Cryptocurrency, Stablecoins & DeFi
Overview
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.
This chapter covers:
- Definition
- DeFi
- Types & characteristics
- Regulation
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).
| Concept | Detail (as stated) |
|---|---|
| Fiat currency | “In general, the U.S. government treats fiat currency — currency issued and backed by a government — as ‘real’ currency.” Examples: U.S. Dollar, Euro, Japanese Yen. |
| Government backing | “Digital assets typically do not have government backing.” |
| What drives value | “Their value is largely driven by supply and demand. Like other investments and securities, higher demand generally leads to higher prices.” |
| Quoting | “Digital asset values are usually quoted in fiat currency terms.” |
Example from the text: one Bitcoin (BTC) is worth roughly $62,000 as of mid-2026.
DeFi (Decentralized finance)
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.
Traditional loan vs. DeFi loan
| Traditional loan | DeFi loan | |
|---|---|---|
| Intermediary | A bank acting as intermediary between depositors (who supply funds) and borrowers (who need funds) | An algorithm matches borrower and lender directly based on each party’s terms |
| Example | — | A lender willing to lend $10,000 at 7% interest matched with a borrower willing to borrow $10,000 at 7% |
| Cost | Bank serves as middleman and charges fees | A computer system connects the parties — often at a lower cost than a traditional bank |
Smart contracts
Most DeFi transactions are governed by smart contracts, which put transaction terms (such as repayment rules) into code written on the blockchain.
📌 Example from the text: 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:
- requiring the business to post digital assets as collateral before the TVs ship, and
- releasing the digital assets to the manufacturer once the TVs are received.
Types and characteristics
🔑 Three primary types are especially important:
| Type | Definition (word-for-word where given) | Key characteristic |
|---|---|---|
| Cryptocurrencies | > 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. (IRS definition) | Fungible — units are interchangeable |
| Stablecoins | “A stablecoin is a type of cryptocurrency whose value is pegged to a fiat currency, asset, or commodity.” | Aims to maintain a consistent value |
| Non-fungible tokens (NFTs) | “NFTs are non-fungible, meaning each token is unique.” | Minted with a special identifier |
Cryptocurrencies
🔑 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:
- Bitcoin (BTC)
- Ethereum (ETH)
- Binance Coin (BNB)
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.”
🔑 Public-private encryption
Most major cryptocurrencies (including the three listed above) use public-private encryption:
| Key type | Definition (as stated) | Share it? |
|---|---|---|
| Public key | “A long alphanumeric string (similar to a very strong password). You can share it with others so they can send you cryptocurrency.” | ✅ Yes |
| Private key | “Another long alphanumeric string. You do not share it. It’s used to access (claim/control) cryptocurrency associated with your public key.” | ❌ Never |
📌 Example from the text — Parsa wants to send BTC to Amanda:
- Amanda shares her public key with Parsa.
- Parsa uses that public key to send BTC to Amanda (either directly or through a third-party app or service such as Coinbase).
- Amanda uses her private key (which she should never share) to access the BTC she received.
🔑 Custody — wallet types
| Wallet type | Where the private key is stored |
|---|---|
| Paper wallets | The private key is written down physically (for example, in a notebook) |
| Hardware wallets | The private key is stored on a device such as a USB drive |
| Online (digital) wallets | The private key is stored in an app or other online program |
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.
Example from the text: a man mistakenly threw away a hard drive holding his private key to 7,500 BTC, which was worth roughly $460 million as of mid-2026.
Uses
- 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.
Blockchain
All cryptocurrency transactions are recorded on the blockchain, a shared database (ledger). The blockchain records details such as:
- the public keys of the sender and receiver,
- the amount transferred, and
- any associated fees paid to third parties (for example, transaction fees charged by crypto exchanges).
Stablecoins
A stablecoin is a type of cryptocurrency whose value is pegged to a fiat currency, asset, or commodity.
| Fact | Detail |
|---|---|
| Most popular today | Tether’s USDT |
| Peg | Pegged to the U.S. Dollar; aims to maintain a consistent $1.00 value per coin |
| Backing | “Stablecoin issuers typically hold reserves of the pegged item and other assets to support the coin’s value.” |
| Example reserves | Tether reported roughly $8.23 billion in excess reserves as of Q1 2026 of fiat currencies and U.S. Treasury securities to back and maintain the pegged value of its stablecoin |
Non-fungible tokens (NFTs)
NFTs share several characteristics with cryptocurrencies:
- They are central to DeFi.
- They often use smart contracts.
- They record transactions on the blockchain.
The key difference is fungibility:
| Cryptocurrencies | NFTs | |
|---|---|---|
| Fungibility | Fungible — units are interchangeable | Non-fungible — each token is unique |
| Illustration | “If you hold two BTC, each BTC is essentially identical and equally valuable.” | “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:
- Jack Dorsey’s first tweet NFT
- Nike sneaker NFTs
- Real estate NFTs
⚠️ Valuation and volatility
- Like cryptocurrencies, NFT values are driven by demand, and prices have been highly volatile.
- 📌 Example from the text: 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.
⚠️ Regulations — securities status of digital assets
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.
The Securities and Exchange Commission (SEC) generally regulates securities. That raises a central question: are cryptocurrencies and NFTs securities?
🔑 The Howey test
The Supreme Court’s 1946 ruling in SEC vs. W.J. Howey Co. established that a security exists when these elements are met:
| # | Element |
|---|---|
| 1 | Investment of money |
| 2 | Common enterprise (pooling money with other investors) |
| 3 | Expectation of profit |
| 4 | Third-party management |
🔑 Regulatory status by asset
| Asset | Regulatory treatment (as stated) | Regulator |
|---|---|---|
| Bitcoin (BTC) | “The SEC has previously described cryptocurrencies like Bitcoin as commodities rather than securities.” | CFTC (Commodity Futures Trade Commission) — “generally outside the SEC’s jurisdiction” |
| Most other cryptocurrencies | ⚠️ “This treatment has not applied to most other cryptocurrencies.” The SEC “has clearly treated many cryptocurrencies as securities.” | SEC |
| NFTs | “While the SEC has not formally stated that NFTs are securities…” | — |
| ICOs (initial coin offerings) | “The SEC has focused on organizations conducting initial coin offerings (ICOs), often treating them as unregistered sales of securities.” | SEC / state administrator |
Gary Gensler’s position
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.”
🔑 The BTC distinction — investment contract
A key distinction often discussed between BTC and other digital assets is whether the asset involves an investment contract.
| BTC | Other cryptocurrencies / digital assets |
|---|---|
| Created by an anonymous person using the pseudonym Satoshi Nakamoto | “Many other cryptocurrencies and digital assets involve organizations raising funds from buyers.” |
| “There is no issuer raising capital by selling newly issued BTC; instead, BTC is mined by computers performing complex calculations.” | — |
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”
Enforcement actions cited
The regulatory landscape for digital assets is changing quickly, and regulators such as the SEC are taking steps to assert authority. Recent enforcement actions:
- SEC charges LOCIcoin issuer with fraud
- SEC charges multiple coin issuers with unlawful sale of unregistered securities
- SEC charges Bittrex with unlawful operation of an unregistered exchange
Core idea: 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.
NASAA’s position
Many securities regulators have urged Congress not to create an entirely separate regulatory framework for digital assets. The North American Securities Administrators Association (NASAA) (the organization responsible for this exam) sent a 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.
Key points
Digital asset
- Any asset that is stored digitally
- Existence and ownership is recorded on an online ledger (blockchain)
- Three primary types:
- Cryptocurrencies
- Stablecoins
- Non-fungible tokens
Blockchain
- Public database (ledger) that captures transaction details
Decentralized finance (DeFi)
- Financial system connecting users without traditional third party involvement
Cryptocurrency
- Convertible virtual currency
Stablecoin
- Type of cryptocurrency that pegs its value to an asset or commodity
- Most stablecoins peg their value to the US Dollar
Non-fungible token (NFT)
- Digital tokens that cannot be duplicated
- All NFTs maintain unique identifiers
Digital asset regulation
- Most cryptocurrencies are considered securities
- Bitcoin is considered a commodity
- Many initial coin offerings (ICOs) are considered unregistered sales of securities (illegal)
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Crypto assets — SEC positions and investor materials | SEC |
| 2 | Crypto assets — custody, ETPs, fraud patterns | SEC / Investor.gov |
| 3 | Customer advisories — precious metals, commodity and digital-asset fraud | CFTC |
| 4 | Achievable Series 65 — chapter 1.7.2 | Achievable (course text) |