Oklahoma Bar Journal

Virtual Currencies Explainer

By Miles Pringle

If you watched the 2022 Super Bowl, you may be excused for concluding that the virtual currency revolution was here, and you were missing out. In fact, it was reported in February 2022 by Bloomberg News, “$112.9 million has been spent on national crypto-related ads since the start of 2020.” For perspective, the number of Americans with exposure to crypto assets is estimated to be 12%,[1] while approximately 58% own stock.[2] Since the Super Bowl, digital assets have experienced a “crypto winter” in which many notable digital assets were more than 70% off their highs[3] – and that was before the epic collapse of FTX and its sister company, Alameda Research. Here, we will discuss some of the concepts behind virtual currencies so you can have a better understanding of what is occurring.

The best way to think about a virtual currency is as a virtual token. The U.S. Commodity Futures Trading Commission defines virtual currencies as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”[4] There are three main types of virtual currencies:

1) Stablecoin: A virtual currency that is secured by another form of value – typically the U.S. dollar.[5] For example, USD coin, a product of the FINTECH Circle, trades at a 1-to-1 rate with the U.S. dollar. Circle holds reserves, so it can always exchange with anyone who wants to exchange their USD coin. Theoretically, the value of a stablecoin should be “stable.”

2) Cryptocurrency: A privately issued virtual currency[6] that is not tied to any other form of value. As a result, the dollar value of any cryptocurrency can fluctuate quite dramatically,g., bitcoin, ethereum and cardano.

3) Central Bank Digital Currency (CBDC): A fiat currency issued in the form of a digital token by a central bank.[7]

 fox17 | #322033903 | stock.adobe.com

Virtual currencies often utilize “blockchain” technology. “At its core, a blockchain is just a database that is maintained by a network of users and secured through cryptography.”[8] The information being maintained can be a ledger of virtual tokens, but it does not have to be. Also, the users maintaining the network do not need to be controlled by a single entity – the basis of the term “DeFi” or decentralized finance.

A ledger is only one type of information that can be maintained. Blockchain technology may have practical uses beyond virtual currency, such as virtual real estate or medical records. For example, non-fungible tokens, or “NFTs,” are unique, one-of-a-kind digital tokens that are managed on a blockchain (unlike other virtual currencies that are fungible, i.e., one token is fundamentally the same as any other token of the same issuance).[9] Theoretically, instead of a car title being recorded on paper, it could be in the form of a digital token.

Bitcoin is the original cryptocurrency, and it was created by Satoshi Nakamoto, a pseudonym for an unknown person or group, in 2008-2009.[10] Bitcoin was intended as a response to the 2008 financial crisis to circumvent the role of banks in the financial system. According to Satoshi Nakamoto, reliance on financial institutions as trusted third parties to process electronic payments “suffers from the inherent weaknesses of the trust-based model. Completely nonreversible transactions are not really possible since financial institutions cannot avoid mediating disputes.”[11] Whether or not Satoshi’s premise is true is another question, as anyone who deals with international payments would disagree with this premise. Moreover, people seem to want mediation or intervention if they are a victim of fraud or theft.

While a speculative investment that some have profited from, bitcoin has never operated well as a currency. It has some inherent weaknesses, such as there is a limit on the number of bitcoin that will ever be created.[12] That can be good for an investment but can create liquidity issues as a currency if ever widely adopted. Bitcoin is also very price volatile, making it difficult to price goods and services for both the vendor and the customer. More importantly, bitcoin is incredibly inefficient. “The Bitcoin network uses about the same amount of electricity as Washington State.”[13] As a result of its design, the Bitcoin network can process about seven transactions per second.[14] Visa, on the other hand, can process 24,000 transactions per second.[15]

Many of the successor virtual currencies build on the open-source software created by bitcoin. According to SoFi Technologies Inc. (an online personal finance company), there are more than 18,000 different types of cryptocurrencies.[16] Some have made significant modifications to the bitcoin structure to solve some of the problems outlined above. In September 2022, for instance, etherum switched from a proof-of-work model to a proof-of-stake model that it claims will cut its energy use by 99%.[17] If and which cryptocurrencies are prevalent in the future is anyone’s guess at this point.

Crypto assets hit their peak value in November 2021 and have come crashing down since, coining the phrase “crypto winter.” In total, crypto assets fell from about $3 trillion to about $1 trillion with “[a]round 95.5% of cryptocurrencies fall[ing] by more than 99.99% from their peaks, with the vast majority effectively plummeting to zero.”[18] To put that into context, during that timeline, the S&P 500 fell about 25% and the composite NASDAQ about 35%.

The crypto winter has affected stablecoins as well. Tether, the world’s biggest stablecoin, dropped below its $1 peg in May 2022.[19] Other stablecoins that were backed by crypto assets and not more stable investments or cash have cratered entirely. Terra coins, for example, saw $60 billion go up in “algorithmic smoke.”[20] Thus, despite its name, stablecoins can be very unstable, and their value very much depends on the quality of the firm standing behind their issuance.

As a result of the crypto winter, several crypto companies have filed for bankruptcy, including crypto exchanges. For example, the crypto exchange Voyager Digital filed for Chapter 11 in July 2022, following “the collapse of Three Arrows Capital, a so-called hedge fund that took loans from other institutions, like Voyager Digital, to make risky gambles on tokens – including the collapsed stablecoin terraUSD.”[21] Interestingly, or concerningly, people who purchased crypto assets through the Voyager Digital platform were (at least initially) being treated as account holders and not actually owners of the assets they thought they purchased (or secured parties).[22]

We must also address the illicit activity associated with cryptocurrencies and digital assets.

As noted by the U.S. Department of the Treasury, “Crypto-assets and markets that operate out of compliance with applicable laws and regulations, or are unregulated, can breed fraud, abusive market practices, and disclosure gaps.”[23] This has borne out with digital assets, particularly cryptocurrencies. “According to one private sector estimate, there was $14 billion worth of crypto-asset-based crime,”[24] and 2022 appears on track to surpass that record again. For example, it was reported in August 2022, “Nomad, a bridge protocol for transferring crypto tokens across different blockchains, lost close to $200 million in a security exploit.”[25] To address these issues, the Department of Justice has formed the National Cryptocurrency Enforcement Team to serve as the focal point for tacking the growth in crime involving virtual currencies and digital assets.[26]

Private actors are not alone in issuing virtual currencies – central banks are also dipping their toes into the proverbial water. In October 2020, the Central Bank of The Bahamas issued the “Sand Dollar.”[27] China, the world’s second-largest economy, has been piloting its digital yuan, coupled with a crackdown on users of private virtual currencies.[28] El Salvador adopted bitcoin as a national currency.[29] All these issuances appear to have little adoption to date.

In the United States, the Board of Governors of the Federal Reserve System has also been exploring a “digital dollar.” In January 2022, the Federal Reserve published a white paper titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation” outlining several of the policy implications of issuing a CBDC. The paper was clear that the “Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”

Many, including past governors of the Federal Reserve, have questioned the utility of a U.S. CBDC. Former Vice Chair Randal Quarles has observed: “The general public already transacts mostly in digital dollars – by sending and receiving electronic balances in our commercial bank accounts … the dollar is already highly digitized. The Federal Reserve provides a digital dollar to commercial banks, and commercial banks provide digital dollars and other financial services to consumers and businesses. This arrangement serves the nation and the economy well: The Federal Reserve functions in the public interest by promoting the health of the U.S. economy and the stability of the broader financial system, while commercial banks compete to attract and effectively serve customers.”[30]

Other board members have been more open to the potential for CBDC. In her testimony to Congress, current Vice Chair Lael Brainard stated, “It is prudent to consider how to preserve ready public access to safe central bank money, perhaps through the digital analogue of the Federal Reserve's issuance of physical currency … New forms of digital money such as stablecoins that do not share these same protections could reintroduce meaningful counterparty risk into the payments system.”

Banking trade associations have pushed back hard on a U.S.-issued CBDC. In its statement before the House Financial Services Committee, the American Bankers Association stated that a CBDC was not necessary to “digitize the dollar.” It went on to state, “There is a growing recognition that the deployment and use of CBDCs would be weighed down by very significant real-world trade-offs. The main policy obstacle to developing, deploying, and maintaining a CBDC in the real economy is the lack of compelling use cases where CBDC delivers benefits above those available from other existing options.”

Сергей Шиманович | #495325920 | stock.adobe.com

It is the early days for virtual currencies when it comes to laws and regulations. By and large, the Securities and Exchange Commission (SEC) has taken the lead in regulating virtual currencies. In 2019, the SEC published its “Framework for ‘Investment Contract’ Analysis of Digital Assets,” which applies the Howey test[31] to determine if an investment contract (which is a type of security) exists. Under the Howey test, an investment contract exists if there is: 1) an investment of money, 2) a common enterprise and 3) a reasonable expectation of profits to be derived from the efforts of others. In 2021, the SEC’s Crypto Assets and Cyber Unit (formerly known as the Cyber Unit) in the Division of Enforcement grew to 50 dedicated positions. In September 2022, the SEC announced plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division of Corporation Finance's Disclosure Review Program. The SEC has filed many enforcement lawsuits, particularly targeting alleged Ponzi schemes.

The Commodity Futures Trading Commission (CFTC) has determined that even if virtual currencies can be securities, they can also meet the definition of commodities. While the CFTC does not have authority over “spot transactions” (transactions for instant delivery on a specific date), it does have oversight over futures, options and derivatives contracts. The CFTC’s jurisdiction is also triggered if there is fraud or manipulation in interstate commerce. The CFTC has acted against unregistered cryptocurrency futures exchanges and has, like the SEC, pursued virtual currency Ponzi schemes.

Other regulators have assumed authority regarding virtual currencies as well. The Office of Foreign Assets Control (OFAC) has determined that U.S. “sanctions compliance obligations apply equally to transactions involving virtual currencies and those involving traditional fiat currencies.” The Office of the Comptroller of the Currency (OCC), which regulates nationally chartered banks, has issued several interpretive letters determining that banks under its supervision were authorized to engage in certain crypto-related activities such as 1) custodial services for virtual currencies, 2) holding reserve deposits for certain stablecoins and 3) operating independent node verification networks (INVNs) and stablecoins for payment activities. However, a bank must demonstrate to the OCC that it has controls in place to conduct these activities in a safe and sound manner.

While the regulatory framework is still being established, a significant step toward obtaining clarity came on March 9, 2022, when President Biden issued the “Executive Order on Ensuring Responsible Development of Digital Assets.” The priorities included 1) protection of consumers, investors and businesses, 2) protection of financial stability and mitigation of system risk, 3) illicit activity, 4) U.S. competitiveness, 5) financial inclusion, 6) financial innovation and 7) international coordination. The executive order requires multiple federal agencies, particularly the Department of the Treasury, to issue several reports and recommendations. Some of those reports have already been published and are relied upon in this article, but there are many more to come.

It is the author’s interpretation that President Biden’s executive order will develop the concepts and priorities to bring the regulation of virtual currencies into focus. It will likely require one or more acts of Congress to ensure such regulations have been properly delegated. Thus, while we are still in the early days of virtual currencies and other digital assets and we do not know what the future holds, the legal and regulatory framework is beginning to come into focus. Stay tuned!


Miles Pringle is executive vice president and general counsel for The Bankers Bank in Oklahoma City. He is president-elect of the OBA, having previously served as a governor and vice president. Mr. Pringle is past chair of the Financial Institutions and Commercial Law Section and the Legislative Monitoring Committee.






[1] U.S. Department of the Treasury, “Crypto-Assets: Implications for Consumers, Investors, and Businesses,” September 2022, pg. 1.

[2] Saad, Lydia, Jones, Jeffery M., “What Percentage of Americans Owns Stock?” Gallup, May 12, 2022.

[3] Ponciano, Jonathan, “Crypto Winter Watch: All The Big Layoffs, Record Withdrawals And Bankruptcies Sparked By The $2 Trillion Crash,” Forbes.com, Aug. 18, 2022.

[4] U.S. Commodity Futures Trading Commission, “An Introduction to Virtual Currency,” available at https://bit.ly/3gX6voI.

[5] President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, Report on Stablecoins, November 2021, p. 1, available at https://bit.ly/3UrcoZ9. “Stablecoins are digital assets that are designed to maintain a stable value relative to a national currency or other reference assets.” The author notes that several writers define stablecoins as a type of cryptocurrency; however, because speculative versus fixed-price assets operate so differently, it is important not to conflate the two.

[6] Frankenfield, Jake, “Cryptocurrency Explained With Pros and Cons for Investment,” Investopedia, Updated Sept. 26, 2022, available at https://bit.ly/3VqGspd.

[7] Board of Governors of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital

Transformation, p. 3, January 2022, available at https://bit.ly/3gVIrmd. “For the purpose of this paper, a CBDC is defined as a digital liability of the Federal Reserve that is widely available to the general public.”

[8] Oberhaus, Daniel, “The World’s Oldest Blockchain Has Been Hiding in the New York Times Since 1995:

This really gives a new meaning to the ‘paper of record,’" Vice.com, Aug. 27, 2018.

[9] Conti, Robyn, Schmidt, John, “What Is An NFT? Non-Fungible Tokens Explained,” Forbes.com, Updated April 8, 2022.

[10] Vigna, Paul, “Who Is Bitcoin Creator Satoshi Nakamoto? What We Know – and Don’t Know,” The Wall Street Journal, Dec. 7, 2021.

[11] Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System,” Oct. 31, 2008, available at bitcoin.org.

[12] Prathap, Madana, “Nearly 90% of all Bitcoin has already been mined – here's how its limited supply has driven up its value,” Business Insider – India, Dec. 24, 2021.

[13] Huang, Jon, O’Neill, Claire, and Tabuchi, Hiroko, “Bitcoin Uses More Electricity Than Many Countries. How Is That Possible?” The New York Times, Sept. 3, 2021.

[14] Bhalla, Anshika, “Top Cryptocurrencies With Their High Transaction Speeds,” Blockchain Council, Sept. 8, 2022, available at https://bit.ly/3H1x7zH.

[15] Visa, VisaNet: The technology behind Visa, June 30, 2012, Pg. 2, available at https://bit.ly/3WpzWPk.

[16] Tardi, Carla, “Understanding the Different Types of Cryptocurrency,” available at https://bit.ly/3izOehG.

[17] Howcroft, Elizabeth, Ponnezhath, Maria, “Ethereum blockchain slashes energy use with 'Merge' software upgrade,” Reuters, Sept. 15, 2022.

[18] Stankovic, Stefan, “Almost Every Crypto Asset Is Down Over 90% From Peak,” Crypto Briefing, Jun. 15, 2022.

[19] Browne, Ryan, “The world’s biggest stablecoin has dropped below its $1 peg,” CNBC, May 13, 2022.

[20] Shen, Muyao, “How $60 Billion in Terra Coins Went Up in Algorithmic Smoke,” Bloomberg, May 20, 2022.

[21] Browne, Ryan, “Bankrupt crypto lender Voyager to sell assets to Sam Bankman-Fried’s FTX for $1.4 billion,” CNBC, Sept. 27, 2022.

[22] In re: Voyager Digital Holdings, Inc. et al., Case No. 22-10943, Bankr. S.D.N.Y., joint plan of reorganization of Voyager Digital Holdings Inc. and its debtor affiliates pursuant to Chapter 11 of the Bankruptcy Code, filed July 6, 2022.

[23] See endnote No. 1.

[24] Id.

[25] Shukla, Sidhartha, “Crypto Firm Nomad Loses Nearly $200 Million in Bridge Hack,” Bloomberg, Aug. 2, 2022.

[26] Department of Justice, “Justice Department Announces First Director of National Cryptocurrency Enforcement Team,” Feb. 17, 2022.

[27] Bharathan, Vipin, “Central Bank Digital Currency: The First Nationwide CBDC In The World Has Been Launched By The Bahamas,” Forbes.com, Oct. 21, 2020.

[28] Dorn, James, “China’s Digital Yuan: A Threat to Freedom,” CATO Institute, Aug. 25, 2021.

[29] Lopez, Oscar, Livni, Ephrat, “In Global First, El Salvador Adopts Bitcoin as Currency,” The New York Times, published Sept. 7, 2021, updated Oct. 7, 2021.

[30] Vice Chair for Supervision Randal K. Quarles, “Parachute Pants and Central Bank Money,” speech at the 113th Annual Utah Bankers Association Convention, Sun Valley, Idaho, June 28, 2021.

[31] SEC v. W. J. Howey Co., 328 U.S. 293 (1946).


Originally published in the Oklahoma Bar Journal – OBJ 94 Vol 1 (January 2023)