This article will review the options the White House has outlined for regulation and oversight of the digital assets sector, based upon a set of reports issued in the last six months.1 The collapse in November 2022 of FTX, the second largest cryptocurrency exchange, has precipitated calls for better oversight for digital assets. This financial disaster is likely to influence potential legislation, regulation and oversight that can and should be brought to bear to curb such obvious abuse. At the same time, the legitimate business uses of digital assets technology can be fostered by sensible legislation and oversight.

What are digital assets?

The Executive Order on Ensuring Responsible Development of Digital Assets2 issued on March 9, 2022, provided no definition of digital assets. A useful definition is, "a digital asset is anything that exists only in digital form and comes with a distinct usage right."3 Cryptocurrencies, such as Bitcoin, Ethereum, and literally thousands of other tokens are included. Similarly, stablecoins are digital asset tokens backed by fiat currency, cryptocurrency, commodities or other assets designed to maintain a stable value. Central bank digital currencies (CBDC) are under development as another form of digital asset. Also covered are non-fungible tokens, (NFTs) which are a type of token being used primarily for unique art. NFTs are also useful for digital certificates, virtual titling to show ownership, certifying authentic scientific research, protection of intellectual property, and other novel uses. The number and types of digital assets is expanding as the underlying blockchain and distributed ledger technologies proliferate.

What are the implications of the FTX collapse for the digital assets sector?

Based on press reports, the nearly complete lack of financial controls, record-keeping, or responsible fiduciary behavior, if not outright criminal fraud, by the owner and employees of the FTX exchange is shocking. The self-dealing between related companies and the obvious "pump and dump" approach to building value in FTT, the native token of the exchange, should have raised red flags long before the exchange collapsed.

FTX was a company registered to do business in the Bahamas and therefore subject to the jurisdiction and oversight of the Bahamian authorities. Much of FTX's business came from U.S. companies and citizens so the authorities in the U.S. also have jurisdiction to the extent that the law permits. The FTX debacle highlights the importance of oversight for protecting small and large investors in speculative ventures. What is concerning is that the owner of FTX was considered one of the most credible voices in the digital assets sector. He advised Congress on potential legislation to manage the sector and met with the Chairman of the SEC to discuss regulation. Interestingly, despite all of that interaction, none of the authorities concerned was aware of the horrendous corporate governance failures in the company.

Cryptocurrency is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Digital currency works in a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.4 There are literally thousands of tokens being bought, sold, and traded daily. Tokens are also a means to exercise governance in digital asset organizations such as decentralized, autonomous organizations, exchanges, and many types of centralized and decentralized entities. It is an example of private money leaping into a gap caused by the inability of many companies and individuals to either obtain or use capital within the tight confines of the existing system.

Most banking, payment and settlement systems are based upon centralized management of the financial system by central banks, commercial banks, specialized exchanges, and intermediary organizations. The system that has developed works reasonably well for the current users, however, it is not well suited to include many unbanked and underbanked individuals and companies, nor can it accommodate the decentralized, transparent systems that are evolving daily around digital assets. The FTX collapse can be seen as a realistic outcome when greed and fraud flourish absent oversight by competent authorities because the rules are not clear, are not enforced, or for which no legal jurisdiction is available to provide oversight.

As new technologies develop, like the internet in the 1990s, opportunities for fraud or poor business management have often led to company failures. This is not so different from the Dot.Com bubble in the late 1990s ending in the crash in 2002. While not the same as Terra/Luna and FTX failing recently, parallels exist with the Enron scandal, Bernie Madoff and his Ponzi scheme, Lehman Brothers and the whole sub-prime mortgage scandal that led to the Great Recession in 2008. These failures of oversight did not involve digital assets.

When the Chairman of the SEC failed to see the hallmarks of fraud in dealings with the CEO of FTX, MORE regulation is not necessarily the answer. A better awareness of the indicia of fraud, better oversight, is what is responsive to the challenge of regulating cryptocurrencies. If the investment of government funds goes to enhanced constructive oversight to help companies meet regulatory requirements and ensure that consumers, businesses and investors are all protected from the gross self-dealing of the FTX debacle, then the money will be well spent and serve the purpose for which it is intended.

The digital assets sector needs to do a much better job of integrating the technology into daily life if it is to be used widely. The average users find it overly complicated to use a wallet, an exchange, a cryptocurrency debit or credit card, or perform basic transactions easily. The public at large is not convinced that digital assets are safe, and the technology remains difficult to use. Based on the recent problems with Terra Luna, FTX, and many others, the public perception is right, in my opinion. The digital assets sector must make the technology safe, simplify normal transactions for users, show why digital assets are superior to existing digital approaches to settlement and payments and show how blockchain records are superior to existing record keeping systems. Without that effort in the digital assets sector, we will not see wide-spread adoption of digital assets and the underlying technology, nor, frankly, should we.

What is the U.S. recommending for the approach to regulation and oversight?

I have provided an analysis and my perspective on the development of a CBDC in a prior article,5 so I will focus here on the recommendations for dealing with illicit finance and related issues as described in the White House Framework. Clearly cryptocurrency companies need oversight to ensure that they operate to protect consumers, investors and businesses from fraud and corruption. I have analyzed the roles of the regulatory agencies in another prior article,6 and note that all of the relevant agencies have been engaged in the interagency effort to create a framework for digital asset legislation, regulation, oversight and other actions.

The White House Framework calls for a number of actions to address, "meaningful risks for consumers, investors, and businesses."7 It states that "independent regulators have worked to protect consumers and ensure fair play in digital assets markets by issuing guidance, increasing enforcement resources, and aggressively pursuing fraudulent actors."8 Other actions agencies are encouraged to take include:

  • Aggressive enforcement actions by the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) against unlawful practices in the digital assets sector.
  • Stronger efforts by the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.
  • Agencies should issue more guidance and rules, collaborate with each other, and share data on consumer complaints to maximize effectiveness.
  • Relevant agencies should increase public awareness of the risks and common frauds.

The White House also seeks to promote safe and affordable financial services for all supported by the following actions:

  • "Agencies will encourage the adoption of instant payment systems, like FedNow, by supporting the development and use of innovative technologies by payment providers to increase access to instant payments."9 They should also consider creating a federal framework to regulate nonbank payment providers.
  • Agencies should seek to "improve the efficiency of cross-border payments by working to align global payments practices, regulations, and supervision protocols, while exploring new multilateral platforms that integrate instant payment systems."10
  • Support research in technical and socio-technical disciplines and behavioral economics to design usable, inclusive, equitable, and accessible digital assets systems.

The financial stability of the existing centralized systems may be vulnerable to turmoil from stablecoin usage, so the U.S. will work within the system to identify and mitigate cyber risks and work internationally to identify and track emerging strategic risks posed by digital asset markets.

Given the U.S. leadership globally in innovation, the White House seeks to foster responsible digital asset innovation though the following actions:

  • Prepare a digital assets research and development agenda to foster fundamental research on topics related to digital assets and improve educational and training offerings.
  • Agencies should provide best practice information and technical assistance.
  • Track and mitigate digital assets sector environmental impacts and improve tools and resources available for that purpose.
  • Create a standing forum, similar to an industry advisory group, for the exchange of information among government, the private sector, academia, standards bodies, and civil society.

An active program currently exists for the U.S. to work with other governments and international agencies on digital assets issues. The White House Framework builds on those relationships to do more of the same work but does not really expand into new action goals.

To fight illicit activities in the digital assets ecosystem, the White House proposes to review the Bank Secrecy Act to cover digital assets service providers, monitor the sector, continue enforcement actions, and work with the private sector. The series of reports by the agencies highlighted the risks of "money laundering; terrorist financing; hacks that result in losses of funds; and fragilities, common practices, and fast-changing technology that may present vulnerabilities for misuse."11

Clearly, the government reports took the track that government agencies generally follow. They can do more of what they are authorized to do, but they cannot be creative or innovative without additional authority from Congress or the Executive Branch. Digital assets companies have been established and can continue to be set up to do be managed with the protections envisioned in the White House Framework.

What is not well addressed in the Framework and is a fundamental necessity for the sector to innovate and grow, is a balance between the regulatory authorities' commitment to a wholly centralized approach and the decentralized nature of digital assets. Some current attempts to draft legislation would force digital assets to fit the centralized model for banking and commodity exchanges. That model is what works for the agencies and the limited number of companies or entities that can comply with the requirements. It is not very compatible with the technology for decentralized organizations, nor the speed and efficiency gained by having smart contracts and rapid settlement and payment systems that the technology offers. Decentralized finance (DeFi) allows auditing of accounts instantly and constantly so that aberrations can be spotted quickly. The benchmark for most companies is to have audited accounts, and Defi permits that act as a natural aspect of blockchain. Leveraging the strength of the technology can help guide appropriate oversight.

Congress should consider the possibility of a new regulatory scheme and a new agency to manage it, based on prudential principles of oversight, separation of ownership among the participants, AML/KYC for larger accounts or transactions, etc., but with an open approach rather than highly centralized system. For example, in order to obtain personal information for a wallet the law could require a warrant based upon probable cause of criminal activity as evidenced by questionable transactions on the blockchain record for the wallet. Prudential limits could also be set for the applications of AL/KYC measures for accounts under a sensible threshold to maintain privacy for the vast majority or users while still enabling regulators to vigorously enforce the rules in order to curb illicit finance. Despite the major issues of fraud and mismanagement in the digital assets sector many participants act responsibly. The FTX collapse shows the critical need for appropriate oversight, but not necessarily a draconian approach to legislation that will stifle innovation.


1.FACT SHEET: White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets, September 16, 2022. (White House Framework).


3. Wikipedia,

4. Wikipedia,

5. Can, and Should, the U.S. Government Develop a CBDC System?

6. Approaches to Regulation for Decentralized Finance, By: James R. Holbein and Justin Holbein,

7. Ibid., Note 1.

8. Id.

9. Id.

10. Id.

11. Id.

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