwoven
requirements, different treatments of cryptocurrency, and regulatory agency
responsibilities that align and conflict with each other. What federal and state
regulations exist, how do states classify cryptocurrencies and what is their likely
direction? Answers will support alignment with development of the regulatory policy
agenda described in the recommendations.
Environmental
Impact
The carbon footprint for mining is very high because computational transaction
validation consumes a tremendous amount of power. Some hydroelectric dams have
been constructed to support the power needs of mining operations but more often
coal-powered plants (some that were decommissioned and are being restarted) make
up the majority of power generation, pushing more carbon dioxide into the
atmosphere. This is a particular problem in less-developed countries where there are
fewer regulations. What is the environmental impact of token mining?
Cryptocurrency
Use by
eCommerce
Platform
Office of the Director of National Intelligence in the 2040 Global Trends report raised
concerns that a private company could launch its own virtual currency and require that
exchanges happen only with their token. How viable a concern is this, what
ramifications exist if it took place, and what steps can be taken to mitigate the risks?

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Conclusion
Cryptocurrencies are increasingly being exploited for their anonymity, flexibility,
and convertibility to facilitate illegal activities. Internet connectivity has propelled
organized crime from local and regional activities to a diverse transnational web of
illegal and legal activities. In all cases, these organizations seek to conduct business on
the fringes of the legitimate economy and out of any government's reach.
When we first met Pete, Sue, and Victoria, they were cutting one another's lawn
and buying coffee, but when the same group turned to illegal activities, transaction
monitoring was more challenging and it was easy to see why stopping the harmful use
of cryptocurrencies was important. Yet, then we looked at the beneficial uses of
cryptocurrency and the legal transition back into the regular marketplace when we saw
the challenge with blanket regulation of cryptocurrency. How is it that we support the
positive uses while reducing the desirability as a method of facilitating illegal activities?
Answering our two research questions provided more insight for navigating this
regulatory environment. The overall qualitative risk of cryptocurrency use on economic
security is almost neutral. However, when factoring in the market size and harmful and
beneficial breakout, we see that the opportunity for individual economic security
significantly outnumbers the threat posed to national economic security. The regulatory
environment is not adapting quickly enough but there is an opportunity to match
cryptocurrency uses to existing classifications and develop new guidelines to encourage
growth.
Policy makers and regulators have the most influence on the issue but they may
perceive expending political capital to initiate or advocate for policy may not be in their
208
best interest. Cryptocurrency users have little to no voice in the regulations, while
currency exchanges and law enforcement are most interested in the issue because of
the potential impacts on their regular operations. Eliminating the use of cryptocurrency
is not possible because of challenges regulating the cyber environment, so policies
should focus primarily on containment and consequence management. With little desire
to make wholesale changes to the current financial environment, making advances in
this area can be achieved through the modification of existing regulations rather than
creating new ones.
Struggle for Control
The broader issue with cryptocurrency is not about legal and illegal use, but is
about control. Fear, uncertainty, and doubt surround the cryptocurrency evolution. DeFi
is an amorphous, disruptive force that will likely have impacts that go far beyond the
financial sector. The real battle taking place is between the entrenched financial system
and the real, or perceived, threat that comes with losing control of peer-to-peer finance.
At a macro level, the global economy is a delicate balance of power among
nations and money equals control. Forming trade pacts to strengthen relationships,
providing financing to developing economies, and levying sanctions are examples of
economic actions used to encourage and discourage behaviors among nations. These
actions are predicated on the central control of economic activity among nation state
financial institutions. Essentials (as described by De Mesquita and Smith) are fearful
that transferring control away from their institutions and putting it into the hands of
individuals and non-nation state organizations will upend the geopolitical power
balance. Influentials face a similar disruption in the power dynamics due to their support
209
of essentials and existing political structures. The country that establishes the platform
for this new economy will reap certain benefits. China, as one of the United States’ main
economic rivals has significant incentive to be the “first mover” and establish itself as
the new world economic superpower. U.S. national security would surely be impacted
by a shift of this nature. Cryptocurrencies are not likely to supplant global fiat currencies
at this point. However, for the United States to maintain a significant role in the global
economy, it must harness the technological benefits of blockchain-based finance rather
than dither and let other nations take a leadership role.
At a micro level, interchangeables (individuals and countries controlled by the
wealthy nation financial hegemony) may be those that benefit from this disruption.
Some individuals view cryptocurrency as their opportunity to withdraw from the central
bank controlled financial system, not because they want to conduct illegal activity;
rather, so they can exist in a more financially equitable world of their choosing.
Future
The dawn of the second industrial revolution is beginning and this one is not
driven by mechanical innovation but by a digital one (Drum, 2018). The virtual and
cryptocurrency markets will continue to evolve as technology changes, access
increases, and uses multiply. Regulatory development will need to consider how to
adapt to a moving target (He et al., 2016). The international environment has changed
over the last several years. Globalization was the mantra for the last decade, but in the
recent past, nations are retrenching, and there are more confrontations between trading
partners. Respondents to the World Economic Forum's 2019 risks survey identified
economic confrontations between nations, erosion of global frameworks, and political
210
confrontations as the top three short-term risks. This may lead to protectionist behavior
and a move away from existing international systems, much less motivation to engage
in new ones. Some efforts have been made to address common threats but what lies
ahead in cryptocurrency? There are many different predictions on what will happen with
cryptocurrency in the future. In particular, determining if it will it remain a niche product
or move into mass market adoption and whether the greatest impact of Nakamoto’s
invention will be cryptographically validated transactions or the blockchain ledger. Table
34 summarizes some potentialities and groups them by likelihood.
Table 34 - Cryptocurrency Industry Predictions
Prediction Likelihood
Time
Horizon
Very Moderately Black Swan
Short term
1–2 yrs
• Peer-to-peer confirmation
becomes accepted
validation for
transactional tokens
• Smart integration across
chains
• Daily use tokens in
experimental stage
• Global adoption of
cryptocurrency
• USD no longer global
reserve currency
• Disruption of global
financial markets
• Quantum computing
invalidates computational
validation
• Group gains control of
foundational blockchains
by owning or mining more
than 51%
Near term
2–5yrs
• Dual existence –
cryptocurrency and fiat
currency more
mainstream
• Liberal democracy CBDC
launched
• Areas with low financial
penetration are early
mainstream adopters
• Confidence in financial
and government
institutions continues to
decrease
• Environmental impact of
crypto mining becomes
an important factor
• Significant value stolen
from mainstream token
• Blockchain based micro-
finance
Long term
5+ yrs
• National security impacts
of cryptocurrency use
become more prominent
• Widespread token-based
transactions
• Bitcoin becomes stable
store of value
• Non-liberal democracy
CBDC gains prominence
• Developing nations will
see majority of
transactions move to
crypto platform
• International trade groups
using dedicated
cryptocurrencies

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The U.S. monetary hegemony has been enabled by acceptance of the U.S.
dollar. As other countries awaken to the possibilities created by bitcoin and other
cryptocurrencies, their adoption is likely to increase (Treece, 2021). An evolution is
underway, one that will disrupt intermediary-oriented financial markets and transition to
decentralized exchanges of value through programmable contacts and cryptographic
currencies. For the United States to remain relevant in the global economy, it will need
to embrace this emerging asset class and take the necessary steps to be part of this
economic platform and encourage innovation. Failing to do so may not have immediate
impacts, but over time, it will create a competitive disadvantage and could shift the
balance of global financial leadership and the nation’s economic influence.

212
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Appendices
Appendix A – Survey Instrument
Question Interview Question
Cryptocurrency Market
1. Over the last five years, would you say the cryptocurrency
market has changed...
• Not at all
• Slightly
• Somewhat
• Moderately
• Significantly
2. What are the primary drivers for that change? Free response
3. In the next five years, how do you see the cryptocurrency
market changing?
• Not at all
• Slightly
• Somewhat
• Moderately
• Significantly
4. What are the primary drivers driving future change? Free response
5. Is there a reliable estimate of the number of users in the
cryptocurrency market?
• Yes
• No
Cryptocurrency uses
6. How do you define a beneficial use of cryptocurrency? Free response
7. What are the three most beneficial uses of
cryptocurrency?
Free response
8. How beneficial are the following cryptocurrency uses:
a) Privacy and control
b) Hedge against government instability
c) Decrease financial system costs
• Not at all
• Slightly
• Somewhat
• Moderately
• Extremely
9. How do you define a harmful use of cryptocurrency? Free response
10. What are the three most harmful uses of cryptocurrency? Free response
11. How harmful are the following cryptocurrency uses?
a) Used to avoid state/federal laws
b) Money laundering
c) Purchase illegal items (e.g. drugs, weapons)
d) Finance terrorism
• Not at all
• Slightly
• Somewhat
• Moderately
• Extremely
12. Based on the previous discussion of beneficial and
harmful uses, what percent of the total cryptocurrency
market constitutes beneficial uses? What percent
constitutes harmful uses?
Free response
226
Question Interview Question
Cryptocurrency impacts on economic security
Economic security is the strength and stability of economic
condition:
• National level – economic growth, stable economy,
manage money supply
• Individual level – can cover expenses, financial resilience,
access to financial markets

Using the definitions above and thinking back to the beneficial and
harmful uses of cryptocurrency you just described...

13. How do you see those uses impacting national economic
security?
Free response
14. How do you see those uses impacting individual economic
security?
Free response
15. Considering the beneficial and harmful uses and potential
impacts of those uses on national and individual economic
security, how would you rate crypto currency as a financial
innovation?
• Very negative
• Somewhat negative
• Neutral
• Somewhat positive
• Very positive
Cryptocurrency Regulations
16. Is the level of cryptocurrency regulation in the United
States...
• Not enough
• About right
• Too much
• Too inconsistent to say
17. What level of agreement do you have with the following
statements:
a) The current regulatory environment encourages
beneficial uses/development of cryptocurrency?
b) The current regulatory environment discourages
harmful uses/development of cryptocurrency?
• Strongly disagree
• Disagree
• Neither agree or disagree
• Agree
• Strongly agree
Closing
18. Which of the following roles would you put yourself into?
(select all that apply)
• Policy Maker
• Regulator
• Law Enforcement
• Economist
• National Security professional
• Currency Exchange/Bank
• Beneficial user
• Harmful user
• Other
19. How long have you been in this role? Free response

227
Appendix B – Interview Script and Worksheets
Question Interview Question
Cryptocurrency Market
You believe over the next five years there will be
____ change in the cryptocurrency market.

A. Of the driving factors for the next five
years, what do you think is the most
important?
Free response
Cryptocurrency uses
B. When I asked you to define beneficial
and harmful uses of cryptocurrency,
what kinds of things did you consider?
Free response
C. For the uses you identified above and
the three listed here (show worksheet to
interviewee), how often are these
beneficial uses employed?
• Never Responses captured on
• Rarely Frequency of Use Worksheet
• Occasionally
• Moderately
• Regularly
D. For the uses you identified above and
the three listed here, how often are
these harmful uses employed?
• Never Responses captured on
• Rarely Frequency of Use Worksheet
• Occasionally
• Moderately
• Regularly
How confident are you in the split of
beneficial and harmful uses?
Free response
Cryptocurrency impacts on economic security
This section of questions began with my working
definition of economic security.

E. How would you define economic
security at a:
• National Level
• Individual Level
Free response
Returning to the list of beneficial and harmful
uses of crypto you provided (show worksheet to
interviewee), what level of impact do they have
on...

F. National economic security?
G. Individual economic security?
• Very Negative Responses captured
• Somewhat Negative on Impact of Use
• Neither Worksheet
• Somewhat Positive
• Very Positive

You rated cryptocurrency as a ____ financial
innovation.
H. Why do you think that?

Free response
Cryptocurrency Regulations
I. What regulatory changes should be
made?
Free response
228
Question Interview Question
Closing
J. Is there anything else you want to share,
or I should have asked?
Free response

Frequency of Use Worksheet

Impact of Use worksheet

Beneficial Uses Never Rarely Occassionally Moderately Regularly Not sure
Increased access to financial services
Hedge against government instability
Decrease financial system costs
Harmful Uses Never Rarely Occassionally Moderately Regularly Not sure
Individuals avoid state/federal laws
Fund illegal organizations
Purchase illegal items (e.g. drugs, weapons)
Finance terrorism
How frequently are beneficial and harmful uses are employed?
Beneficial Uses
Very
Negative
Somew hat
Negative
Neither
Somew hat
Positive
Very
Positive
Very
Negative
Somew hat
Negative
Neither
Somew hat
Positive
Very
Positive
Increased access to financial services
Hedge against government instability
Decrease financial system costs
Harmful Uses
Individuals avoid state/federal laws
Fund illegal organizations
Purchase illegal items (e.g. drugs, weapons)
Finance terrorism
For each of the beneficial and harmful uses, what level of impact does it have on...
National Economic Security? Individual economic security?
(economic grow th, stable economy, manage money supply) (cover expenses, financial resilience, access to financial markets)

Abstract (if available)

Abstract Currency serves as society’s memory of actions undertaken and the creation of benefit. For thousands of years, it has facilitated exchange and is considered one of mankind’s greatest inventions. It has changed in form and function and adapted to technological advances as countries reached across oceans and trade became a global endeavor. Yet, few could anticipate the transformational shift caused by Satoshi Nakamoto’s introduction of bitcoin and the blockchain in 2008 and the disruptive impact it would have on the financial system. Intermediary driven reconciliation was replaced with algorithmic validation, allowing individuals to exchange value nearly instantaneously anywhere in the world. Cryptographic currency was initially the domain of the nefarious attempting to hide their transactions from the government, but over the last decade, it has shown great promise in expanding access to financial markets, decreasing costs, and improving transaction efficiency. This research explores those beneficial and harmful uses, their impact on national and individual economic security, and the regulatory environment. The findings reveal that a national strategy is needed to align federal and state government efforts, public-private partnerships can help facilitate knowledge transfer, and policy formulation and a policy agenda, consistently applied, will provide the regulatory framework for containing harmful uses while allowing for innovation.

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Asset Metadata

Creator Karimi, Bijan Patrick (author)

Core Title Cryptographic currency and economic security: threats, opportunities, and regulatory challenges

School School of Policy, Planning and Development

Degree Doctor of Policy, Planning & Development

Degree Program Planning and Development,Policy

Degree Conferral Date 2021-12

Publication Date 09/14/2021

Defense Date 07/16/2021

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag cryptocurrency,cryptographic currency,decentralized finance,economic security,national security,OAI-PMH Harvest

Format application/pdf (imt)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Robertson, Peter (committee chair), Edwards, Thomas (committee member), Southers, Erroll (committee member)

Creator Email bijan.p.karimi@gmail.com,bkarimi@usc.edu

Permanent Link (DOI) https://doi.org/10.25549/usctheses-oUC13787080

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