Strengthening American Leadership in Digital Financial Technology (President's Working Group on Digital Asset Markets report under EO 14178), 166 pp. (Part 3 of 4)
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Research, not advice. Part of the Bitcoin research archive (October 2026). Claims labelled unverified, contested or fringe are reported, not endorsed; statuses of bills and rules are as of the date checked. Government, court and patent records are public domain; the research notes are CC BY 4.0.
license. The District of Columbia,339 Puerto
Rico,340 and all states but Montana341 have money transmitter licensing frameworks, though various states
exempt stablecoin issuers (or persons otherwise engaged exclusively in digital asset activities) from their
licensing requirements.342 Accordingly, a nonbank stablecoin issuer generally must obtain numerous licenses
to operate nationwide. While states have made efforts to coordinate exams and harmonize some standards,
there are significant differences in these frameworks and often overlapping supervision. Further, the lack of
clarity regarding the SEC’s jurisdiction over stablecoins has also limited development, including with respect to
the payment of interest and ancillary services like staking. However, recent statements by SEC staff regarding
stablecoins have begun to provide regulatory clarity on which types of stablecoins may fall under the agency’s
jurisdiction.343 As a result, some U.S.-based issuers have sought licenses in other jurisdictions with more
developed and, in some cases more stringent, regulatory frameworks.344
337 Graphic prepared by Paxos.
338 GENIUS explicitly subjects permitted payment stablecoin issuers to the BSA. S. 1582, 119th Cong. (2025) § 4(a)(5)(A) (enacted). More generally, domestic
and foreign stablecoin issuers offering services wholly or in substantial part in the United States are treated as banks or MSBs under the BSA and its
implementing regulations. See 31 C.F.R. § 1010.00(ff) (2024); Financial Crimes Enforcement Network (FinCEN), FIN-203-G001, Application of FinCEN’s
Regulations to Persons Administering, Exchanging, or Using Virtual Currencies 1 (Mar. 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN-
2013-G001.pdf (stating that any person “creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies . . . . is an MSB under
FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.”) (emphasis omitted).
Stablecoin issuers that are U.S. persons must also comply with OFAC restrictions. Finally, note that, on January 10, 2025, during the last days of the Biden
Administration, the Consumer Financial Protection Bureau (CFPB) proposed a rule that would have interpreted the Electronic Fund Transfer Act and its
implementing regulation, Regulation E, to apply to stablecoins. Electronic Fund Transfers Through Accounts Established Primarily for Personal, Family, or
Household Purposes Using Emerging Payment Mechanisms, 90 Fed. Reg. 3723 (Jan. 15, 2025). In May 2025, the Trump Administration’s CFPB withdrew the
proposed rule. Protecting Americans From Harmful Data Broker Practices (Regulation V); Withdrawal of Proposed Rule, 90 Fed. Reg. 20568 (May 15, 2025).
339 D.C. Code § 26–1001 et seq.
340 10 L.P.R.A. § 2601 et seq.
341 The Challenge of Being the Only State Not Regulating Money Transmitters, Mont. Division of Banking & Financial Institutions (Apr. 12, 2023), https://
banking.mt.gov/News/The-Challenge-of-Being-the-Only-State-Not-Regulating-Money-Transmitters.
342 See, e.g., Wyo. Stat. Ann. § 40-22-104(a)(vi).
343 SEC Division of Corporate Finance, Statement on Stablecoins (Apr. 4, 2025), https://www.sec.gov/newsroom/speeches-statements/statement-
stablecoins-040425. Note that GENIUS also prohibits the payment of interest or yield solely in connection with the holding, use, or retention of a payment
stablecoin issued by a U.S.-licensed or foreign payment stablecoin issuer. S. 1582, 119th Cong. (2025) § 4(a)(11) (enacted).
344 For a comparison of stablecoin licensing frameworks in different countries, see PwC, PwC Global Crypto Regulation Report 2025 4 (Apr. 3, 2025), https://
legal.pwc.de/content/services/global-crypto-regulation-report/pwc-global-crypto-regulation-report-2025.pdf.
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Stablecoins and Payments • Innovation in Payments
Internationally active stablecoin issuers also face a fragmented regulatory landscape. Large financial centers
are developing and implementing stablecoin frameworks. Some stablecoin firms have chosen to operate
globally out of smaller jurisdictions that lack a comprehensive regulatory framework or the ability to implement
one. The lack of a coherent and unified framework for stablecoins can undermine their reliability as money
instruments, limiting their utility, stability, or ability to circulate without trading at a discount. It could also
lead to technical challenges, as issuers attempt to meet differing standards on issues such as interoperability,
privacy, and governance. Regulatory fragmentation can also lead to market fragmentation and to reduced or
trapped liquidity within specific stablecoin arrangements; this can limit market depth in ways that affect the
broader health of digital asset markets. More immediately, fragmentation may impose inefficient compliance
and operational costs on U.S. stablecoin issuers operating internationally, damaging their competitiveness.
Stablecoins may be used in a range of applications, including retail and institutional payments and to facilitate
trading in other digital assets. These use cases implicate other regulatory frameworks, including market
structure,345 which is discussed in detail in Chapter III. Customers also may rely on third-party custodians or
other intermediaries to hold their stablecoins.
Recommendation
Faithfully and Expeditiously Implement GENIUS
Executive Order No. 14178 outlines the policy of the Trump Administration to promote and protect the
sovereignty of the U.S. dollar, including through actions to promote the development and growth of lawful and
legitimate dollar-backed stablecoins worldwide.346 Additionally, Congress and President Trump have worked
together to enact GENIUS, which enshrines a pro-innovation framework for stablecoins in Federal law.
The Working Group especially applauds the following aspects of GENIUS, which are essential to enabling
growth and stability in the digital asset market.
• Integrity of Payment Stablecoins. The composition of reserve assets is essential to promote trust in and
use of dollar-backed stablecoins. Payment stablecoins347 are required to be backed by high-quality and liquid
assets so that a claim on a stablecoin issuer representing $1 is worth $1 when redeemed. High quality and liquid
reserve assets reduce the potential for losses to holders of stablecoins and the risk of a run on the stablecoin.
• Onshore Innovation. In order to offer or sell payment stablecoins to a person in the United States, issuers
are required to retain a U.S. license – which would entitle them to modest, additional benefits – or meet
comparable regulatory standards under a foreign licensing regime. Such regulation mitigates risks to
U.S. financial stability, promotes U.S. national security interests, and ensures that U.S.-licensed issuers are
competitive globally.
• Facilitate Cross-Border Flows. Internationally active stablecoin issuers may face unwarranted
impediments to operating across multiple jurisdictions. GENIUS encourages cross-border flows by allowing
U.S. authorities to evaluate foreign frameworks and grant reciprocity to jurisdictions with comparable or
equivalent regimes. Evaluation considerations include reserve requirements, prudential standards, and
supervisory and enforcement capacity.
345 Once a federal regulatory framework for stablecoins is in place, policymakers also should consider addressing the Federal income tax treatment of
stablecoins. The tax rules applicable to any asset depend on how that asset is classified, (e.g., as currency, property, securities or commodities) and how
returns on the assets are treated for tax purposes. The tax characterization of stablecoins is currently uncertain, which means that it is not certain which
set of tax rules apply to them. For further discussion of this issue, see Chapter VII.
346 Exec. Order No. 14178, supra note 1, at § 1(a)(ii).
347 GENIUS defines a payment stablecoin as a digital asset (i) that is, or is designed to be, used as a means of payment or settlement, (ii) the issuer of which
(a) is obligated to convert, redeem, or repurchase for a fixed amount of monetary value, not including a digital asset denominated in a fixed amount of
monetary value, and (b) represents that such issuer will maintain, or create the reasonable expectation that it will maintain, a stable value relative to the
value of a fixed amount of monetary value, and (iii) is not a national currency, a deposit, or a security. S. 1582, 119th Cong. (2025) § 2(22) (enacted).
STREN GTH EN I N G AMERI CAN L EA DERS HIP IN DIGITAL FINANCIAL TECHNOLO GY • 93 •
Stablecoins and Payments • Central Bank Digital Currencies
• Mitigate Risks to Financial System. Risks that might undermine confidence in payment stablecoins
are addressed to promote use of dollar-backed stablecoins. Specifically, the GENIUS licensing structure
mitigates risks of runs (and secondary runs on underlying assets), risks of operational failure, and risks to
financial stability.
• Promote Competition. Payment stablecoins compete with each other and with the services of other
payments providers. GENIUS promotes competition and choice for consumers while recognizing
differences in business models. Fostering a competitive financial ecosystem while also supporting bank
(including community bank) digitalization ensures the continued relevance of both traditional financial
institutions and of business models relying on new technologies.
• Protect Consumers. U.S.-licensed stablecoin issuers are required to address risks to consumers. They must
provide adequate, monthly disclosures of reserve assets and ensure that payment stablecoin owners can
redeem their stablecoins for cash 1:1 on demand. Issuers are not permitted to misrepresent that payment
stablecoins are backed by the full faith and credit of the United States, guaranteed by the United States
Government, or subject to federal deposit insurance or federal share insurance. Moreover, stablecoin
holders’ claims in insolvency are prioritized, and third parties providing custodial services for stablecoin
issuers must segregate stablecoin reserves from their own assets.
• Clarify Regulatory Status of Stablecoins. Payment stablecoins issued by U.S.-licensed issuers (which,
under GENIUS, cannot be yield-bearing) are treated as neither securities nor commodities under relevant
securities and commodities laws and regulations. Additionally, U.S.-licensed stablecoin issuers are not
treated as investment companies under relevant securities laws.
• National Security. Illicit actors, including sanctions evaders, can use stablecoins as a relatively safe and
stable way to hold illicit proceeds before exchanging into fiat currency and to access U.S. dollar liquidity.
In response to specific requests from U.S. and foreign law enforcement, some stablecoin issuers have, in
some cases, taken steps to freeze assets. To promote integrity in stablecoins, protect U.S. national security
interests, and build upon existing AML/CFT and sanctions requirements for stablecoin issuers, GENIUS
explicitly treats U.S.-licensed stablecoin issuers as “financial institutions” under the BSA and therefore
subject to applicable AML/CFT obligations.348 Foreign payment stablecoin issuers are also required to
comply with lawful U.S. orders to freeze and seize assets to counter illicit use.349
The Working Group believes that GENIUS will create a thriving and durable stablecoin ecosystem in the
United States.
To enable this ecosystem to realize its full potential under GENIUS, the Working Group urges all
relevant federal agencies, including Treasury, the OCC, the FDIC, the FRB, the NCUA, the SEC, and the
CFTC, to faithfully and expeditiously implement GENIUS, as required by law.
Central Bank Digital Currencies
A Central Bank Digital Currency is a digital form of fiat money and direct liability of the central bank. CBDC
projects around the world may be targeted at retail payments or wholesale payments. In retail usage, the CBDC
targets individuals by making them holders of a liability of the central bank used for low-value transactions,
including payments. In wholesale usage, the CBDC targets institutions with a function much like a tokenized
central bank reserve, representing an obligation of the central bank to the token holder.
348 Note that domestic and foreign stablecoin issuers offering services wholly or in substantial part in the United States are already subject to the BSA.
Supra note 338.
349 See Chapter V, “Stablecoin Freeze and Seize Process.”
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Stablecoins and Payments • Promoting the Competitiveness of the U.S. Dollar Through Digital Asset Payments and Capital Markets
The Executive Order prohibits the promotion of CBDCs both domestically and abroad.350 CBDCs are provided
by a central bank government authority, and the retail use of CBDCs introduces the greatest risks to the private
sector and private citizens. CBDCs consolidate government control of personal financial information, severely
compromising individual economic and privacy rights. Combined with the potential incorporation of smart
contracts, retail CBDCs could effectively turn fiscal policy over to unelected monetary authorities and could
be used to channel resources away from certain activities and toward others at the whims of those authorities.
According to one estimate, at least 90 countries are actively considering or experimenting with CBDCs.351
China’s CBDC, the e-CNY, has an expansive pilot project that involves 60 banks and payment service providers.
In 2021, the European Central Bank (ECB) launched a two-year investigation phase for the issuance of a CBDC,
the digital euro, and has been in the preparation phase for the digital euro’s issuance since November 2023.352
The ECB is targeting October 2025 for a Governing Council decision regarding the potential launch of the next
phase in the digital euro’s development.353
Retail CBDC efforts, both domestically and abroad, pose severe risks to individual rights, financial systems, and
the sovereignty of the United States. In contrast, private sector technological innovations like stablecoins and
other forms of tokenized assets preserve economic liberty.
Recommendations
• Discourage, oppose, and prohibit the ability of any agency from undertaking any action to establish, issue,
or promote any CBDCs in the United States or abroad.
• Support legislation prohibiting the adoption of any CBDCs in the United States, including, for example, the
Anti-CBDC Surveillance State Act, which was passed by the House of Representatives on July 17, 2025.354
• Support U.S. technological leadership and competitiveness in capital markets and work to upgrade
domestic payment systems, FMIs, and cross-border payments; urge other countries to adopt policies that
promote the role of the private sector within a technology-neutral regulatory regime.
• Examine the extent to which U.S. federal agencies (including the Banking Agencies) and relevant international
financial institutions have engaged in CBDC research or pilot programs contrary to the policies set forth in
Executive Order No. 14178.355
Promoting the Competitiveness of the U.S. Dollar Through Digital Asset Payments
and Capital Markets
A promising use case for stablecoins and other new forms of money is cross-border payments and financial
transactions. A wide range of jurisdictions, private sector groups, and international organizations are engaged
in initiatives to improve cross-border payments.356 Some aim to improve the current regime for cross-border
payments, to which the U.S. dollar and U.S. financial institutions are central, while other projects may aim to
transform global payments to the detriment of the United States.
The dollar is the leading currency in the international monetary system within which cross-border payments
and financial markets have matured. The dollar’s share of global trade (54%) and financial activities (59% of
350 Exec. Order No. 14178, supra note 1, at § 5(a) (“Except to the extent required by law, agencies are hereby prohibited from undertaking any action to
establish, issue, or promote CBDCs within the jurisdiction of the United States or abroad.”). The Executive Order defines “Central Bank Digital Currency”
as “a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank.” Id. at § 2(c).
351 See Today’s Central Bank Digital Currencies Status, CBDC Tracker, https://cbdctracker.org (updated May 2025).
352 Timeline and Progress on a Digital Euro, European Central Bank, https://www.ecb.europa.eu/euro/digital_euro/progress/html/index.en.html (last visited July 13, 2025).
353 Staying Ahead of the Curve: Towards Further Testing and Development, European Central Bank, https://www.ecb.europa.eu/euro/digital_euro/progress/
shared/pdf/241202-timeline-digital-euro-project.en.pdf (last visited July 13, 2025).
354 H.R. 1919, 119th Cong. (2025).
355 See Exec. Order No. 14178, supra note 1.
356 See FSB, supra note 327.
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Stablecoins and Payments • Promoting the Competitiveness of the U.S. Dollar Through Digital Asset Payments and Capital Markets
foreign currency reserves)357 has been much larger than the United States’ share of global Gross Domestic
Product (now around 26%).358 For example, 88% of all FX transactions use the U.S. dollar in one leg of the
transaction.359 More than 80% of the global trade finance market is denominated in dollars.360 Around 60%
Stablecoins: simplifying global banking - streamlined
of global banking sector liabilities and claims are denominated in dollars.361 This affords the United States
framework, process and approach.
broad commercial and security advantages, such as reduced currency risk for U.S. businesses doing business
globally. The U.S.Stablecoins
dollar alsoenable
delivers significant
effortless, benefits
borderless to foreign
transactions investors,
by unifying traditionalmarkets,
and digital and economies in the
financial
form of a stable store of Their
systems. value, a widely
adoption accepted
reduces retail
complexity, instrument,
enhances and aand
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makesliquid global currency, reducing
global finance
more accessible and efficient for individuals and businesses alike.
transaction costs for people and businesses around the world.
Stablecoin
Stablecoin Adoption: Converging Adoption
with : Converging
Existing Frameworkswith Existing Frameworks
Current Banking Networks
(SWIFT Network)
2 to 5+ business days
Traditional
Sending The traditional banking system experiences significant inefficiencies Receiving
Party in cross-border payments stemming from the extensive Party
intermediation inherent in the correspondent banking network.
Framework Originating Correspondent SWIFT Correspondent Beneficiary
Bank (Sender) Bank Network (Receiver) Bank Bank
Stablecoin Access Partners
(Bridge Partners)
30 minutes or less
Stablecoin
Sending On-Ramp Blockchain Off-Ramp Receiving
Party Partner Network Partner Party
“Sandwich”
Exchange Fiat to Stablecoin Exchange Stablecoin to Fiat
Providers that enable users to access Providers that enable users to access
stablecoins and the blockchain. Moving stablecoins and the blockchain. Moving
balances from existing financial systems. balances to existing financial systems.
Direct Transactions
Seconds or less
Stablecoin
(Direct P2P)
Sending Blockchain Receiving
Party Network Party
Adoption Sender’s Wallet
Users that hold stablecoin balances
Recipient’s Wallet
Users that hold stablecoin balances
(reserves) that provide immediate (reserves) that provide immediate
accessibility and transferability. accessibility and transferability.
Bridge to Adoption Built by “On-Ramp” & “Off-Ramp” Providers:
Seamless Conversion No Third-Party Integrated Regulatory
01 between Fiat & Stablecoin
02 Integration Required
03 Compliance Process
On-ramp and off-ramp providers make it easy to These intermediary providers offer direct access to With built-in AML and KYC protocols, on-ramp and
convert fiat currencies into stablecoins and vice stablecoins and services without requiring external off-ramp providers ensure transactions are secure,
versa. This creates a smooth bridge between integrations. This facilitate smooth adoption but transparent, and meet regulatory standards. This
traditional financial systems and the crypto simplifying processes, enhancing key areas of fosters trust among users, supports broader
ecosystem, reducing barriers for users and security, and reducing operational complexity for adoption of stablecoins, and ensures compliance
businesses (i.e., a stablecoin “customer service”). businesses and users alike. with global financial regulations.
Graphic prepared by Alvarez & Marsal
Comprehensive Solutions from the Leading Global Crypto Advisor
357 Sam Boocker & David Wessel, The changing role of the US dollar, Brookings (Aug. 23, 2024), https://www.brookings.edu/articles/the-changing-role-of-
the-us-dollar.
358 GDP (current US$) – United States, World, World Bank Group, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2024&locations=US-
1W&start=1960&view=chart (last visited July 13, 2025).
359 U.S. Department of the Treasury Under Secretary for International Affairs Jay Shambaugh, Remarks at the Third Conference on the International Roles
of the U.S. Dollar Hosted by the Federal Reserve Board and the Federal Reserve Bank of New York (May 20, 2024), https://home.treasury.gov/news/press-
releases/jy2352.
360 First Deputy Managing Director Gita Gopinath, International Monetary Fund, Geopolitics and its Impact on Global Trade and the Dollar, International
Monetary Fund (May 7, 2024), https://www.imf.org/en/News/Articles/2024/05/07/sp-geopolitics-impact-global-trade-and-dollar-gita-gopinath.
361 Carol Bertaut, Bastian von Beschwitz & Stephanie Curcuro, “The International Role of the U.S. Dollar” Post-COVID Edition, Board of Governors of the
Federal Reserve System: FEDS Notes (June 23, 2023), https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-us-dollar-post-
covid-edition-20230623.html.
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Stablecoins and Payments • Promoting the Competitiveness of the U.S. Dollar Through Digital Asset Payments and Capital Markets
International payments are mainly conducted via the correspondent banking system, in which the primary
participants are large banks and financial intermediaries with access to U.S. dollar clearing services and
liquidity. Smaller institutions typically access this system through accounts at larger banks. Participants
send payment instructions and confirmations through specialized messaging systems, like that operated by
the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Payments ultimately settle on
commercial and central bank balance sheets, often on a net basis at predetermined times of day for reasons
of operational and liquidity efficiency. A single payment may travel across several bank balance sheets and
require reconciliation all along the chain in a complex system that has evolved over decades. In many FX
transactions between two non-U.S. currencies, the original currency is converted first to U.S. dollars and then
to the final currency, because it is often cheaper than a direct conversion or because there is higher liquidity
for conversion to or from the U.S. dollar. This explains the U.S. dollar’s dominant role in FX transactions, and
why U.S. institutions and U.S. dollar accounts are central to cross-border payments. This centrality incentivizes
foreign financial institutions to implement U.S. sanctions and maintain robust AML/CFT controls, both of which
are key U.S. economic and national security tools.
For individuals sending remittances, especially to countries with poorer connectivity to the correspondent
banking system, payments may be slower, more expensive, and more opaque. According to 2024 World Bank
data, the global average cost of remitting $200 was 6.4%, with high variation across regions and only 77% of
remittances were available within one day.362 Such direct and indirect costs impede economic development,
creating a demand for alternatives that may be filled by U.S. adversaries. Additionally, as capital markets
accelerate, slower payment infrastructure could increase the risk of failed transactions and may increase
costs for securities firms active across global markets. Despite next day (T+1) settlement for most securities
transactions in the United States, FX transactions still settle in two days (T+2), requiring banks to hold capital
against FX transactions to insure against settlement failure. Additionally, large sections of the system may have
dependencies on unreliable core infrastructures, introducing concentration and operational risks. For example,
in late February 2025, a “hardware defect” in Europe’s Target 2 legacy payment system caused a seven-hour
outage, delaying trillions of euros worth of payments.363 Finally, foreign jurisdictions, seeking to evade U.S.
sanctions, may seek to create alternatives that avoid U.S. jurisdiction.
Digital asset proponents are applying the full suite of new money-like products to cross-border retail
payments. Digital assets and stablecoins already flow across borders, although the evidence indicates that,
except for in select countries, these flows predominantly finance activity within the global digital asset
ecosystem.364
Large-value wholesale cross-border payments can also benefit from the advantages of digital assets and DLT.
While some of this work advances piecemeal upgrades or technical improvements to existing systems, there is
significant interest in designing new multilateral FMIs or common platforms for cross-border payments. In its
most ambitious form, a new FMI would accommodate varied types of tokenized assets traded across borders.
Development of new FMIs remains conceptual for now, and further exploration is ongoing to determine the
technical, operational, and economic viability. The ability to instantaneously transfer deposits globally, or to
program payments with specific conditions, has the potential to significantly enhance client firms’ treasury
operations and cash management. Atomic settlement of wholesale FX payments could also help significantly
reduce settlement risk. Private sector financial institutions, including U.S. firms, both individually and in
consortia, are driving some of these projects.
362 FSB, supra note 327, at 33.
363 Tom Simms, Francesco Canepa & John O’Donnell, ECB’s multi-trillion payments breakdown sends shudders through Europe, (Feb. 28, 2025), https://www.
reuters.com/markets/europe/deutsche-boerses-clearstream-deals-with-residual-impact-ecb-outage-2025-02-28.
364 Raphael Auer et al., DeFiying gravity? An empirical analysis of cross-border Bitcoin, Ether and stablecoin flows, BIS Working Paper No. 1265 (May 2025),
https://www.bis.org/publ/work1265.pdf.
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Stablecoins and Payments • Promoting the Competitiveness of the U.S. Dollar Through Digital Asset Payments and Capital Markets
Without strong U.S. leadership, the development of alternative payment arrangements may weaken the role
of U.S. financial institutions, the dollar, and the effectiveness of U.S. national security tools. While many private
sector projects are being led by or involve U.S. financial institutions, many have based their innovation outside
the United States to take advantage of more favorable regulatory environments for deploying digital assets and
tokenization. This reduces the United States’ ability to establish, influence, and benefit from new standards and
best practices for innovative cross-border FMIs. Additionally, adversarial nations have been active in efforts to
establish new cross-border payment arrangements with the explicit goal of reducing reliance on U.S. dollar-based
infrastructures. The negative effects of these efforts could build as more arrangements are created from which
the U.S. dollar and the United States are absent. Advances in international projects to develop FMIs using novel
payment technology may define new de facto standards. If the United States does not lead, these standards may
be of poor quality, conflict with U.S. values or national security priorities, or intentionally erode U.S. interests.
The United States must seize the opportunity to exert leadership over the emergence and evolution of new
financial market technologies and champion the U.S. private sector to lead these innovations. U.S. participation in
the development of alternative payment arrangements—either directly or indirectly through the oversight of U.S.
private sector initiatives—will help preserve the dollar’s role and increase the ability of the United States to preserve
or improve the efficacy of its national security tools. For example, a U.S. regime for well-regulated stablecoins that
can flow across borders via reciprocity arrangements, as is envisioned by GENIUS, can support the emergence of a
new U.S.-based system for real-time cross-border dollar payments. By virtue of the dollar’s availability, other U.S.-led
arrangements that may rely on innovations such as tokenization would be relatively more attractive than competing
non-dollar models. The involvement of U.S. financial institutions would also reinforce U.S. AML/CFT and sanctions
frameworks, incentivize foreign financial institutions to maintain strong AML/CFT programs, and incentivize non-
U.S. persons to abide by U.S. sanctions if they seek to access to the U.S. financial system.
Recommendations
• Relevant U.S. agencies, including Treasury, should promote U.S. private sector leadership in the responsible
development of innovative cross-border payments and financial markets technologies. Toward this end,
Treasury should consider using its convening authority to encourage and provide clarity to U.S. financial
institutions in leading these efforts.
• Treasury and other relevant agencies should promote U.S. leadership in establishing international legal,
regulatory, and technical standards and best practices for new payments technologies that reflect U.S.
interests and values. Standards, including international standards, should be calibrated to accurately reflect
the risk of innovative digital products and services.
• Domestically and internationally, U.S. authorities should encourage payment solutions that: (i) protect
the two-tier banking system and promote the private sector’s role in financial intermediation, payments,
and capital formation; (ii) preserve individual rights and limit government control of personal financial
information; and (iii) incorporate robust and effective AML/CFT and sanctions controls.
• Treasury, in coordination with other relevant agencies, should engage with international counterparts and
institutions by leading initiatives to upgrade domestic payment systems, FMIs, and cross-border payment
systems, to help protect the primacy of the dollar-based international monetary system.
STREN GTH EN I N G AMERI CAN LEADERS HIP IN DIGITAL FINANCIAL TECHNOLO GY • 98 •
VI Countering Illicit Finance
CHAPTER VI
Countering Illicit Finance
STRENGTHENING AMERICAN LEADERSHIP IN DIGITAL FINANCIAL TECHNOLOGY
Countering Illicit Finance •
Countering Illicit Finance
“The developers expect that this will result in a stable-with-respect-to-energy currency outside
the reach of any government.” – I am definitely not making an [sic] such taunt or assertion.
BitcoinTalk Forum Post Re: “Slashdot Submission for 1.0”
Satoshi Nakamoto, July 2010365
Digital assets, like traditional assets, are subject to abuse by bad actors—terrorists, drug traffickers, state-
sponsored hackers, human traffickers, fraudsters, sanctions evaders, and others. But unlike traditional assets, the
technology underlying digital assets enables ways to mitigate the risk of illicit transactions.366 The U.S. financial
system’s strength, size, and reliability make it a notable target, and misuse by these actors affects matters
of national security. To unleash the full potential of digital assets in the United States, preserve the rights of
innovators to build technologies that advance individual privacy and liberty, and stop financial crime that targets
Americans, the Working Group encourages the adoption of certain measures to deter and combat illicit finance.
These measures, tools, and authorities must be properly scoped to encourage innovation, respect the liberties
and privacy of lawful digital asset users, and protect the financial system from abuse. Treasury’s policy,
enforcement, intelligence, and regulatory tools under the Bank Secrecy Act (BSA)367 and sanctions authorities
are critical to protecting the U.S. financial system. Effective and clear regulation coupled with law enforcement
actions against malicious actors can build confidence among U.S. users and firms seeking to grow domestically.
Transparency regarding developers’ obligations under the law will encourage the onshoring of blockchain
development and support the efforts of American innovators to lead the digital assets industry forward.
The Financial Crimes Enforcement Network (FinCEN), a Treasury bureau tasked with safeguarding the
financial system from illicit activity, has shown leadership on this front. As part of an ongoing effort to establish
clarity for the digital asset industry and the Trump Administration’s broader efforts to ensure regulations are fit-
for-purpose, FinCEN is withdrawing two notices of proposed rulemaking related to digital assets, including one
rulemaking colloquially referred to as the “unhosted wallet rule”368 and a second that proposed amendments to
the travel and recordkeeping rules.369
The U.S. Department of Justice (DOJ) has also committed to ending the Biden Administration’s strategy of
regulation by prosecution in the digital assets space.370 The DOJ will no longer pursue litigation or enforcement
actions that have the effect of superimposing regulatory frameworks on digital assets.371 This decision stems
from the fact that financial regulators (including the SEC, and the CFTC) have regulatory subject matter
expertise and are better suited for such regulatory activities.372 Going forward, the DOJ’s investigations and
prosecutions involving digital assets shall focus on prosecuting individuals who victimize digital asset investors or
365 satoshi, supra note 16.
366 Supra note 349
367 The term “Bank Secrecy Act” refers to a collection of statutes, including certain parts of the Currency and Foreign Transactions Reporting Act, Pub. L.
No. 91-508, its amendments, and the other statutes relating to the subject matter of that Act. These statutes are codified at 12 U.S.C. § 1829b, 12 U.S.C. §§
1951-1960, 18 U.S.C. § 1956, 18 U.S.C. § 1957, 18 U.S.C. § 1960, and 31 U.S.C. §§ 5311-5314 and §§ 5316-5336 and notes thereto with implementing regulations
at 31 C.F.R. ch. X (2024).
368 See Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets, 85 Fed. Reg. 83840 (Dec. 23, 2020).
369 See Threshold for the Requirement To Collect, Retain, and Transmit Information on Funds Transfers and Transmittals of Funds That Begin or End Outside
the United States, and Clarification of the Requirement To Collect, Retain, and Transmit Information on Transactions Involving Convertible Virtual
Currencies and Digital Assets With Legal Tender Status, 85 Fed. Reg. 68005 (Oct. 27, 2020).
370 U.S. Department of Justice (DOJ), Memorandum from the Deputy Attorney General: Ending Regulation by Prosecution 1 (Apr. 7, 2025), https://www.justice.
gov/dag/media/1395781/dl?inline.
371 Id.
372 Id. at 1, 3.
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use digital assets in furtherance of criminal offenses.373 The DOJ has also disbanded its National Cryptocurrency
Enforcement Team and refocused its Market Integrity and Major Frauds Unit on other priorities.374
The Working Group applauds these actions and encourages all relevant agencies to follow the examples set by
FinCEN and the DOJ in evaluating and better tailoring regulation and enforcement.
Illicit Finance Risks
U.S. digital asset participants use digital assets for a variety of legitimate purposes, including investments,
remittances, and payment for goods and services. However, like any medium of exchange, digital assets may
be used by illicit actors to facilitate and profit from crime. The ability to transfer assets quickly across borders
and perceptions of anonymity, which appeal to many digital asset users, also make digital assets attractive to
illicit actors.
Despite increasing over the last decade, the prevalence of money laundering and terrorist financing via
digital assets remains well below that of the same activities utilizing fiat currency, bank and traditional money
services fund transfers, and other methods that do not involve digital assets.375 The Federal government’s
approach to addressing illicit finance in the digital asset ecosystem is informed by an understanding of how
threat actors misuse digital assets and the features of the underlying technology. Moreover, certain industry
estimates indicate that the vast majority of digital asset activity is legitimate, with a relatively small amount
of illicit activity. For example, two blockchain analytics companies assessed that between 0.61% and 0.86% of
all onchain digital asset volumes in 2023 were illicit, accounting for between $46.1 billion and $58.7 billion. As
indicated below, these companies have also conducted assessments for 2024 but anticipate adjustments to
illicit volume over time with delayed reporting, further analysis, and improved attribution techniques to identify
illicit activity.376 These assessments help provide a baseline for illicit activity in the digital asset ecosystem given
certain limitations with using blockchain information for ecosystem-wide trends.377
373 Id. at 1.
374 Id. at 4.
375 See Treasury, 2024 National Terrorist Financing Risk Assessment, supra note 336; Treasury, 2024 National Money Laundering Risk Assessment, supra note 336.
376 Chainalysis, The 2025 Crypto Crime Report 5 (Feb. 2025), https://www.chainalysis.com/wp-content/uploads/2025/03/the-2025-crypto-crime-report-
release.pdf; TRM Labs, 2025 Crypto Crime Report 4 (2025), https://cdn.prod.website-files.com/6082dc5b670562507b3587b4/6823baf9045160ea474b3f7a_
TRM_2025%20Crypto%20Crime%20Report.pdf.
377 The limitations include the adjustments described above, variations in how analytic companies attribute illicit activity to wallets, differences in the
networks and assets included in the assessment, and the fact that assessments only include transactions involving wallet addresses that have been
identified as illicit. Attribution for these purposes can be particularly challenging for transactions involving proceeds of crimes initially conducted in fiat
currency and subsequently converted into digital assets.
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Share of Digital Asset Transaction Volume Associated with Illicit Activity, 2021-2024378
Notably, in addition to volume of illicit activity, the harmful impact of illicit conduct must also be considered
in assessing illicit finance risks in the digital asset ecosystem. For example, while the Democratic People’s
Republic of Korea’s (DPRK) revenue generation through digital assets is a small amount compared to the
market capitalization of digital assets, DPRK is reliant on digital assets to fund the regime’s weapons of mass
destruction and ballistic missiles program.379
DPRK and ransomware cybercriminals have generated significant revenue in digital assets through theft and
extortion payments for several years. In February 2025, DPRK cybercriminals stole digital assets valued at $1.5
billion from a digital asset service provider, the largest theft in digital asset history.380 In 2024, reported losses
from digital assets fraud exceeded $9 billion, a 66% increase from 2023, according to complaints received
by the Federal Bureau of Investigation’s (FBI’s) Internet Crime Complaint Center.381 Losses to digital asset
investment schemes accounted for nearly $6 billion of this total amount.382
Illicit actors can exploit several vulnerabilities in the digital asset ecosystem, including jurisdictional arbitrage,
digital asset service providers that fail to comply with applicable AML/CFT and sanctions obligations, and
anonymity-enhancing technologies. Often, illicit actors use foreign digital asset service providers with weak AML/
CFT and sanctions requirements to launder illicit proceeds. Some of these service providers tout their weak AML/
CFT and sanctions controls to attract customers. The lack of standardization across AML/CFT frameworks across
jurisdictions allows some digital asset service providers to operate in countries with deficient or non-existent
AML/CFT requirements. A Financial Action Task Force (FATF) survey identified that as of mid-2025, nearly 30
countries had not determined their approach to digital asset service providers for AML/CFT, and many countries
378 Chainalysis, supra note 376; TRM Labs, supra note 376.
379 See Office of the Director of National Intelligence, Annual Threat Assessment of the U.S. Intelligence Community (Mar. 2025), https://www.dni.gov/files/
ODNI/documents/assessments/ATA-2025-Unclassified-Report.pdf.
380 Federal Bureau of Investigation (FBI), I-022625-PSA, North Korea Responsible for $1.5 Billion ByBit Hack (Feb. 26, 2025), https://www.ic3.gov/psa/2025/
psa250226.
381 FBI, Federal Bureau of Investigation Internet Crime Report 2024 35 (2024), https://www.ic3.gov/AnnualReport/Reports/2024_IC3Report.pdf.
382 Id. at 36.
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with AML/CFT frameworks for digital asset service providers have not yet operationalized them.383 These
international gaps may allow non-compliant digital asset service providers outside the United States to solicit U.S.
customers away from more compliant U.S.-based digital asset service providers.
Even in the United States, where digital asset service providers are subject to AML/CFT and sanctions
obligations, some digital asset service providers fail to comply with applicable obligations. Such compliance
failures can result in an uneven playing field, placing firms that faithfully discharge their responsibilities to help
safeguard the U.S. financial system at a competitive disadvantage.
Illicit actors use certain tools and methods—such as mixers, anonymity-enhanced cryptocurrencies (AECs),
and chain-hopping—to obfuscate transactional information that may be otherwise viewable on public
blockchains.384 These tools and methods can hinder law enforcement investigations, including tracing criminal
proceeds for seizure and forfeiture, which can allow victim compensation. While these methods and tools may
also be used for legitimate digital assets activities, including by users who want increased privacy for digital
asset transactions (see Chapter VI, Advancing Privacy through Digital Identity and Related Tools), they can
heighten illicit finance risks if they do not simultaneously allow for or promote risk mitigation measures.
Illicit actors may also use DeFi services, along with self-custody, to facilitate peer-to-peer transactions in the
laundering process. While there are licit reasons to self-custody digital assets (see Chapter II), illicit actors can
use the pseudonymity of self-custody and peer-to-peer payments to conceal or to quickly move proceeds.
Improving the AML/CFT and Sanctions Frameworks
The U.S. AML/CFT and sanctions frameworks are designed to protect the integrity of the U.S. financial
system on which U.S. persons and the global economy rely for trade, investments, remittances, and everyday
transactions. The BSA, administered by FinCEN, places obligations on financial institutions to monitor, report,
and take steps to mitigate money laundering, the financing of terrorism, and other illicit finance activity. These
requirements both mitigate the risk of illicit actors accessing the financial system and provide actionable
information for law enforcement and national security agencies to identify and disrupt criminal activity. U.S.
economic and trade sanctions, administered by Treasury’s Office of Foreign Assets Control (OFAC), prohibit
certain adversaries from accessing the U.S. financial system and deter or disrupt behavior that undermines U.S.
national security or foreign policy through the imposition of material costs.
To implement the Trump Administration’s policy of encouraging innovation and responsible use of digital
assets, the United States must protect the digital asset ecosystem and its users by mitigating and combatting
the risks posed by illicit use. Meeting this objective requires AML/CFT and sanctions regimes that impose clear
obligations, tailored to the risk and structure of the industry. In the view of the Working Group, this moment
serves as a valuable opportunity to comprehensively review the AML/CFT regime to ensure it protects the
financial system from abuse without impeding on the rights of law-abiding Americans. Such regulatory
frameworks should respect the lawful use of digital assets by individuals and digital asset firms in the United
States and acknowledge Americans’ privacy rights. Updates to the AML/CFT and sanctions regimes to better
account for digital asset actors will create a more transparent, resilient, and safe digital asset sector and give
the United States a comparative advantage globally.
383 Financial Action Task Force, Targeted Update on Implementation of the FATF Standards for Virtual Assets and Virtual Asset Service Providers 11 (Jun.
2025), https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/2025-Targeted-Upate-VA-VASPs.pdf.coredownload.pdf.
384 “Chain-hopping” refers to the practice of converting one digital asset into a different digital asset at least once before moving the funds to another
service or platform.
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Prescribing BSA Obligations
BSA Background
The BSA authorizes the Secretary of the Treasury to impose various obligations on financial institutions
to detect and combat money laundering, the financing of terrorism and other illicit finance activity, and to
otherwise safeguard the national security of the United States.
Among other things, the BSA and its implementing regulations require financial institutions to establish written
programs to combat money laundering and the financing of terrorism and to keep records385 and file reports
that “are highly useful in . . . criminal, tax, or regulatory investigations, risk assessments, or proceedings” or
“intelligence or counterintelligence activities, including analysis, to protect against terrorism.”386 The Secretary
of the Treasury may also “establish appropriate frameworks for information sharing among financial institutions
and service providers, their regulatory authorities, associations of financial institutions, the Treasury, and law
enforcement authorities to identify, stop, and apprehend money launderers and those who finance terrorists.”387
In 2021, Congress enacted the Anti-Money Laundering Act of 2020 (AML Act) as a part of the William M.
(Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021.388 A key objective of the AML Act
was to strengthen and modernize the AML/CFT regulatory framework. The AML Act also amended the BSA
to further solidify the inclusion of digital assets into the U.S. AML/CFT framework, expanding key definitions to
account for “value that substitutes for currency.”389 The Secretary of the Treasury has delegated the authority
to implement, administer, and enforce the BSA and its implementing regulations to the Director of the FinCEN.
An entity generally has BSA obligations if it qualifies as a “financial institution” under the BSA, which is based
on the entity’s activities, regardless of whether the activity is in fiat, digital assets, or both. Participants in the
digital asset ecosystem may meet the definition of one or more financial institution types under the BSA (e.g.,
MSBs, insured banks, trust companies, futures commissions merchants, broker-dealers), but are predominantly
treated as MSBs.390 Key components of regulations implementing the BSA pre-date the creation of digital
assets, smart contracts, and other industry innovations. Accordingly, the current U.S. AML/CFT framework
does not clearly account for all aspects of the digital asset ecosystem.
Statutory Changes for Digital Asset Financial Institutions
The U.S. AML/CFT framework should consider how obligations can be better tailored and clarified for digital
asset actors. To achieve this, the Working Group recommends that Congress—as it considers germane
legislation—consider providing statutory changes to the BSA that define with greater certainty the actors in the
385 See 31 U.S.C. § 5318(h). The program rules are located at 31 C.F.R. §§ 1020.210 (banks), 1021.210 (casinos and card clubs), 1022.210 (money services
businesses), 1023.210 (brokers or dealers in securities, or broker-dealers), 1024.210 (mutual funds), 1025.210 (insurance companies), 1026.210 (futures
commission merchants and introducing brokers in commodities), 1027.210 (dealers in precious metals, precious stones, or jewels), 1028.210 (operators of
credit card systems), 1029.210 (loan or finance companies), and 1030.210 (housing government sponsored enterprises) (2024). Additionally, under Title 12 of
the U.S. Code, the federal banking agencies and the NCUA maintain regulations requiring insured depository institutions and credit unions to “establish and
maintain procedures reasonably designed to assure and monitor” their compliance with the requirements of the BSA. See, e.g., 12 U.S.C. §§ 1818(s), 1786(q);
see also 12 C.F.R. §§ 208.63(b), 211.5(m), 211.24(j) (FRB); 12 C.F.R. § 326.8(b) (FDIC); 12 C.F.R. § 748.2 (NCUA); 12 C.F.R. § 21.21(c) (OCC) (2025).
386 31 U.S.C. §§ 5311(1), 5318(g) (2024).
387 31 U.S.C. §§ 5311(5) (2024); see also 31 U.S.C. § 310(d) (2024).
388 Pub. L. No. Law 116-283 (2021). The AML Act was enacted as Division F, §§ 6001-6511, of the Pub. L. No. 116-283 (2021).
389 See AML Act § 6102(d). Note that regulatory definitions pre-dating the AML Act recognized that BSA obligations could apply to activity involving “value
that substitutes for currency.” See Financial Crimes Enforcement Network; Amendments to the Bank Secrecy Act Regulations-Definitions and Other
Regulations Relating to Money Services Businesses, 74 Fed. Reg. 22129, 22137 (May 12, 2009) (discussing current definition of “money transmitter” and
proposed inclusion of “value that substitutes for currency,” among other changes”); Bank Secrecy Act Regulations – Definitions and Other Regulations
Relating to Money Services Businesses, 76 Fed. Reg. 43585 (July 21, 2011) (adopting definition); FinCEN, FIN-2019-G001, Application of FinCEN’s
Regulations to Certain Business Models Involving Convertible Virtual Currencies 4 (May 9, 2019), https://www.fincen.gov/sites/default/files/2019-05/
FinCEN%20Guidance%20CVC%20FINAL%20508.pdf; FinCEN, FIN-2013-G001, supra note 338, at 3.
390 See, e.g., 31 C.F.R. §§ 1010.100(h) (defining broker or dealer in securities), 1010.100(bb) (defining introducing broker-commodities), 1010.100(ff) (defining
money services business) (2024); Tarbert, Blanco & Clayton, supra note 111.
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digital asset ecosystem that are subject to BSA obligations. Such legislation could consider creating a bespoke
digital asset-specific financial institution types or sub-types, which could enable Treasury to more carefully
tailor AML/CFT obligations to different participants in the digital asset industry, such as exchanges, stablecoin
issuers, and firms engaged in digital commodity transactions.
While stablecoin issuers typically transact with institutional rather than retail customers, illicit actors may use
stablecoins to generate and launder their proceeds of crime. As a good practice, some issuers have capabilities
to mitigate risks related to secondary market transactions in the stablecoin that they issue. This can include
the ability to freeze funds or block transactions involving their stablecoin. Many issuers also use blockchain
analytics to identify risks in the stablecoin ecosystem and can use that information to freeze tokens when
warranted. Additionally, Treasury should work to develop tailored AML/CFT obligations for payment stablecoin
issuers, including ensuring that U.S. law enforcement receives highly useful reports involving stablecoins.
Treasury should also explore how stablecoin issuers’ risk-based AML programs should address higher-risk
activities in the secondary stablecoin ecosystem without placing undue burden on the issuer, as well as
program requirements relating to freezing and seizing stablecoins. Chapter V discusses additional information
on stablecoins and related regulatory recommendations that are relevant for understanding the operational
context in which stablecoins are used.
Further, as discussed in Chapter III, certainty regarding the regulatory market structure for digital assets is critical
to market growth. As Congress considers updating federal agencies’ authorities related to digital assets, it should
ensure that necessary changes are also codified in the BSA such that digital asset firms supervised by the CFTC
and SEC, including any newly created types of financial institutions, are subject to BSA obligations as appropriate.
BSA Obligations and Considerations for DeFi
FinCEN has taken steps to promote certainty and foster innovation in the digital markets. Guidance from
FinCEN has been useful in assisting industry with understanding obligations as money transmitters. In 2013,
FinCEN issued guidance, which explained how FinCEN characterized certain activities involving digital assets
under the BSA and implementing regulations.391 The guidance clarified that an administrator or exchanger that
“(1) accepts and transmits a virtual currency or (2) buys or sells convertible virtual currency for any reason” is a
money transmitter392 under FinCEN regulations and, therefore, subject to the regulations of a money services
business (MSB) under the BSA.393 The 2013 guidance also stated that a user who “obtains virtual currency and
uses it to purchase real or virtual goods or services is not an MSB under FinCEN’s regulations.”394
In 2019, FinCEN issued additional guidance on the application of regulations on certain business models
involving convertible virtual currencies (CVCs).395 The guidance highlighted key facts and circumstances
FinCEN used to set forth how various models could be treated under the BSA. For example, the guidance
further clarified how FinCEN regulations may apply to peer-to-peer activity, explaining that “Peer-to-Peer
(P2P) exchangers are (typically) natural persons engaged in the business of buying and selling CVCs,” and
391 FinCEN, FIN-2013-G001, supra note 338.
392 Id. at 3. FinCEN’s regulations define “money transmitter” as a person that provides money transmission services, or any other person engaged in the
transfer of funds. 31 C.F.R. § 1010.100(ff)(5)(i)(A) (2024). The term “money transmission services” means “the acceptance of currency, funds, or other
value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another
location or person by any means.” Id.
393 FinCEN, FIN-2013-G001, supra note 338, at 3. The guidance also defines “virtual currency” as “a medium of exchange that operates like a currency
in some environments, but does not have all the attributes of real currency” and notes that “virtual currency does not have legal tender status in any
jurisdiction.” Id. at 1. The guidance defines convertible virtual currency (CVC) as “a type of virtual currency [that] either has an equivalent value in real
currency, or acts as a substitute for real currency.” Id. Later guidance from FinCEN refers to “digital asset,” “cryptocurrency,” and “cryptoasset” as labels
applied to particular types of CVCs. See FinCEN, FIN-2019-G001, supra note 389, at 7.
394 FinCEN, FIN-2013-G001, supra note 338, at 2.
395 FinCEN, FIN-2019-G001, supra note 389.
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that a “natural person operating as a P2P exchanger that engages in money transmission services involving
real currency or CVCs must comply with BSA regulations as a money transmitter acting as a principal.”396 In
contrast, “a natural person engaging in such activity on an infrequent basis and not for profit or gain would be
exempt from the scope of money transmission.”397
FinCEN’s 2019 guidance also provided insight on how an entity’s control over access to value could impact
whether an entity is an MSB. The guidance set forth four criteria to be considered an intermediary under the
BSA, including “whether the person acting as intermediary has total independent control over the value.”398
Hosted wallet providers are generally subject to BSA requirements since they control the user’s value.399 In
contrast, in unhosted, single-signature wallets, the owner has “total independent control over the value,” and,
according to the guidance, a natural person who engages in peer-to-peer transactions for their own purposes
is not a money transmitter.400
Finally, the guidance suggests that determining whether certain participants in the DeFi ecosystem provide
money transmission services depends on the facts and circumstances of the model, which would presumably also
include a consideration of whether the service exerts “total independent control.”401 FinCEN further stated in an
administrative ruling that “production and distribution of software, in and of itself, does not constitute acceptance
and transmission of value, even if the purpose of the software is to facilitate the sale of virtual currency.”402
While this guidance is instructive, the current U.S. AML/CFT regime does not sufficiently consider truly
decentralized protocols, where the governance/decision-making is distributed across communities of users, and
the protocols may be immutable or otherwise technologically incapable of collecting customer information or
reporting suspicious activities. The uniqueness of the DeFi ecosystem has propelled a protracted conversation
in policy circles across the globe regarding the appropriateness and logistics of requiring decentralized
protocols and other participants in the DeFi ecosystem to adhere to same AML/CFT obligations as centralized
intermediaries, whether unique obligations tailored to the technology should be developed, and how to
effectively mitigate illicit finance risks in the DeFi ecosystem, among other core considerations.
This challenge calls for creative solutions to enable clarity for those engaged with the technology.
Decentralized protocols generally have no administrator, retain no control over any funds or digital assets being
transacted, are unable to collect customer information, and cannot file Suspicious Activity Reports (SARs).
Moreover, decentralized protocols are unable to complete simple MSB registration functions, like completing
the registration process with FinCEN—Form 107—that necessitates importing identity validating information
(i.e., SSN/EIN, phone numbers, physical address, etc.), or conducting entity-level MSB anti-money laundering
obligations, such as adopting a written anti-money laundering program.403
To provide clarity to industry and allow tailored solutions to mitigate illicit finance risks, Congress should
consider a principled approach to defining various actors in the DeFi ecosystem as discussed in Chapter III.
Congress could provide a clear definition of what constitutes “true” decentralized protocols and clarify, or
provide direction to the appropriate regulator to clarify, how obligations apply to entities that utilize smart
contracts or have some characteristics of DeFi but do not meet all elements of a decentralized protocol. As
part of this effort, Congress should consider codifying language expressing which portions, if any, of the DeFi
396 Id. at 14, 15.
397 Id. at 15 (emphasis omitted).
398 Id.
399 See id. at 15-16.
400 See id.
401 See id. at 14, 15, 18.
402 FinCEN, FIN-2014-R002, Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity (Jan. 30, 2014),
https://www.fincen.gov/sites/default/files/administrative_ruling/FIN-2014-R002.pdf.
403 31 C.F.R. § 1022.210 (2024).
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ecosystem should have AML/CFT obligations and the kinds of obligations actors should have by constructing
the parameters of an AML/CFT framework appropriate to the class of activity.
Depending on the definition, this could include services that custody assets or have centralized governance,
including through instances in which governance tokens are held by one or a small group of persons that can
effectively assert control. In considering statutory changes, Congress should recognize the good practices that
some participants in the DeFi ecosystem are implementing and focus on which entities are best positioned to
mitigate illicit finance risk. Parts of the ecosystem, such as certain application layer participants, relayers, and
remote procedure call (RPC) nodes, are currently implementing risk mitigation measures, including risk-rating
wallets and rejecting transactions above a certain risk score. Subject to Congress’s direction, Treasury could apply
specified obligations to actors in the DeFi ecosystem based on the role that they play and the attendant risks.
Further Improvements to the AML/CFT Regime
In October 2023, FinCEN issued a notice of proposed rulemaking that proposed requiring financial institutions
and financial agencies to implement certain recordkeeping and reporting requirements relating to transactions
involving convertible virtual currency (CVC) mixing.404 FinCEN received over 2,200 comments in response
to the proposal. Concerns remain about how illicit actors, such as DPRK and ransomware actors, continue to
use mixers to obfuscate and launder funds. Nevertheless, lawful users of digital assets may leverage mixers
to enable financial privacy when transacting through public blockchains. To maintain the balance of those
critical objectives, Treasury should consider the need to mitigate illicit finance risks, protect privacy, and reduce
burden to the financial sector to evaluate appropriate next steps.
The United States has observed digital asset service providers and other actors attempting to avoid BSA
obligations by domiciling in jurisdictions with weaker or non-existent regulatory frameworks or enforcement
capacity, while still providing services that reach U.S. customers and even substantially impacting the U.S.
digital asset ecosystem. This places U.S.-based industry actors at a disadvantage.
Recommendations
• Treasury should faithfully and expeditiously implement the Guiding and Establishing National Innovation
for U.S. Stablecoins Act (GENIUS), which, among other things, requires Treasury to adopt rules to treat
permitted payment stablecoin issuers as financial institutions under the BSA and to seek public comment
and conduct research to identify innovative or novel methods, techniques, or strategies that regulated
financial institutions use to detect illicit activity involving digital assets.405
• Digital asset market structure legislation should consider creating digital asset specific financial institution
types or sub-types within the BSA. Now that GENIUS has been enacted into law, and pending additional
market structure legislation being considered by Congress, FinCEN should evaluate whether and how its
existing guidance related to the digital asset sector, including the guidance issued in 2013 and 2019, should
be rescinded, modified, or updated to reflect legislative and regulatory changes.
◆ As part of this effort, FinCEN could consider whether additional guidance would be helpful for particular
market segments or for application of particular BSA obligations.
• Legislation should consider specifying actors within the decentralized finance ecosystem that should have
AML/CFT obligations, taking into consideration those actors’ roles in the ecosystem and attendant risks.
• Treasury should consider next steps regarding its proposed rulemaking concerning CVC mixing.
404 See Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern, 88
Fed. Reg. 72701 (Oct. 23, 2023).
405 S. 1582, 119th Cong. (2025) §§ 9(a)-(c) (enacted).
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• Congress should consider clarifying language regarding the BSA’s application to foreign-located actors,
taking into consideration the extent to which a foreign-located actor’s conduct, and the effect of such
conduct on the United States, warrants reach of U.S. law.
• Congress should evaluate the self-custody language that is included in CLARITY406 and codify the following
principles through legislation that reinforce the importance of self-custody:407
◆ Principle 1: The importance of U.S. individuals maintaining the capability to lawfully hold, or custody,
their own digital assets without a financial intermediary.
◆ Principle 2: The importance of enabling U.S. individuals to engage in lawful, direct digital asset transfers
that do not involve a financial intermediary with another individual that lawfully self-custodies digital
assets.
• Congress should codify principles regarding how control over an asset impacts BSA obligations, particularly
for money transmitters, through legislation such as the Blockchain Regulatory Certainty Act,408 which has
been incorporated into CLARITY.
◆ Specifically, such legislation could codify that a software provider that does not maintain total
independent control over value is not engaged in money transmission for purposes of the BSA.409
Enhancing Effective Supervision
As the United States further develops a regulatory framework for digital assets and the number of supervised
financial institutions in the digital asset ecosystem increases, it will be critical for relevant regulatory
supervisors to enhance capabilities and expertise to supervise digital asset firms, as well as traditional financial
institutions engaged with digital asset or digital asset actors.
Banks, credit unions, and other financial institutions interested in providing services to the digital asset
industry or digital asset services to their customers may have questions about BSA obligations as they extend
new services or develop new relationships.410 Accordingly, supervisors administering and examining for BSA
obligations should consider where additional guidance would enhance institutions’ abilities to interact with
digital assets and digital asset actors.
At present, experience with and resources devoted to supervision of digital assets firms varies across
supervisory agencies. Ensuring effective and more consistent supervision and examination of digital asset
service providers for AML/CFT requirements may require: (i) training; (ii) evaluating examination cycles and
priorities based on risk; (iii) increasing the number of supervisors focusing on digital asset firms; and (iv)
updating examination manuals to cover digital assets. Moreover, communication and information sharing on
risks, best practices, and challenges across supervisors could support more effective supervision. Emphasis
on effective, risk-based supervision should be central to these efforts, in contrast to a technical, one-size-fits
all approach that does not make distinctions in risk profiles across supervised financial institutions. Effective
supervision can reduce burdens for both supervisors and for financial institutions under their jurisdiction,
allowing each to allocate resources in a manner consistent with risk. Moreover, this approach avoids placing
unwarranted burden on lower-risk sectors, entities, and activities. Such efforts also present an opportunity to
allow for more risk-based and effective supervision of financial institutions, including digital assets firms, in line
with broader efforts to strengthen the U.S. AML/CFT framework.
406 H.R. 3633, 119th Cong. (2025)
407 Protecting these capabilities should not inhibit the ability or authority to carry out enforcement actions or special measures authorized under applicable law.
408 H.R. 3533, 119th Cong. (2025); see Emmer’s Securities Clarity Act and Blockchain Regulatory Certainty Act, supra note 196.
409 See FinCEN, FIN-2019-G001, supra note 389, at 15, 18.
410 See Chapter IV.
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Recommendations
• Treasury and the agencies to which it has delegated responsibility for AML/CFT examinations should
identify areas of uncertainty for traditional financial institutions providing services to digital asset actors
and digital asset services to customers. Agencies, including Treasury and the Federal banking agencies,
should provide needed guidance or other materials to help clarify AML/CFT obligations and expectations
with regards to those actors and services.
• Supervisors should evaluate whether additional compliance tools, training, and internal resources are
needed to ensure examiners can effectively and efficiently evaluate institutions’ digital asset-related
policies, procedures, and programs.
Adapting BSA Reporting to Better Account for Digital Assets
A critical component of the BSA regime is the mandatory reporting intended to provide highly useful
information for criminal, tax,411 and regulatory investigations, risk assessments, or proceedings, as well
as intelligence or counterintelligence activities to protect against terrorism.412 These reports enable law
enforcement and national security agencies to identify criminal activity, find otherwise opaque connections
between related criminal actors, and locate assets derived from criminal activity that can be seized and, at
times, returned to crime victims. While these reports are useful to law enforcement and national security
agencies, creating and filing these reports imposes a burden on filers. As reporting obligations are considered,
the burdens and benefits of reporting, as well as privacy concerns, must be carefully weighed.
Suspicious Activity Reports
Under the BSA and its implementing regulations, covered financial institutions are obligated to file Suspicious
Activity Reports (SARs) when the institution knows, suspects, or has reason to suspect that a transaction
conducted or attempted by, at, or through the financial institution (i) involves funds derived from illegal
activity or is intended or conducted to disguise funds derived from illegal activity; (ii) is designed to evade any
requirement of FinCEN’s regulations or any other regulation promulgated under the BSA; (iii) lacks a business
or apparent lawful purpose, or is not the sort in which the particular customer would normally engage and
the financial institution knows of no reasonable explanation for the transaction; or, for some institutions, (iv)
involves the use of a financial institution to facilitate criminal activity.413
Certain financial institutions, including digital asset service providers, have expressed that the SAR reporting
regime could be more effective, both at providing key intelligence for law enforcement and national security
agencies and ensuring financial institutions are directing their resources towards generating the most
significant and impactful SARs.
As part of its efforts to implement the AML Act, Treasury is in the process of comprehensively reviewing its
SAR regulations, guidance, and the SAR form itself, to maximize the value and efficiency of the reporting, while
protecting individual privacy. As part of this process, Treasury should consider how best to update the form to
facilitate inclusion of digital asset-specific information, which could increase the utility of these reports to law
enforcement conducting digital assets-related investigations. Treasury should also consider how to streamline
reporting for less complex reports and—as part of this review—consider how to enhance financial institutions’
use of technology, including artificial intelligence and machine learning.
411 In addition to BSA reporting, the IRS uses reporting provided for Federal tax purposes to prevent tax evasion. For further discussion of current and
proposed tax reporting regimes, see Chapter VII.
412 31 U.S.C. § 5311.
413 See 31 U.S.C. § 5218(g); see also 31 C.F.R. §§ 1020.320, 1021.320, 1022.320, 1023.320, 1024.320, 1025.320, 1026.320, 1029.320, 1030.320 (2024).
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Recommendation
• Treasury should continue to evaluate modernizing Suspicious Activity Report (SAR) reporting, including the
SAR form itself, to ensure it captures highly useful information.
Other BSA Forms
In addition to reporting by financial institutions, the BSA and its implementing regulations require other entities
to file certain reports that provide highly useful information. For example, the BSA directs Treasury to require
citizens of the United States, among others, to “keep records and file reports” when they maintain a relationship
“with a foreign financial agency.” Pursuant to this direction, Treasury requires each U.S. person having a financial
interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country
to file a Report of Foreign Bank and Financial Accounts (FBAR).414 Although the FBAR does not currently require
reporting related to digital assets, reporting required by FBAR regulations in some circumstances overlaps
with reporting required by the Foreign Account Tax Compliance Act. Chapter VII contains more discussion and
recommendations related to this reporting.
Additionally, the BSA, the Internal Revenue Code, and their respective implementing regulations require
any person engaged in a trade or business who, in the course of such trade or business, receives more than
$10,000 in coins or currency in one transaction or two or more related transactions to file a Form 8300 with
FinCEN or the IRS.415 In 2021, Congress amended the Internal Revenue Code to incorporate digital assets into
the Form 8300;416 however, digital asset transactions are not yet required to be reported as implementing
regulations have not yet been made.417 Chapter VII discusses how any IRS regulations implementing these rules
would account for stakeholder concerns.
Although Congress amended the Internal Revenue Code, it did not amend the corresponding authority in
the BSA. Once digital asset transactions are required to be reported on Form 8300, this discrepancy may
create substantial industry confusion as trades and businesses may be required to follow one procedure if a
reportable transaction involves digital assets and another if the reported transaction involves fiat currency.
Recommendation
• Congress should, through appropriate legislation, ensure that the information required by statute to be reported
to FinCEN for BSA purposes under 31 U.S.C. § 5331 conforms with the information required to be reported by
statute to the IRS for federal income tax purposes under 26 U.S.C. § 6050I, as was the case prior to 2021.
Improving Sanctions Compliance Regarding Digital Assets
OFAC sanctions regulations apply to all U.S. persons, including digital asset exchanges, technology companies,
software developers, or other digital asset industry participants, that are subject to U.S. jurisdiction.418
414 31 C.F.R. § 1010.350 (2024).
415 31 U.S.C. § 5331; 26 U.S.C. § 6050I; 31 C.F.R. § 1010.330(a)(1)(ii) (2024). The $10,000 threshold for reporting transactions was established in 1984 (IRS) and
2001 (FinCEN) and has never been adjusted for inflation.
416 Note that the constitutionality of this amendment is currently being litigated. See Carman v. Yellen, No. 5:22-cv-00149 (E.D. Ky.).
417 Internal Revenue Service, IR-2024-12, Treasury and IRS Announce That Businesses Do Not Have to Report Certain Transactions Involving Digital Assets
Until Regulations Are Issued (Jan. 16, 2024), https://www.irs.gov/newsroom/treasury-and-irs-announce-that-businesses-do-not-have-to-report-certain-
transactions-involving-digital-assets-until-regulations-are-issued.
418 The key terms of each sanctions program are defined in the implementing regulations or Executive Orders, as appropriate. The term “U.S. persons” is
defined in many implementing regulations to include “any United States citizen, permanent resident alien, entity organized under the laws of the United
States or any jurisdiction within the United States (including foreign branches), or any person in the United States.” Additionally, non-U.S. persons are
also subject to certain OFAC prohibitions. For example, non-U.S. persons are prohibited from causing or conspiring to cause U.S. persons to wittingly or
unwittingly violate U.S. sanctions, as well as engaging in conduct that evades U.S. sanctions.
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Although OFAC may impose civil penalties for sanctions violations based on strict liability,419 OFAC’s sanctions
compliance program expectations for digital assets industry participants are risk-based, not rigid or
prescriptive.420 Additionally, to promote clarity, innovation, and compliance with sanctions obligations, Treasury
prioritizes engagement with the digital asset industry to educate participants on sanctions obligations,
including through informal engagements and discussions as well as formal outreach at industry-focused
conferences. OFAC uses these engagements to share existing industry guidance and public resources, such
as OFAC’s Compliance Hotline, which industry participants and the broader public can use to contact OFAC
for guidance around sanctions regulations. These resources are key to ensuring that industry participants,
including companies developing new offerings that may not understand how sanctions obligations apply, have
access to OFAC guidance which they can rely on as they innovate in the digital assets sector.
Still, some digital asset firms have expressed a desire for additional resources explaining sanctions obligations
related to various business models. Given that sanctions obligations apply to all U.S. persons and not just financial
institutions or businesses, this is particularly relevant for developers who are creating software in the DeFi
space. Developers and technologists should have clear resources available to them so that they understand
how sanctions obligations apply. Based on feedback from the private sector, OFAC could consider publication of
additional resources to further promote digital asset industry compliance with sanctions obligations.
Recommendations
• Treasury should issue a Request for Information (RFI) to directly solicit sanctions compliance information,
input, and recommendations from industry participants to understand ongoing developments and
innovations and gaps in existing OFAC guidance as well as to identify opportunities for enhanced private
sector collaboration.
• Treasury should consider revising and updating OFAC’s existing Sanctions Compliance Guidance for the
Virtual Currency Industry brochure, which highlights existing compliance tools such as traditional sanctions
screening and blockchain analytics to help improve sanctions compliance by all industry participants, in
accordance with insight gleaned from the RFI process.
Advancing Privacy Through Digital Identity and Related Tools
The public nature of many blockchains provides insight into financial activities in digital assets, which
can be used to support AML/CFT and sanctions compliance. While public blockchains provide
certain transparency, some digital asset users may want to preserve their privacy when conducting
transactions. The Working Group supports civil liberties protections surrounding privacy and the ability
of individuals to privately transact on public blockchains. Enabling privacy is also critical to enabling
the increased use of digital assets for payments as individuals may not want to publicly disclose every
purchase of goods or services or allow salary payments or other private transactions to be tracked.
At the same time, regulated intermediaries need to be able to identify customers, report suspicious
activities, and freeze or block certain transactions in line with their BSA and sanctions obligations.
Several entities in the digital asset industry are developing tools designed to support various elements
419 Note that OFAC takes a number of factors into consideration when determining whether to assess a civil monetary penalty, and, if so, what penalty would
be appropriate (e.g., willfulness, reckless, and knowledge of the conduct at issue, as set forth in OFAC’s Economic Sanctions Enforcement Guidelines,
31 C.F.R. pt. 501, Appendix A (2024)).
420 OFAC has issued guidance specific to the digital asset to promote understanding of, and compliance with, sanctions requirements and due diligence
best practices. See generally OFAC, Sanctions Compliance Guidance for the Virtual Currency Industry (Oct. 2021), https://ofac.treasury.gov/media/913571/
download?inline.
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of AML/CFT and sanctions compliance while maximizing user privacy. For example, digital identity
technologies, identity proofing solutions, and other credentialing approaches can support regulated
digital asset intermediaries in verifying identities of customers while preserving user privacy. Digital
asset intermediaries could also use these tools as a safeguard against malicious actors attempting to
gain unauthorized access to user accounts. While the applicability of these tools varies by operational
models, governance, trustworthiness, and convenience, they offer a potential pathway to support
intermediaries’ risk mitigation in the digital asset ecosystem.
Some private sector digital identity tools combine online and offline components. For example, some
digital credentials are issued based on physical attributes, such as requiring a credential recipient to
appear in person or requiring physical documents for verification prior to issuance of a credential.
Additionally, some tools may use unique capabilities within the digital asset space, with some tools
tokenizing credentials and others tying the credential to a digital asset wallet address and preventing
transfers to other addresses. These tools could potentially be used by regulated digital asset
intermediaries to support onboarding or by a DeFi services’ smart contracts to automatically check
for a credential before executing a user’s transaction. These tools could also potentially incorporate
a user’s transaction history on the public blockchain into their identity profile, providing additional
information to digital asset intermediaries and other counterparties on a user’s behavior and exposure
to illicit finance risks.
To maximize privacy, some tools use Zero Knowledge Proofs,421 which can enable users to confirm that
their identity has been verified or subject to screening by a third party without revealing underlying
personal information. Depending on the design of the tool, access to underlying personal information
could be allowed at the user’s request or with their permission. Additionally, some technologies allow
selective disclosure of attributes, in which a user can decide which personal information to share
with the recipient. These technologies can potentially support a path to enabling greater privacy
preservation in customer identification models.
Further evolution of these tools, however, may require additional exploration on how private sector
tools can adequately verify customers and protect their data. Regulatory bodies should provide
additional clarity to financial institutions on how these tools can be used to identify and verify
customers and to comply with other AML/CFT and sanctions obligations.
Moreover, digital identity solutions offer innovative capabilities to protect sensitive information
and to reduce compliance burdens associated with verifying identifies. For example, the ability to
pass a credential with only the necessary identifying information for a particular task both ensures
that information is not unnecessarily exposed should an institution’s systems be compromised and
streamlines the verification process. As these solutions continue to mature, regulators should consider
how to encourage the use of privacy-preserving technologies and ensure financial institutions can take
advantage of their benefits, including by, where appropriate and consistent with risk, being able to rely
on another financial institution’s performance of customer identification.
421 A “zero-knowledge proof” is a “cryptographic scheme where a prover is able to convince a verifier that a statement is true, without providing any more
information than that single bit (that is, that the statement is true rather than false).” Glossary: Zero-Knowledge Proof, National Institute of Standards and
Technology, https://csrc.nist.gov/glossary/term/zero_knowledge_proof (last visited July 13, 2025).
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Recommendations
■ Treasury should consider coordinating with the National Institute of Standards and Technology
(NIST), and other federal agency partners as appropriate, to:
◆ Identify emerging approaches to implement customer identification in digital asset scenarios,
including possible applications of the Fourth Revision of the NIST Digital Identity Guidelines (SP
800-63-4) to these scenarios.
◆ Evaluate lessons learned in the project “Accelerate Adoption of Digital Identities on Mobile
Devices” being executed in the National Cybersecurity Center of Excellence for applicability to
customer identification programs in digital asset scenarios.
◆ Evaluate the digital asset ecosystem, including existing identity credentialing tools and
technical aspects of digital asset services, to determine potential approaches for defining,
mandating, and enforcing customer identification programs and evaluate the potential efficacy
of such schemes in detecting, deterring, and investigating fraudulent transactions.
■ As is required by GENIUS, Treasury should issue an RFI to gather information on innovative tools to
detect illicit activity, including with respect to digital identity verification.422
■ Utilizing the information gathered from such RFI, additional research, and industry engagement,
Treasury should, in consultation with the federal functional regulators,423 consider issuing guidance
to financial institutions on how they can utilize digital identity solutions within their existing
customer identification programs.424 Treasury should ensure that future guidance balances secure
identity verifications with protection of personally identifiable information.
Equipping Digital Asset Actors to Mitigate Risk
Protecting the digital asset ecosystem from misuse requires strong partnership between the public and private
sectors. The government relies on financial institutions to comply with AML/CFT and sanctions obligations
designed to identify, report, and mitigate illicit finance risks. As such, it is critical that the private sector is
equipped with the appropriate authorities and a strong understanding of risk to combat misuse.
Enabling Private Sector Investigations
Some characteristics of digital assets, including the ability to rapidly transfer digital assets across borders, can
present challenges in identifying and disrupting illicit activity involving these assets. Moreover, digital asset
transfers are typically irreversible, further reducing the likelihood that funds, even if quickly reported, can be
recovered. To mitigate this risk, some digital asset institutions, including exchanges and stablecoin issuers,
may in some circumstances wish to temporarily hold assets when they identify suspected illicit activity. During
the time those assets are held, institutions can investigate and determine whether, for example, the asset
is stolen or linked to fraud or other criminal activity. Enabling institutions to identify and temporarily hold
property involved in suspected illegal activity will equip these institutions with ability to control risk and protect
digital asset users.
At times, however, institutions may feel constrained in their ability to temporarily hold assets to investigate
suspected illegal activity. In other contexts, some states have enacted digital asset specific-“hold laws” that
422 S. 1582, 119th Cong. (2025) § 9(a) (enacted).
423 “Federal functional regulators” means the SEC, CFTC, FDIC, OCC, FRB, and NCUA. 31 U.S.C. § 5318.
424 See S. 1582, 119th Cong. (2025) § 9(d) (enacted).
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offer safe harbors to institutions that temporarily hold property involved in suspected illegal activity during the
pendency of a short duration investigation.425 The ability to temporary hold property as authorized by such laws
enable institutions to, for example, contact a user to ascertain whether they are a scam victim or whether an
asset has been stolen.
Recommendation
• Congress should consider enacting a digital asset-specific “hold law” that offers a safe harbor to institutions
that temporarily and voluntarily hold property involved in suspected illegal activity during a short duration
investigation. Such a law should consider transparency when an asset is frozen and consumer protection
measures.
Increasing Public-Private Cooperation
Public-private partnerships play a critical role in sharing trend and operational information to support actions
to deter and disrupt illicit activity. For example, the private sector has insight into emerging risks, challenges
in complying with AML/CFT and sanctions obligations, and innovative measures to mitigate these risks. The
Working Group supports efforts across the Federal government to solicit private sector input when evaluating
potential policy directions or developing guidance and regulations.
Treasury, to highlight one example of these efforts, held private sector roundtables in May 2025 to discuss
DeFi, stablecoins, and cybersecurity. During the roundtables, more than thirty industry participants shared
good practices, challenges, and recommendations for how the Federal government can promote responsible
innovation in the digital asset ecosystem. Building on the May roundtables, in July 2025 FinCEN held a FinCEN
Exchange426 to convene traditional financial institutions, digital asset service providers, compliance tool
providers, industry associations, and law enforcement to discuss responsible innovation, industry challenges,
new compliance tools, compliance best practices, and fraud and scam typologies. Treasury will continue
engaging with the private sector through similar forums and bilateral meetings to both share information
and to learn from industry about developments in the digital asset ecosystem. This can include further
engagements to discuss innovative compliance tools and good practices employed by DeFi participants, such
as application layer participants (front ends), relayers, and RPC nodes, to mitigate illicit finance risks. Moreover,
the Federal government shares trends on illicit finance risks in digital assets through products like FinCEN
alerts or advisories, FBI’s Public Service Announcements, and public-private partnership efforts, including
FinCEN Exchange as well as direct engagement.
The Federal government also enables sharing actionable information, including through FinCEN’s 314(a) and
314(b)427 programs and the Illicit Virtual Asset Notification (IVAN) public-private partnership. Through the
314(a) program, law enforcement authorities can submit identifiers to financial institutions about individuals,
entities, and organizations engaged in or reasonably suspected, based on credible evidence, of engaging
in terrorist acts or money laundering activities. Upon receiving the identifier, a financial institution confirms
whether it has additional information on the entity.428 The complementary 314(b) program provides financial
institutions with the ability to share information with one another, under a safe harbor that offers protections
425 See generally American Bankers Association Foundation, State “Hold” Laws and Elder Financial Exploitation Prevention: A Survey Report (2025), https://
www.aba.com/-/media/documents/reference-and-guides/2025-sbfs-elder-law-survey-report.pdf?rev=a5327479843f4d4c9b1366c7ef43ddfa.
426 FinCEN Exchange is a voluntary public-private information sharing partnership among FinCEN, law enforcement agencies, national security agencies,
financial institutions, and other private sector entities to enhance coordination, communication, and feedback in the fight against financial crimes.
Launched in 2017, FinCEN Exchange was designed to enable financial institutions to better identify and report information on the highest priority illicit
finance risks to the U.S. financial system and national security. Congress statutorily established FinCEN Exchange through Section 6103 of the Anti-
Money Laundering Act of 2020, codified at 31 U.S.C. § 310(d).
427 References to “314” are derived from the programs’ statutory authority, Section 314 of the USA PATRIOT Act. Regulations implementing Section 314 are
codified at 31 C.F.R. § 1010.520 (implementing Section 314(a)) and § 1010.540 (implementing Section 314(b)) (2024).
428 See 31 C.F.R. § 1010.520(b) (2024).
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from liability, in order to better identify and report activities that may involve money laundering or terrorist
activities.429 IVAN is a public-private partnership platform through which partners can share information
associated with the utilization of digital assets in support of illicit activity, along with identification and
mitigation of said threats. IVAN enables participants to root out nefarious actors hoping to hide behind virtual
assets and the underlying blockchain technology.
Given the characteristics of digital assets noted above, it is critical that the public and private sectors can
quickly share information about illicit finance risks. The Working Group supports this information sharing—
provided it is used for the purpose prescribed in the law to target illicit finance and terrorist activity—to more
effectively target bad actors operating in the digital asset ecosystem. It is imperative that this information
sharing not be used to infringe on the civil liberties of law-abiding citizens and such digital assets users. Wide
and meaningful participation in IVAN and the 314(a) and 314(b) programs could increase both the amount of
information shared as well as the firms that are able to act upon the information, potentially making the digital
asset ecosystem safer and protecting U.S. users.
Recommendations
• Treasury should undertake efforts to encourage greater information sharing, including through FinCEN’s
314(a) and 314(b) programs. Such efforts should include encouraging domestic and cross-border
information sharing, greater participation in sharing programs by digital asset financial institutions and
improved information sharing between digital asset and traditional financial institutions.
• Public and private sector participation in real-time information sharing through IVAN should be encouraged
to the extent consistent with legal obligations.
Disrupting and Mitigating Systemic Illicit Finance Risks
The Federal government takes a whole of government approach to disrupting and exposing illicit activity in
the digital asset ecosystem. This approach and use of authorities prevents bad actors from using digital assets
to facilitate money laundering and illicit activity, deprives bad actors of their proceeds, and, when possible,
compensates victims. These efforts make the digital asset ecosystem safer for U.S. digital asset users and
service providers while also promoting U.S. national security.
The Federal government uses OFAC sanctions and FinCEN authorities to counter foreign actors, like DPRK
or ransomware cybercriminals, and their facilitators, including foreign digital asset service providers that
enable illicit activity and are not subject to the clear requirements under OFAC and FinCEN regulations in the
United States. Additionally, when necessary, the Federal government uses civil enforcement actions to impose
consequences on firms operating without taking appropriate steps to mitigate illicit finance risks in violation
of applicable laws and regulations. Both FinCEN and OFAC have taken several civil enforcement actions for
violations of their applicable laws and regulations that have exposed illicit actors, addressed the abuse of digital
assets, and driven compliance with regulatory obligations.
Law enforcement also plays a critical role in this effort through seizures, takedowns, and criminal prosecution
to support these objectives. In particular, law enforcement seizure and forfeiture capabilities are critical to
support the compensation of victims for losses in digital assets and for losses converted by criminals into
digital assets.
However, as described below, there are some limitations on how the Federal government can effectively use
these tools to support these objectives. For example, Treasury’s authorities are not always clearly applicable
429 See 31 C.F.R. § 1010.540(b) (2024); see also FinCEN, Section 314(b) Fact Sheet (Dec. 2020), https://www.fincen.gov/sites/default/files/shared/314bfactsheet.pdf.
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in the digital asset space, and law enforcement’s authorities should be updated to better address abuse in the
digital assets ecosystem and better compensate victims.
Applying Treasury Authorities to Digital Asset Ecosystem
As noted above, FinCEN and OFAC use authorities to disrupt and expose foreign illicit activity in the digital
asset ecosystem, focusing on key means used by malicious actors to profit from their crimes. However, some
existing tools and authorities are not always applicable to or as effective in the digital asset ecosystem. As
explained below, certain FinCEN authorities restrict or prohibit U.S. financial institutions from establishing
or maintaining correspondent or payable-through accounts for foreign financial institutions facilitating illicit
financial activity, but those authorities are less impactful when digital asset exchanges are not reliant on
correspondent relationships.
Tailoring Section 311 Authorities for Digital Assets
Section 311 of the USA PATRIOT Act authorizes the Secretary of the Treasury to identify a foreign jurisdiction,
foreign financial institution, class of transactions, or type of account as being a “primary money laundering
concern,” and to require domestic financial institutions and domestic financial agencies to take one or more
of five “special measures.”430 The five special measures are prophylactic safeguards that defend the U.S.
financial system from money laundering and terrorist financing. The Secretary of the Treasury has delegated
authority to administer the BSA, including but not limited to Section 311, to the Director of FinCEN.431 FinCEN
may therefore impose one or more of these special measures to protect the U.S. financial system from these
threats. Special measures one through four impose additional recordkeeping, information collection, and
reporting requirements on covered U.S. financial institutions.432 The fifth special measure allows FinCEN
to prohibit, or impose conditions on, the opening or maintaining in the United States of correspondent or
payable-through account for or on behalf of the identified primary money laundering concern.433 These special
measures under Section 311 frequently require notice and comment rulemaking.434
FinCEN has encountered limitations when applying its Section 311 authority to digital assets. Specifically, the
fifth special measure is limited to correspondent or payable-through accounts, which do not translate to the
digital asset industry.
Congress has given FinCEN newer authorities, similar to Section 311, in Section 2313a of the Fentanyl
Sanctions Act435 and Section 9714 of the Combating Russian Money Laundering Act436 to address primary
money laundering concerns in connection to illicit opioid trafficking and Russian illicit finance, respectively.
The new authorities are limited to specific areas of money laundering concern but allow FinCEN to prohibit,
or impose conditions upon, certain transmittals of funds, as defined by the Secretary of the Treasury, by any
domestic financial institution or domestic financial agency. By using “certain transmittals of funds” instead of
“correspondent or payable-through accounts,” the new authorities can be applied to both traditional finance
and digital assets.
430 Section 311 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act
of 2001 (codified at 31 U.S.C. § 5318A).
431 U.S. Department of the Treasury, Treasury Order 180-01 (Jan. 14, 2020), https://home.treasury.gov/about/general-information/orders-and-directives/treasury-
order-180-01.
432 See 31 U.S.C. § 5318A (b)(1) - (b)(4).
433 31 U.S.C. § 5318A(b)(5).
434 31 U.S.C. § 5318A(a)(3).
435 See 21 U.S.C. § 2313a.
436 Section 9714 (as amended) can be found in a note to 31 U.S.C. § 5318A.
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Recommendation
• Congress should, consistent with how it has approached Fentanyl and Russian illicit finance, add a
sixth special measure to Section 311 authorizing FinCEN to prohibit, or impose conditions upon, certain
“transmittals of funds” that are not tied to a correspondent banking relationship. This would enable
Treasury to target foreign digital asset exchanges or digital asset transactions involving criminal or state
actors—without regard to the nature of their illicit activity.
Leveraging OFAC Authorities to Disrupt Malicious Foreign Digital Asset Actors
OFAC continues to use its sanctions authorities to target the illicit use of digital assets, especially instances in
which digital assets are used in conjunction with (i) crimes targeting Americans, (ii) laundering proceeds of
illicit drug and narcotics sales, and (iii) terrorist organizations or the Iranian regime. Since January 2025, OFAC
has added dozens of digital asset wallet addresses and other identifiers to the sanctions list across multiple
sanctions programs in support of U.S. national security priorities to constrain foreign criminal and state actor
abilities to generate and move illicit funds. OFAC is also exploring how calibrated uses of its authorities could
strengthen its ability to force foreign digital asset firms and users to choose between accessing the U.S. market,
or providing financial support to sanctioned drug traffickers, weapons proliferators, and terrorist financiers.
Recommendation
• Treasury should continue to use OFAC’s sanctions authorities, which range from applying full blocking
sanctions to more calibrated restrictions, to target malicious actors seeking to harm Americans and to limit
the access of foreign digital asset actors engaged in illicit activity to U.S. markets, in support of the Trump
Administration’s priorities.
Tailoring Law Enforcement Capabilities and Authorities
Criminal actors who victimize Americans and exploit the legitimate financial sector harm the U.S. economy
and interfere with the responsible use and growth of digital assets. Holding these criminal actors accountable
supports the Trump Administration’s policies, including by targeting the financial networks that enable
transnational criminal organizations to profit, protecting victims, and promoting U.S. leadership in digital
assets. Enhancing the authorities of the DOJ and U.S. federal law enforcement agencies will strengthen the
United States’ ability to achieve these goals.
Improving Crime Victim Compensation Regulations
The Asset Forfeiture Program is essential to the fight against transnational criminal organizations, including
cartels, that perpetuate violence, drug trafficking, human trafficking, and drive the opioid crisis. Prosecutors
have used asset forfeiture robustly to recover digital assets involved in fraud or theft, sometimes involving
assets worth significant amounts. The asset forfeiture statutes, in addition to providing powerful tools to deny
criminals the proceeds of crime and disrupt criminal organizations, provide discretion to use forfeited assets
to compensate victims. Accordingly, the DOJ uses its authorities to provide discretionary victim compensation
through the Department’s Asset Forfeiture Program, but the regulations governing the remission and
mitigation of forfeitures have not been amended since 2012. Since that time, the Asset Forfeiture Program
has grown significantly, and forfeiture has also become an essential tool to fight fraud and other financial
crime, including digital asset‑related thefts and scams. As a result, certain aspects of the remission regulation
need revision to enhance victims’ recoveries. Current regulations governing the use of forfeited funds to
compensate victims, 28 C.F.R. Part 9, can be updated to increase compensation and simplify procedures
for victims of crime, including digital asset‑related fraud and theft, and to increase government efficiency.
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Revisions to these regulations would allow greater victim compensation, more like that available through
criminal restitution, and simplify procedures for compensating victims and returning property to innocent
owners.
Enhancing Criminal Laws to Protect Investigations and Penalize Bad Actors Targeting Digital Assets
Protecting the digital asset ecosystem requires that prosecutors have the necessary authorities to counter
bad actors who seek to exploit it. Statutes authorizing criminal charges and sentencing guidelines could be
amended to ensure that bad actors who misuse digital assets or victimize digital asset owners or investors are
appropriately charged and sufficiently penalized, and to ensure that prosecutors can appropriately recover
those assets.
Address Gaps in Criminalizing False Statements to Financial Institutions
Transnational criminal organizations, cartels, terrorists, and other criminals need access to the U.S. financial
system to move the money and digital assets that fuel their crimes. These criminals often make fraudulent or
false statements to financial institutions to obtain or maintain access to financial accounts and services so they
can quickly move their ill-gotten gains. Existing law criminalizes certain fraud and false statements made to
some kinds of financial institutions, as defined in Title 18 of the U.S. Code.437 But because the law criminalizes
only certain false statements to certain financial institutions, gaps exist—and criminal actors are actively
exploiting them. First, the definition of “financial institution” in Title 18 of the U.S. Code is narrower than the
definition in Title 31 of the U.S. Code, and thus omits virtual asset service providers.438 In addition, the law does
not apply to all false statements in connection with opening and maintaining access to services from financial
institutions. Addressing these gaps would enable prosecution of more of the criminal misuse of digital assets
by (i) making clear that lying to financial institutions to open or maintain accounts, including accounts used to
launder digital assets and convert them into fiat currency, is a crime; and (ii) protecting all financial institutions,
including those offering digital asset services, that are the target of criminal schemes.
Facilitate Criminal Investigations and Prosecutions for Digital Asset Theft
As digital assets continue to become more commonly held and stolen forms of property, it is important to use
all appropriate charges to prosecute those who steal and transfer illicitly obtained digital assets. The National
Stolen Property Act (NSPA) has served as an effective tool to prosecute those involved in the theft and
subsequent interstate movement or transfer of traditional forms of property, including money and securities.
But the statute does not explicitly include digital assets. Clarifying that digital assets are covered property for
purposes of the NSPA would allow law enforcement to use this provision in appropriate criminal investigations
and prosecutions.
Protecting Investigations and Enhancing Civil Remedies
Protect Investigations through Anti-Tip-Off Amendments
Tracing illicit proceeds through financial institutions is a complex and sensitive operation, made even more
complicated when proceeds are converted to digital assets and moved across the ecosystem. If suspects are
tipped off during the process, they can quickly move their assets and flee the United States. The anti‑tip‑off
statute, 18 U.S.C. § 1510, prevents employees of financial institutions from tipping off their customers to
ongoing investigations of certain violations. Without these protections, financial institutions may be subject to
contractual or other requirements that could result in notification of sensitive ongoing investigations, impeding
law enforcement. Some virtual asset service providers have argued that they are not financial institutions for
437 18 U.S.C. § 1014.
438 Compare 18 U.S.C. § 20 with 31 U.S.C. §§ 5312(a)(2) and (c).
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the purpose of this statute. This can result in investigators limiting their efforts to pursue and recover illicit
financial schemes involving digital assets or risk exposure of the investigation. To close this gap, the anti-tip off
statute can be amended to cover all Title 31-defined financial institutions along with the current, more limited
Title 18-defined financial institutions. Additionally, expanding the statute’s list of covered offenses would close
another gap in the law. Specifically, including serious underlying offenses, such as drug and human trafficking
offenses, as covered offenses would prohibit agents of financial institutions from tipping off suspects about
investigations targeting that conduct alongside other prohibited offenses.
Extending the Modified Tracing Requirement for Civil Forfeiture to Digital Assets
18 U.S.C. § 984 allows the Federal government to initiate civil forfeiture proceedings against certain property,
including funds deposited in an account in a financial institution and cash “found in the same place or account” in
the same amount that the government can trace to the illegal activity during the year before filing a civil complaint.
This means that the government is not required to trace particular dollars by unique serial numbers to the illegal
activity. This provision is particularly useful in cases where criminal proceeds are commingled with other funds. For
example, if the government demonstrates that $50,000 in cash drug proceeds was deposited into an account that
also contains other deposited funds, the statute authorizes the government to forfeit $50,000 from the account
without showing that the forfeited funds are the exact same $50,000 in drug proceeds. The statute does not,
however, apply to digital assets. Therefore, in a drug case in which a bad actor accepts payment in bitcoin and holds
the bitcoin in a wallet that also contains other bitcoin, under current law, the government cannot forfeit the drug
proceeds unless it can specifically trace particular bitcoin to the drug transaction.
Amending Section 984 to make certain digital assets subject to the same modified traceability requirement as
exists for cash would allow the government to seize and forfeit digital assets found in the same wallet used to
hold crime-linked digital assets, without requiring the government to prove the forfeited assets were the exact
same digital assets derived from or used to commit a criminal offense.
Recommendations
• Congress should evaluate victim compensation regulations and propose amendments to address concerns
regarding victim compensation and improve asset-forfeiture efforts in the digital assets space.439
• Congress should tailor 18 U.S.C. § 1014 to protect all financial institutions (defined under Title 31 of the U.S.
Code), including those offering digital asset services. In addition, Congress should clarify that the law
applies to all false statements in connection with obtaining or maintaining access to services from financial
institutions. Relatedly, U.S.S.G. Section 2B1.1 should be updated to include a sentencing enhancement for
making false statements to financial institutions where the scheme involves significant volume of criminal
funds but no loss to the institution.
• Congress should amend the NSPA to clarify that digital assets are property subject to this act.
• Congress should amend the anti-tip-off provision in 18 U.S.C. § 1510 to update the definition of “financial
institution” from the narrower definition found in 18 U.S.C. § 20 to the broader definition found in the BSA, 31 U.S.C.
§§ 5312(a)(2) and (c), to cover, among other additions, certain digital asset firms that operate as money services
businesses (MSBs). Congress should also amend the same anti-tip-off provision to include additional serious
underlying offenses as covered offenses to prohibit agents of financial institutions from tipping off suspects.
• Congress should amend 18 U.S.C. § 984 to make certain digital assets subject to the same modified
traceability requirement as exists for cash to allow the government to seize and forfeit digital assets found
in the same wallet used to hold crime-linked digital assets, without requiring the government to prove the
forfeited assets were the exact same digital assets derived from or used to commit a criminal offense.
439 See DOJ, Memorandum from the Deputy Attorney General, supra note 370, at 3. The DOJ has already begun these efforts.
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Protecting the Digital Asset Industry from Malicious Cyber Actors
Strong cybersecurity practices are needed to safeguard digital assets from theft, fraud, and
cyberattacks. The documented efforts of nation-state cyber groups and other illicit actors to steal or
fraudulently acquire digital assets present a national security concern. DPRK has been particularly
adept at stealing digital assets from market participants, illustrated by the theft of $1.5 billion from a
digital asset firm in February 2025. DPRK uses complex social engineering schemes to compromise
networks, posing a persistent threat to organizations with access to large quantities of digital assets
or products. Critically, the Federal government assesses that DPRK uses digital assets to fund its
weapons of mass destruction and ballistic missile programs. These hacks and the risks to U.S. digital
asset users and national security demonstrate the need to improve cybersecurity measures within the
digital asset industry.
This section discusses some of the cybersecurity challenges that the digital asset ecosystem faces
and identifies measures that can be implemented to bolster cybersecurity. Malicious cyber actors
exploit vulnerabilities in software, hardware protocols, or even human processes to penetrate a victim’s
security controls to maliciously alter code or conduct unauthorized transactions. To discover and
exploit these vulnerabilities, malicious cyber actors conduct network scanning and reconnaissance.
The availability of vulnerabilities may be exacerbated by the lack of cybersecurity requirements or
audits in the digital asset space. Additionally, while there are several efforts to share threat information
within industry and between the public and private sectors, information sharing could be further
improved to strengthen industry’s ability to defend against threats. Treasury, through its Office of
Cybersecurity and Critical Infrastructure Protection (OCCIP), is currently exploring how to expand
existing mechanisms to share cybersecurity-related information with the digital asset industry. The
below explores some risks present in three segments of the digital asset industry designed to illustrate
how malicious cyber actors exploit digital asset participants: custody services, smart contracts, and
blockchain network validation processes. This is not, however, an exhaustive list.
OCCIP works to strengthen the security and resilience of financial services sector critical infrastructure
and reduce operational risk. The office works closely with financial sector companies, industry
groups, and government partners to share information about cybersecurity and physical threats
and vulnerabilities. OCCIP’s information sharing is primarily centered around traditional financial
institutions but is exploring how to expand its efforts to digital asset firms. One example of its
information sharing initiatives is Treasury’s Automated Threat Information Feed (ATIF), which provides
participants with access to a tailored cyber threat feed. The ATIF aggregates indicators from Treasury,
open-source data feeds, Federal government partners, international partners, and participating
members. The feed is available through Cloudflare to their existing customers, or through the Malware
Information Sharing Platform, an open-source threat intelligence platform.
Additionally, Treasury chairs the Financial and Banking Information Infrastructure Committee (FBIIC),
which is chartered under the President’s Working Group on Financial Markets and is charged with
coordinating efforts to improve the reliability and security of financial information infrastructure.
OCCIP, as the delegated chair and the Secretariat of FBIIC, utilizes FBIIC for improving coordination
and communication among financial regulators, enhancing the resiliency of the financial sector, and
promoting public-private partnership.
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Recommendations
■ As noted in Chapter III, the Working Group recommends that relevant agencies develop principles-
based requirements and standards, as appropriate, for digital asset firms. Such principles-based
requirements and standards should take into account the various activities and related risks of
various industry participants to strengthen industry’s protection from malicious cyber actors.
■ The Working Group recommends that relevant agencies consider measures to increase
information sharing on potential threats across the private sector and between the public and
private sectors.
■ Treasury’s OCCIP could work with industry to identify opportunities to increase information sharing
on cybersecurity risks, including by providing U.S. regulated digital asset firms access to the ATIF.
■ Treasury’s OCCIP—through the existing public-private partnership structure—could explore
identifying gaps in addressing operational resiliency of digital asset firms to enable broader adoption.
Custody: Digital asset firms that custody digital assets for retail or institutional customers can be
attractive to illicit actors because of the large amount of funds that they hold. Attackers use a variety
of techniques—phishing, often leveraging emailing and short message service (SMS); key logging;
or social engineering—to illicitly gain access to a digital asset firm’s custody infrastructure, either
controlled by the firm or managed by a third-party provider. In some instances, this can include
malicious cyber actors gaining access to the private keys to the firm’s wallet addresses or exploiting
other security gaps. Attackers can use access to steal funds from digital asset firms, potentially
resulting in substantial losses. While digital asset firms that take custody of user assets are frequent
targets, other digital asset participants that aggregate funds, including cross-chain bridges and
unhosted wallet addresses with a large amount of digital assets, may also be attractive targets for
malicious cyber actors.
Example Mitigation Measures
Digital asset firms custodying assets could:
■ Implement policies and procedures designed to protect the confidentiality, integrity, and
availability of information systems. These should be informed by a risk assessment and cover,
among other topics, asset inventory and device management, data controls and identity
management, and systems and network monitoring.
■ Implement policies and procedures to define and limit user access privileges for digital asset
operations and transaction processes. This should include policies for secure key management
practices, specifically for signing keys, and ensuring that third party service providers, if applicable,
have a solid track record of secure key management practices before using their services.
■ Use tools to simulate and validate transactions prior to signing to confirm the intent of the
transaction matches the outcome.
■ Use digital identity tools to protect private keys and digital assets accounts.
■ Enforce credential requirements and multifactor authentication (MFA). North Korean malicious
cyber actors continuously target user credentials, email, social media, and private business
accounts. Organizations should be aware of MFA interception techniques for some MFA
implementations and monitor for anomalous logins and require users to change passwords
regularly to reduce the impact of password spraying and other brute force techniques. The
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Working Group recommends organizations implement and enforce MFA to reduce the risk of
credential theft.
Smart Contracts: Smart contracts are programs on blockchain networks that automatically execute
the terms of an agreement when specific conditions are met. Malicious actors can exploit unpatched
vulnerabilities in smart contracts to their advantage. Not every bug will result in a catastrophic failure
or allow for exploitation, and bugs often go unnoticed for years. While the ability to view open-source
code for DeFi services’ smart contracts may enable security engineers to review code for potential
exploits, no software is immune to defects in code, regardless of whether it is open- or closed-source
or used by one person or millions of entities worldwide. Coding flaws can be exploited by malicious
cyber actors to remove funds from DeFi services without authorization, so it is essential to prioritize the
security and quality of code on an ongoing basis. These risks may be exacerbated for smart contracts
that lack a mechanism for alterations if a critical vulnerability is discovered or exploited.
Example Mitigation Measures
■ Adhere to secure development practices, conduct quality assurance and control of smart contracts
prior to deployment, and employ third-party auditing to reduce risk of software defects.
■ Leverage trusted code libraries.
■ Monitor for new vulnerabilities.
■ Consider emergency stops and circuit breakers for unexpected smart contract issues.
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VII. Taxation
CHAPTER VII
Taxation
STRENGTHENING AMERICAN LEADERSHIP IN DIGITAL FINANCIAL TECHNOLOGY
Taxation •
Taxation
The nature of Bitcoin is such that once version 0.1 was released, the core design was set in
stone for the rest of its lifetime. Because of that, I wanted to design it to support every possible
transaction type I could think of . . . . The design supports a tremendous variety of possible
transaction types that I designed years ago. Escrow transactions, bonded contracts, third
party arbitration, multi-party signature, etc. If Bitcoin catches on in a big way, these are things
we’ll want to explore in the future, but they all had to be designed at the beginning to make
sure they would be possible later.
BitcoinTalk Forum Post Re: “Transaction and Scripts”
Satoshi Nakamoto, June 2010440
The advent and growth of digital assets has raised numerous questions about the application of federal
income tax laws. The “tremendous variety of possible transaction types” Satoshi Nakamoto identified for
digital assets—some of which have no analog in traditional assets—can make applying current provisions to
digital asset transactions challenging. As such, providing guidance or enacting legislation that addresses the
special characteristics of these digital assets and transactions will help taxpayers understand their federal tax
obligations, and in turn promote the growth and use of digital assets in the United States.
Addressing aspects of federal tax law contrary to the goals of the Executive Order has been a priority since
the first days of the Trump Administration. H.J. Res. 25, a joint resolution sponsored by Senator Ted Cruz and
Representative Mike Carey, was signed into law by President Trump in April 2025.441 This resolution overturned
a Biden Administration effort to define certain DeFi developers as “brokers” for tax purposes, even though
neither those developers nor their software ever held custody of their users’ digital assets.442 The Working
Group applauds this action as an example of the pro-innovation approach to tax law the Federal government
should embrace.
As background, federal tax law consists of the Internal Revenue Code (Code),443 regulations implementing the
Code, related statutes, tax treaties, and an extensive body of case law and associated common law doctrines
that provide a foundation for statutory law and remain essential to interpreting it. The IRS also publishes
Revenue Rulings and Notices providing its interpretation of the law to particular facts, which are not binding for
taxpayers but generally relied upon.444
Crucial questions of federal tax law with respect to income derived from digital assets include evaluating
timing, source, and character (i.e., capital income or ordinary income) and the appropriate application of
statutory provisions. The guidance issued to date by Treasury and the IRS is described below.
440 satoshi, Comment to Re: Transactions and Scripts: DUP HASH160 . . . EQUALVERIFY CHECKSIG, BitcoinTalk (June 17, 2010 at 6:46 PM), https://bitcointalk.
org/index.php?topic=195.msg1611#msg1611.
441 Pub. L. No. 119-5, 139 Stat. 48 (2025).
442 Press Release, Sen. Cruz Applauds Signing of Cryptocurrency Resolution into Law (Apr. 11, 2025), https://www.cruz.senate.gov/newsroom/press-releases/sen-
cruz-applauds-signing-of-cryptocurrency-resolution-into-law; see Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital
Asset Sale, 89 Fed. Reg. 106928 (Dec. 30, 2024) (no longer of force or effect).
443 Unless otherwise specified, all “Section” or “§” references in this tax chapter are to sections of the Code or the regulations issued thereunder.
444 A Revenue Ruling is an official interpretation by the Internal Revenue Service (IRS) of the Code, related statutes, tax treaties and regulations on how the
law is applied to a specific set of facts and is published in the Internal Revenue Bulletin. A Notice is a public pronouncement that may contain guidance
that involves substantive interpretations of the Code or other provisions of the law and is also published in the Internal Revenue Bulletin. Treas. Reg. §
601.601(d)(2)(i)(a) (2024); Understanding IRS Guidance: A Brief Primer, IRS, https://www.irs.gov/newsroom/understanding-irs-guidance-a-brief-primer (last
visited July 13, 2025).
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Current Tax Guidance on Digital Assets
Treasury and the IRS have issued regulations and related guidance addressing how digital assets are
taxed (“substantive guidance”) and relating to reporting on digital asset transactions by brokers and other
intermediaries (“third-party information reporting”).
Notice 2014-21 provides core guidance for digital asset transactions.445 It provides that digital assets are treated
as property, as opposed to currency, for federal income tax purposes, and that general federal income tax
principles apply to digital asset transactions.446 The Notice also provides FAQs addressing several specific
issues as well. Other substantive guidance consists in part of published sub-regulatory guidance addressing
hard forks,447 staking,448 and non-fungible tokens (NFTs).449
Treasury has proposed regulations relating to the corporate alternative minimum tax (CAMT) that do
not reference digital assets but would affect how they are taxed. CAMT was signed into law by the Biden
Administration as part of the Inflation Reduction Act of 2022.450 A prior version of the CAMT was repealed,
by President Trump, by the Tax Cuts and Jobs Act of 2017.451The impetus—at the time—to implement CAMT
was to address differences between book income and taxable income, and CAMT sought to do so by creating
a minimum tax on book income.452 This policy is problematic for a multitude of reasons; most acutely, it
attempts to combine two separate policy matters (financial accounting treatment versus tax treatment).
Moreover, implementing a minimum tax on book income has the potential net effect of burdening investment.
In fact, the Treasury Inspector General for Tax Administration, during the Biden Administration, found that
“CAMT is a complex tax law” and that “IRS employees … have spent approximately 21,237 hours on the first
six CAMT notice publication projects.”453 Further, given the complexities of the law, the “IRS waived failure to
pay estimated tax penalties with respect to CAMT obligations in Tax Year 2023.”454 Needless to say, although
CAMT does not specifically target the digital asset sector, it creates a potential punitive effect on the sector’s
growth, much like it could have an adverse impact on other sectors like oil and gas extraction. CAMT therefore
contradicts the policy goals of Executive Order No. 14219, which directs agencies to identify and remove certain
regulations and other guidance that among other things, impede private enterprise and entrepreneurship.455
Treasury and the IRS have published final regulations with respect to third-party information reporting
implementing legislation that requires centralized brokers and other persons who take possession of customer
445 2014-16 I.R.B. 938 (Apr. 14, 2014). The Infrastructure and Investment Jobs Act, Pub. L. No. 117-58, 135 Stat. 429 (2021) amended the Code to define a
digital asset, for purposes of information reporting by brokers, as any digital representation of value which is recorded on a cryptographically secured
distributed ledger or any similar technology as specified by the Secretary. Notice 2014-21 referred to “convertible virtual currency.” The term “digital
asset” includes property that Treasury and the IRS have previously referred to as convertible virtual currency.
446 IRS, Notice 2014-21, supra note 445. Note that Notice 2023-34, 2023-19 I.R.B. 837 (May 8, 2023) modifies Notice 2014-21 but does not change its conclusions.
447 IRS, Revenue Ruling 2019-24, 2019-44 I.R.B. 1004 (Oct. 28, 2019).
448 IRS, Revenue Ruling 2023-14, 2023-33 I.R.B. 484 (Aug. 14, 2023).
449 IRS, Notice 2023-27, 2023-15 I.R.B. 634 (Apr. 10, 2023).
450 Pub. L. No. 117-169, 136 Stat. 1818 (2022).
451 Pub. L. No. 115-97, 131 Stat. 2054 (2017).
452 Book income refers to the amount of income corporations report on their financial statements based on applicable financial accounting standards,
with material differences as compared to taxable income. This includes different treatment of losses, timing differences for when or whether income is
recognized, and different treatment of costs and expenses (e.g., capitalization or deduction).
453 Treasury Inspector General for Tax Administration, Review of the Corporate Alternative Minimum Tax Implementation Identified Weaknesses in the Pre-
Rulemaking Process (Sept. 9, 2024), https://www.tigta.gov/sites/default/files/reports/2024-09/2024308036fr.pdf.
454 Id at 4. The IRS has subsequently waived failure to pay estimated tax penalties with respect to CAMT obligations for tax years 2024 and 2025. See IRS,
Notice 2024-33, 2024-18 I.R.B. 959 (Apr. 29, 2024); IRS, Notice 2024-47, 2024-27 I.R.B. 1 (July 1, 2024); IRS, Notice 2024-66, 2024-40 I.R.B. 682 (Sept. 30,
2024); IRS, Notice 2025-27, 2025-26 I.R.B. 1611 (June 23, 2025).
455 Exec. Order No. 14219, Ensuring Lawful Governance and Implementing the President’s “Department of Government Efficiency” Deregulatory Initiative,
90 Fed. Reg. 10583 (Feb. 19, 2025).
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Taxation • Substantive Tax Issues
digital assets to report information to the IRS and customers on the customers’ sales of digital assets.456 In
addition to the broker reporting rules, the regulations provide substantive guidance for taxpayers to determine
their basis, gain, and loss from digital asset sales. Treasury and the IRS have also published sub-regulatory
guidance providing transition relief with respect to the information reporting regulations.457 The IRS has issued
a form and instructions on which brokers must report the information to the IRS and taxpayers.
Most recently, Treasury and the IRS have provided transition relief to U.S. digital asset exchanges and others
implementing the digital asset broker regulations458 and have withdrawn regulations that would have required
certain DeFi participants to provide broker reporting in line with the passage of H.J. Res. 25.459
The section below covers the Working Group’s priority items for the publication of guidance, along with priority
legislative recommendations. The following sections discuss substantive tax issues, taxpayer reporting issues,
and third-party information reporting.460
Substantive Tax Issues
Priority Guidance
CAMT
CAMT imposes a minimum tax generally equal to the excess, if any, of 15% of “adjusted financial statement
income” (AFSI) less regular tax paid.461 The calculation of AFSI generally starts with a corporation’s net income
as reported on its financial statement, subject to certain adjustments. CAMT applies generally to corporations
with average AFSI over a three-year period of more than $1 billion and provides statutory adjustments to AFSI
for financial statement income and losses resulting from stock and partnership investments. Regulations
proposed in 2024 provide for additional adjustments for transactions where there are mismatches in financial
statement or taxable income that distort true economic income (e.g., a hedging transaction in which only one
side of the transaction is marked to market).462
Stakeholders have requested that Treasury and the IRS issue guidance to the effect that AFSI does not include
financial accounting unrealized gains and losses on cryptocurrency, or on investments generally.
Priority Guidance
Treasury and the IRS should publish guidance addressing the determination of AFSI with respect to
financial accounting unrealized gains and losses on investment assets other than stock and partnership
interests. Toward this end, the IRS issued Notice 2025-27463 stating that Treasury and the IRS anticipate
interim guidance under CAMT to address how unrealized gains and losses on certain investment assets
reported for financial statement purposes are considered for purposes of determining AFSI.464
456 Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions, 89 Fed. Reg. 56480 (July
9, 2024). A second regulation that was adopted in December 2024 addresses certain decentralized finance participants but no longer has force or effect.
See supra notes 441, 442.
457 IRS, Notice 2024-56, 2024-29 I.R.B. 64 (July 15, 2024); IRS, Notice 2024-57, 2024-29 I.R.B. 67 (July 15, 2024); IRS, Rev. Proc. 2024-28, 2024-31 I.R.B. 326 (July
29, 2024); IRS, Notice 2025-7, 2025-5 I.R.B. 524 (Jan. 27, 2025).
458 IRS, Notice 2025-33, 2025-27 I.R.B. 4 (June 30, 2025).
459 Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales, 90 Fed. Reg. 30825 (July 11, 2025) (effectuating a
change to the Code of Federal Regulations to reflect that 89 Fed. Reg. 106928 (Dec. 30, 2024) no longer has force or effect); see supra notes 441, 442.
460 Descriptions of market practices and the use of terminology used by digital asset participants in the following sections of this chapter are not intended
as characterizations of those transactions for federal income tax purposes.
461 Section 10101 of Pub. L. No. 117-169, 136 Stat. 1818, 1818-1828 (2022) imposes the CAMT for taxable years beginning after December 31, 2022.
462 Corporate Alternative Minimum Tax Applicable After 2022, 89 Fed. Reg. 75062 (Sept. 13, 2024).
463 2025-26 I.R.B. 1611 (June 23, 2025).
464 IRS, Notice 2025-27, supra note 454.
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Staking – Grantor Trust Classification
U.S. investment funds holding digital assets that qualify as exchange-traded products (ETPs) (pursuant to
securities laws) are often organized as trusts. Typically, such funds take the position that they are classified for
U.S. federal income tax purposes as investment trusts treated as grantor trusts. An investment trust is a type
of legal-form trust that satisfies strict restrictions on its permitted activities and is consequently eligible to
provide simplified tax reporting to its investors. A legal-form trust is classified as an investment trust rather than
a business entity only if it is not engaged in a profit-making business. In addition, there may not be a power to
vary the investments of the trust, and the trust may have only one class of ownership interests with a very limited
exception.465 Investors in an investment trust that is a grantor trust are treated as if they were the direct owners
of their pro rata interests in trust assets for federal income tax purposes. They receive tax reporting from the
trust or their brokers on IRS Forms 1099 (e.g., an IRS Form 1099-B, Proceeds from Broker and Barter Exchange
Transactions, reporting gross proceeds and basis if the trust sells an asset). A legal-form trust that is intended to
be structured as an investment trust treated as a grantor trust, but fails to satisfy the requirements for investment
trust status, typically is classified as a partnership for federal income tax purposes. In this case, investors would
receive tax reporting on Schedule K-1 of IRS Form 1065, U.S. Return of Partnership Income.
Stakeholders have requested guidance addressing whether a trust holding digital assets that stakes those
assets and receives staking rewards can qualify as an investment trust treated as a grantor trust.466
Priority Guidance
Treasury and the IRS should publish guidance addressing whether a trust that otherwise qualifies as an investment
trust treated as a grantor trust fails to qualify as such if the trust stakes digital assets owned by the trust.
Wrapping
Wrapping is a technique used to convert a digital asset native to one blockchain (“original digital asset”) into a
digital asset native to a different blockchain (“wrapped digital asset”). Wrapping may also be used to convert
a digital asset that cannot be used in certain smart contracts into a wrapped digital asset that can be used in
those smart contracts. The wrapped digital asset is backed one-for-one by the original digital asset, which
is immobilized by a custodian or through smart contracts. The original digital asset may not be used in any
transactions while it is wrapped. The wrapped digital asset can be unwrapped or be converted back to the
original digital asset, at any time.
Wrapping is commonly used to transact with the value of the original digital asset on a different blockchain. An
example is wrapped bitcoin, which can be used in DeFi operations, while bitcoin itself generally cannot. Stakeholders
have asked for guidance addressing whether wrapping and unwrapping transactions are taxable transactions.
Priority Guidance
Treasury and the IRS should publish guidance addressing whether wrapping and unwrapping transactions
are taxable transactions.
IRS FAQs
As described in the Current Tax Guidance on Digital Assets section above, the IRS issued FAQs on several issues
involving digital assets starting in 2014. New FAQs have been added from time to time, but the FAQs have not
been comprehensively revised to consider published guidance and regulations relating to digital assets.
465 See Treas. Reg. § 301.7701-4 (tax classification of trusts).
466 Stakeholders also have requested guidance on other issues relating to staking. See Chapter VII, Substantive Tax Issues: Priority Guidance – Other Issues.
For a description of staking, see Chapter II, Mining and Staking.
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Priority Guidance
Treasury and the IRS should update the IRS FAQs on digital assets. These updates will provide industry and
taxpayers with regulatory certainty by reflecting guidance that was published after the issuance of the FAQs.
Other Issues
Stakeholders have requested guidance on several issues beyond those described above. The Working Group
believes many of these issues might warrant future guidance in line with the goals of the Executive Order.
■ Mining and Staking. Stakeholders have asked:
◆ for clarification, modification, or reversal of IRS guidance on the timing of income from staking and
mining rewards;467
◆ whether staking activity constitutes a trade or business for federal income tax purposes and related
questions including:
• whether staking gives rise to income effectively connected with the conduct of a trade or business in
the United States;
• whether staking gives rise to unrelated business taxable income under Section 512;
• whether staking gives rise to income from commercial activity for purposes of Section 892; and
• whether income from staking is treated as fixed, determinable, annual or periodic income to foreign
taxpayers;
◆ the source of income from staking rewards;
◆ whether the receipt of airdrops and hard forks invalidates investment trust status; and
◆ whether staking benefits from the securities or commodities “trading safe harbors” of Section 864.
■ Valuation. Guidance on how to value digital assets that are traded on multiple exchanges or thinly traded,
for purposes of determining amount realized and basis.
■ NFTs. Guidance on non-fungible tokens, including whether they are treated as collectibles for purposes of
Sections 408(m) and 1(h)(5).
■ Losses on digital assets. Guidance relating to losses on digital assets, including the standards and
acceptable proof for worthlessness and abandonment and when losses may be deducted if they are held
by a taxpayer that becomes bankrupt. Guidance relating to thefts of digital assets.
■ Charitable deductions. Legislation removing the requirement for a qualified appraisal for charitable
donations of digital assets worth more than $5,000.
In addition, many substantive issues that could be addressed either through future guidance or legislation
include:
■ Whether tokenization of an asset gives rise to a new asset for federal income tax purposes, and if so under
what circumstances.
■ The application of the investment company rules of Sections 351 and 721 to digital assets.
■ Distributions of digital assets in partnership liquidations (the “marketable securities” rules).
■ The application of the hot asset rules to sales of partnerships holding digital assets.
467 For further discussion of these issues, see Chapter VII, Taxpayer Reporting: Priority Guidance – De Minimis Digital Asset Receipts and Chapter VII,
Taxpayer Reporting: Legislative Proposals for Other Issues – Timing of Income from Mining and Staking.
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■ Expanding the classes of assets that may be held by regulated investment companies to include digital assets.
■ The treatment of digital assets for purposes of the subpart F, GILTI, and PFIC rules.
■ The tax treatment of blockchain splits and blockchain mergers.
■ The rules applicable to digital assets with respect to retirement accounts.
■ The tax consequences of repatriation by an offshore foundation
Regarding offshore foundations, the Working Group encourages non-profit organizations supporting the
development of blockchain technologies to domicile in the United States. Toward this end, the Working Group
will engage with Treasury and the IRS to study ways to incentivize their repatriation and domestication.
Priority Legislative Recommendations
Characterization as Securities or Commodities
As described in the Current Tax Guidance on Digital Assets Section above, IRS Notices characterize virtual
currency for federal income tax purposes as property, not currency. However, IRS guidance does not address
whether a digital asset is considered a security or commodity for federal income tax purposes. The Code and
case law define the term “security” in different ways for different tax purposes, and those definitions are not
the same as the securities law meaning of the term “security.” Code provisions also do not define the term
“commodity” or define it in a circular manner, and do not cross-reference the commodities law meaning of the
term. The characterization of an asset as a security or commodity for federal income tax purposes affects the
application of multiple provisions of the Code. For example, Code provisions applicable to commodities include
Section 475(e) and (f) (elections for dealers or traders in commodities to mark commodities to market), Section
864(b)(2)(B) (trading in commodities safe harbor), and Section 7704(d)(1)(G) (passive income exception
applicable to commodities partnership).
Congress is considering legislation that would dictate when a digital asset is subject to regulation by the SEC or
the CFTC, such as the Digital Asset Market Clarity Act of 2025 (CLARITY).468 This legislation does not address
the tax classification of digital assets. Adding digital assets, or in some cases actively traded fungible assets
(the type of digital assets most similar to securities and commodities), as a new category of asset subject to
Code provisions would permit legislation to consider characteristics of digital assets that are different from
those of traditional securities or commodities. An alternative approach could be for a digital asset, or one
or more types of digital assets, to be defined as a security or a commodity by reference to securities and
commodities laws. Because the tax rules for securities and commodities differ in significant respects, it would
be important that an asset have a single tax classification throughout its existence.
Recommendation
Legislation should be enacted that treats digital assets as a new class of assets subject to modified versions
of tax rules applicable to securities or commodities for federal income tax purposes. Code provisions
that should be expanded to apply to actively traded fungible digital assets include Sections 475 (mark-
to-market election), 864(b) (trading safe harbors), 1058 (securities loans), and 7704 (publicly traded
partnership rules).469 In addition, Sections 1091 (wash sale rules) and 1259 (constructive sales) also should
apply to digital assets. Alternatively, legislation could instead clarify when a digital asset commodity or
other digital asset is treated as a security or a commodity for federal income tax purposes.
468 H.R. 3633, 119th Cong. (2025).
469 A 2023 report by the Joint Committee on Taxation discusses the current state of the law and possible legislation with respect to most of these
provisions. Joint Committee on Taxation (JCT), Selected Issues Regarding the Taxation of Digital Assets (June 2023), https://www.finance.senate.gov/imo/
media/doc/jct_report_on_digital_assets.pdf.
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Stablecoins
As described in Chapter V, a stablecoin is a digital asset that intends to maintain a stable value relative to a
reference asset, usually a currency. Most stablecoins are pegged to the U.S. dollar.470 Stablecoins are widely
used in digital asset transactions in a manner similar to a cash-equivalent, like shares in a money market fund.
For example, a taxpayer may sell bitcoin for a stablecoin and later use the stablecoin to buy another digital
asset. The Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS), which was signed
into law on July 18, 2025, regulates the issuance of payment stablecoins in the United States.471
The tax characterization of stablecoins themselves under current law is uncertain. Characterization as debt,
for example, is not certain—stablecoins typically do not have an unqualified obligation to pay a fixed amount,
but they are held out as redeemable for cash. Under GENIUS, U.S.-licensed issuers of payment stablecoins
are obligated to convert, redeem, or repurchase such stablecoins for a fixed amount of monetary value.472 The
payment stablecoins must also be collateralized with high quality liquid assets.473
The determination of a financial instrument’s status as debt for federal income tax purposes is made under
factors established by case law. A common requirement is for the instrument to have an unconditional promise
to pay on demand, or on a specified date, a sum certain in money.474 The instrument must also be evaluated
based on other criteria established by case law, typically including whether the instrument pays interest,
whether the issuer is adequately capitalized, whether the instrument is issued to a related party, and the
seniority of the payment obligation. Payment stablecoins would satisfy the unconditional promise requirement
and several of the other typical characteristics of debt. They also would have the economic characteristics of
highly rated collateralized debt.
The expected use of payment stablecoins as financial assets that function in a manner similar to cash-
equivalents raises the question of whether they could be considered as either money or currency for federal
income tax purposes. Those terms are not defined by statute or case law, but Section 985(b)(1)(B) defines
functional currency for certain purposes as the currency of the economic environment in which a significant
part of a business unit’s activities is conducted and which is used by such unit in keeping its books and records.
The functional currency of a U.S. individual is always the dollar. Relatedly, a recent IRS Notice described “real”
currency as (i) the coin and paper money of the United States or of any other country that is (ii) designated as
legal tender, (iii) circulates, and (iv) customarily used and accepted as a medium of exchange in the country of
issuance.475 At present, stablecoins do not appear to satisfy these requirements. Stablecoins also are not issued
by or guaranteed by any government.
Treatment of payment stablecoins as money or currency for federal income tax purposes does not seem
likely under current law. Moreover, even if payment stablecoins were treated as currency, they could be
nonfunctional currency for federal income tax purposes, in which case gain or loss on stablecoins would
continue to need to be reported on tax returns. Treating payment stablecoins as money (and functional
currency) would affect the application of many provisions of the Code in ways that may not be desirable. For
example, the Code does not contemplate the possibility of gain or loss on money,476 so no rules exist to deal
with the possibility of gains or losses on payment stablecoins treated as money. In addition, treatment
470 Supra note 333.
471 See supra note 97 (defining “payment stablecoin”).
472 S. 1582, 119th Cong. (2025) § 2(22)(A)(ii)(I) (enacted).
473 See S. 1582, 119th Cong. (2025) § 4(a)(i)(A) (enacted).
474 See 26 U.S.C. § 385(b)(1).
475 IRS, Notice 2014-21, supra note 445.
476 The Code has rules for gains or losses on functional currency transactions that are part of the ordinary business operations of a qualified business unit
such as a branch, but those rules generally would not apply to the use of stablecoins by U.S. persons in the United States.
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of payment stablecoins as money, as opposed to property, may affect basis and recognition of gain or loss
to corporations, partnerships, and their owners in the context of distributions and contributions of payment
stablecoins.477
If payment stablecoins were treated as debt for federal income tax purposes, they would be subject to multiple
provisions of the Code that apply to debt. They may also be subject to provisions applicable to securities as
defined for federal income tax purposes (which is independent of the securities law definition of that term),
depending on which tax definition of security is applicable. Treatment of a payment stablecoin as a security is a
separate and additional inquiry from characterization as debt.
Among the Code provisions that could apply to payment stablecoins treated as debt are (i) the wash sale
loss disallowance rules of Section 1091, and (ii) the anti-bearer bond rules applicable to registration-required
obligations that are not in registered form.478 As discussed in Chapter V, while stablecoins today are primarily
used to facilitate trading in other digital assets, they could be more widely adopted as forms of payment in the
future. Stablecoins can diverge from their pegs and can therefore give rise to loss on disposition when used to
make payments. This would implicate the wash sale rules.
To the extent that stablecoins are used as forms of payment, applying the wash sale rules would be difficult
to administer and yield very little tax unless the taxpayer were transacting in large amounts. There may also
be limited utility in applying the wash sale rules to dispositions of small amounts of stablecoins in trading
activities.479 Application of the anti-bearer bond rules would make stablecoins impractical for several reasons,
including that U.S. issuers would be subject to an excise tax. That said, stablecoins function somewhat like
bearer bonds since they are readily tradable and held in a way that does not identify the owner.
Recommendation
Legislation should be enacted that would characterize payment stablecoins for federal income tax purposes,
as such matters are not addressed by GENIUS. Characterization as debt seems most appropriate given the
ways in which payment stablecoins are structured and the potential for gain or loss on disposition. If payment
stablecoins are treated as debt, the legislation should also consider the applicability of existing federal
income tax rules that could impede the widespread use of payment stablecoins as financial assets that
function in a similar manner to cash-equivalents. In particular, legislation should address the wash sale and
anti-bearer bond rules. To address the wash sale rules, possible options include:
• Providing that the wash sale rules do not apply to payment stablecoins;
• Providing that the wash sale rules do not apply to de minimis losses from payment stablecoins, possibly up
to an aggregate threshold;480 or
• Providing that gains and losses on payment stablecoins are not considered for federal income tax purposes.
477 As discussed in Third-Party Information Reporting: Other Issues – Digital Assets Received in a Trade or Business, below, the treatment of digital assets as
cash for purposes of Section 6050I has raised a number of concerns by taxpayers.
478 The anti-bearer bond rules are in Sections 149(a), 163(f), 165(j), 312(m), 871(h), 881(c), 1287, and 4701.
479 The digital asset reporting rules that apply to U.S. digital asset exchanges and other brokers do not require brokers to report dispositions of stablecoins
to buy other digital assets, and do not require reporting of dispositions of stablecoins for cash unless aggregate dispositions of stablecoins during a
calendar year exceed $10,000. These rules apply only for broker reporting purposes, not for purposes of taxpayer determinations of gain or loss on
stablecoin transactions.
480 Stakeholders have urged that either Congress or the IRS adopt a broader de minimis rule. See infra note 488 for a discussion of possible legislation on this topic.
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If no such legislation is enacted, Treasury and the IRS should consider issuing guidance that would clarify
the tax classification of payment stablecoins, and address the potential application of the wash sale481 and
anti-bearer bond rules.482
Wash Sales
Because wash sale rules apply to securities, they would not apply to digital assets that are not securities.
Taxpayers with loss positions in digital assets are engaging in transactions that would be subject to the wash
sale rules if the digital assets were subject to Section 1091. For example, a taxpayer may sell a digital asset at
a loss on one day and repurchase the same digital asset the next day, claiming the loss for tax purposes while
being in a substantially similar position economically.
Recommendation
The wash sale rules should be amended to add digital assets to the list of assets subject to the wash sale
rules.483 If legislation of this kind is enacted, the broker reporting regulations should be amended to reflect
these changes to the wash sale rules. As previously discussed, the wash sale rules should not apply to
payment stablecoins.
Crypto Lending
Pursuant to Section 1058, loans of securities ordinarily are treated as an exchange of the security for an
obligation to return the security on which no gain or loss is recognized. This is contingent upon the transfer of
the security being pursuant to an agreement that meets certain requirements. Gain or loss is not recognized on
the return of that security in exchange for rights under the agreement. The agreement must (i) provide for the
return to the transferor of securities identical to the securities transferred; (ii) require that payments be made
to the transferor of amounts equal to all interest, dividends and distributions on the security during the term
of the securities loan; (iii) not reduce the risk of loss or opportunity for gain of the transferor in the transferred
securities; and (iv) meet such other requirements as the Secretary of the Treasury may prescribe. These rules
are intended to ensure that the taxpayer making the loan of securities remains in an economic and tax position
similar to the position it would have been in absent the loan.
In a transaction commonly referred to as a crypto loan, a taxpayer (the original digital asset owner) transfers a
digital asset to a third party transferee either directly or indirectly (such as through a centralized platform, or
through the use of an automatically executing smart contract), subject to an obligation (or the provisions of the
automatically executing smart contract) for the transferee to deliver the same type of digital asset back to the
original digital asset owner in the future. At a later date, the transferee delivers the same type of digital asset to the
original digital asset owner. The transferee may also deliver or credit additional digital assets or other consideration
to the original digital asset owner as compensation for the use of the digital asset during the transaction.484
481 IRS, Rev. Proc. 2014-45, 2014-34 I.R.B. 388 (Aug. 18, 2014) and IRS, Rev. Proc. 2023-35, 2023-42 I.R.B. 1079 (Oct. 16, 2023) provide that the IRS will not
treat a redemption of shares in a money market fund as part of a wash sale. Revenue Procedure 2014-45 states that a money market fund is often used
as an account into which, or from which, cash is automatically deposited or withdrawn, under a sweep arrangement. The Revenue Procedures relieve tax
administration burdens attributable to changes in SEC rules that made it more likely that money market fund shares would be redeemed at a loss. If no
legislation addressing the tax treatment of payment stablecoins is enacted, Treasury and the IRS could consider issuing similar guidance with respect to
payment stablecoins under a similar tax administration rationale.
482 If legislation is not enacted, Treasury and the IRS could consider whether it is possible to issue guidance concluding that payment stablecoins are not
registration-required. Obligations are registration-required unless one of three exceptions applies. Section 163(f)(2).
483 Proposed wash sale legislation expanding the scope of the wash sale rules to cover digital assets has previously been considered, and was scored as
raising $26 billion over 10 years, although that version of the legislation also included non-digital asset provisions. Office of Management and Budget,
Budget of the U.S. Government: Fiscal Year 2025 163 (Mar. 11 2024), https://www.whitehouse.gov/wp-content/uploads/2024/03/budget_fy2025.pdf.
484 See Chapter II, Market Activities: Lending, Borrowing, and Collateral (discussing cryptocurrency lending).
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Taxpayers may engage in crypto borrowing and lending transactions for reasons similar to those for securities lending,
or in transactions that may be conceptually similar to borrowing cash on a collateralized basis. That said, crypto lending
transactions may differ in a number of regards from securities loans. For example, the loan may be effected purely
through smart contracts, with automatically executing software replacing a traditional legal agreement. Further,
amounts received (typically, airdrops) on the loaned asset are not necessarily passed back to the lender.
Section 1058 does not apply to loans of digital assets, unless the asset constitutes a security for federal income
tax purposes. Stakeholders have requested guidance to the effect that crypto loans are treated as transactions
in which no gain or loss is recognized under circumstances similar to those provided by Section 1058.
Loans of digital assets that satisfy requirements similar to the Section 1058 conditions described above should
be accorded similar treatment. While the Working Group understands that some market participants take
the position that loans of digital assets that meet similar conditions are non-taxable, no authority directly
addresses those transactions. As such, there is uncertainty for taxpayers on this crucial question.485 Moreover,
crypto lending transactions may not be carried out in a way that fully complies with the requirements of Section
1058, as described above, and the enactment of Section 1058 may have limited the extent to which prior non-
statutory law applies to loans of securities or other assets.
Recommendation
Legislation should be enacted to amend Section 1058 to provide that it applies to loans of actively traded
fungible digital assets, provided that the loan has terms similar to those currently required for loans of
securities. The Secretary of the Treasury should be granted authority to determine when a digital asset is
actively traded, and to address differences between the standard terms of securities loans and crypto loans.
Mark-to-Market Rules
Traders in securities, and dealers and traders in commodities, may elect to mark their securities or commodities to
market for federal income tax purposes. No guidance addresses the extent to which these rules apply to digital assets.
Recommendation
See the Characterization as Securities or Commodities discussion above, which recommends amending
Section 475 to include actively traded fungible digital assets.
Trading in Securities or Commodities Safe Harbors
Non-U.S. traders in securities or commodities may trade through an independent U.S. agent, or trade for
their own account with U.S.-based personnel, without being treated as engaged in the conduct of a trade or
business in the United States. This precludes them from the obligation to file U.S. income tax returns due to
those trading activities, provided that certain conditions are met. These safe harbors do not apply to digital
assets unless they qualify for federal income tax purposes as securities or commodities and those conditions
are met. While the Working Group acknowledges that some market participants take the position that certain
digital assets are treated as commodities for federal income tax purposes, no authority directly addresses
whether trading in those assets satisfies the commodities trading safe harbor.486
Recommendation
See the Characterization as Securities or Commodities discussion above, which recommends amending
Section 864(b)(2) to include actively traded fungible digital assets.
485 See generally JCT, supra note 469.
486 Id.
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Taxpayer Reporting
Priority Guidance
De Minimis Digital Asset Receipts
It is common for taxpayers holding digital assets to receive or have the opportunity to receive new digital assets
that may have minimal or speculative value. For example, taxpayers who delegate their rights to stake to others
who validate transactions may receive frequent small rewards. A taxpayer may also receive unsolicited airdrops
of, or claims to, a newly created digital asset as a marketing promotion by the creators of the new digital asset.
These assets may be illiquid and therefore hard to value. In practice, it appears that they frequently lose value
shortly after the drop. When a hard fork of a digital asset takes place, the new digital asset’s value is often
uncertain for a period of time and may rapidly decline.
Under applicable law and current IRS guidance,487 taxpayers must include the fair market value of these assets in
income when they have dominion and control over the asset. Digital asset exchanges have different practices as
to when they make a new asset available to customers. As such, a customer of multiple exchanges may acquire
dominion and control over a new asset at different times as a result of the exchanges’ varied practices.
These fact patterns give rise to administrative burdens to taxpayers to track and record each event. At times,
these burdens may exceed the value of the transactions. These burdens arise from one or more of: (i) high
volume but low value assets, (ii) valuations that change rapidly, typically with a loss of value, and