Our financial system continues to evolve as technology advances. Digital assets are now a real part of modern markets, and financial professionals need to understand how they work and when they may (or may not) be appropriate.
In this chapter, we’ll discuss the following topics related to digital assets:
A good starting point is a clear definition. According to the Internal Revenue Service (IRS):
Digital assets are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology
The IRS does not currently treat any digital asset as a currency (including cryptocurrencies). In general, the U.S. government treats fiat currency - currency issued and backed by a government - as “real” currency. The U.S. Dollar, Euro, and Japanese Yen are examples of fiat currencies.
Digital assets typically do not have government backing, and their value is largely driven by supply and demand. Like other investments and securities, higher demand generally leads to higher prices. Digital asset values are usually quoted in fiat currency terms. For example, one Bitcoin (BTC) is worth roughly $119,000 as of June 2025.
Digital assets are central to the decentralized finance (DeFi) movement. DeFi aims to remove centralized third parties (for example, banks and other financial services firms) so users can transact directly.
A traditional loan usually involves a bank acting as an intermediary between:
A DeFi loan can use an algorithm to match a borrower and lender directly based on each party’s terms (for example, a lender willing to lend $10,000 at 7% interest and a borrower willing to borrow $10,000 at 7%). Instead of a bank serving as the middleman and charging fees, a computer system connects the parties - often at a lower cost than a traditional bank.
Most DeFi transactions are governed by smart contracts, which put transaction terms (such as repayment rules) into code written on the blockchain (discussed below). For example, suppose a business agrees to purchase TVs directly from a manufacturer using a smart contract and a digital asset (such as a cryptocurrency). The smart contract could automate key steps, including:
The digital asset world is broad and complex, but three primary types are especially important:
The IRS defines a cryptocurrency as:
A convertible virtual currency that can be used as payment for goods and services, digitally traded between users, and exchanged for or into real currencies or [other] digital assets.
The three most popular cryptocurrencies today are:
Cryptocurrencies are secured by cryptography, which protects information using codes and mathematical methods. The word “crypto” comes from Greek for “secret,” so “cryptocurrency” can be loosely understood as “secret currency.”
Most major cryptocurrencies (including the three listed above) use public-private encryption:
To see how this works, consider a simple example. Ben wants to send BTC to Amanda:
Private keys are stored in different types of wallets:
No matter which wallet is used, the private key must be protected. If it’s lost, it’s virtually impossible to regain access to the cryptocurrency. There are many real-world examples of this risk, including a man who mistakenly threw away a hard drive holding his private key to 7,500 BTC, which was worth more than $893 million as of July 2025.
Like other currencies, cryptocurrencies can serve as a medium of exchange, helping people avoid a barter system. Paying for groceries with currency is simpler than trading goods directly (for example, shoes for a steak). Cryptocurrencies also provide an alternative to traditional currencies like the U.S. Dollar, and broader adoption can create more ways to transact.
All cryptocurrency transactions are recorded on the blockchain, a shared database (ledger). The blockchain records details such as:
A stablecoin is a type of cryptocurrency whose value is pegged to a fiat currency, asset, or commodity. The most popular stablecoin today is Tether’s USDT, which pegs its value to the U.S. Dollar and aims to maintain a consistent $1.00 value per coin.
Stablecoin issuers typically hold reserves of the pegged item and other assets to support the coin’s value. For example, Tether claims to maintain roughly $1.6 billion in reserves of fiat currencies and U.S. Treasury securities to back and maintain the pegged value of its stablecoin.
Non-fungible tokens (NFTs) share several characteristics with cryptocurrencies. They are central to DeFi, often use smart contracts, and record transactions on the blockchain. The key difference is fungibility:
Like cryptocurrency keys, each NFT is minted with a special identifier that distinguishes it from other NFTs.
NFTs have taken many forms since their inception in 2014. Examples include:
Like cryptocurrencies, NFT values are driven by demand, and prices have been highly volatile. For example, Jack Dorsey’s first tweet NFT sold for $2.9 million and later lost virtually all its value. Some enthusiasts expect NFTs to be most valuable in digital social platforms (for example, using Nike NFT sneakers in the metaverse). Skeptics argue they are simply lines of code.
Digital assets and their markets are often described as the “digital wild west.” Price volatility, theft, and organizational failures have affected the sector since its early days. Until recently, regulators largely avoided direct regulation of digital assets and their marketplaces, in part due to legal constraints.
For example, the Securities and Exchange Commission (SEC) generally regulates securities. That raises a central question: are cryptocurrencies and NFTs securities?
The Supreme Court’s 1946 ruling in SEC vs. W.J. Howey Co. (covered in detail later in this material) established that a security exists when these elements are met:
The SEC has previously described cryptocurrencies like Bitcoin as commodities rather than securities. Commodities are regulated by the Commodity Futures Trade Commission (CFTC) and are generally outside the SEC’s jurisdiction. However, this treatment has not applied to most other cryptocurrencies.
Gary Gensler, the former Chair of the SEC, has argued that cryptocurrencies are securities. In September 2022, he gave a lengthy speech outlining his position. One of his opening lines was:
“Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered under the securities laws.”
A key distinction often discussed between BTC and other digital assets is whether the asset involves an investment contract. BTC was created by an anonymous person using the pseudonym Satoshi Nakamoto. There is no issuer raising capital by selling newly issued BTC; instead, BTC is mined by computers performing complex calculations. By contrast, many other cryptocurrencies and digital assets involve organizations raising funds from buyers.
As Gensler put it:
“If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that’s a security”
The regulatory landscape for digital assets is changing quickly, and regulators such as the SEC are taking steps to assert authority. While the SEC has not formally stated that NFTs are securities, it has clearly treated many cryptocurrencies as securities, as reflected in recent enforcement actions:
In particular, the SEC has focused on organizations conducting initial coin offerings (ICOs), often treating them as unregistered sales of securities. This topic is covered in a future chapter, but the core idea is straightforward: securities generally must be registered with the SEC and/or the state administrator (similar to the SEC, but at the state level). Offering unregistered securities without a valid exemption (exception) violates the law and can lead to fines, penalties, and possible jail time.
Many securities regulators have urged Congress not to create an entirely separate regulatory framework for digital assets. For example, the North American Securities Administrators Association (NASAA) (the organization responsible for this exam) sent this letter to Congress in January 2022, including the following:
[NASAA has] used the elasticity of the securities regulatory framework to support and otherwise address all kinds of new approaches to capital formation and investment … We continue to work hard to ensure that the latest innovations in our capital markets occur within the well-established regulatory framework that supports investor protection and capital formation.
In other words, regulators generally prefer to apply existing securities rules to digital assets that meet the definition of a security.
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