Since the beginning of man and long before the establishment of the State, there has always been a need to exchange goods and services. Before the concept of currency, it is believed that exchange was conducted through barter.  Market participants, often fellow villagers, would directly exchange one good or service for another without a medium of exchange; for example, a farmer may exchange a dozen chickens for a pair of shoes from a shoemaker.  However, this process was limiting and inefficient as it required a double coincidence of wants, did not provide transferability or divisibility, and had significant search, negotiation, and transaction costs.  As a result, new mediums of exchange developed over time.  Initially, commercial (non-State) mediums developed using commodities and rarities that could be easily traded—cowrie, shells, salt, gold, iron rings, and brass rods. For over 2,000 years, cities and empires traded this way without using coins or other standardized or government-issued currencies. 

Commodity mediums were eventually replaced in mid-600 B.C. with a form of money—a mutually accepted representation of value—its tangible counterpart, currency.  One of the earliest forms of currency, metal spade coins, was first used in Guanzhuang, China.  Similarly, electrum coins (a naturally occurring mix of silver and gold) originated in Lydia, which now resides in central Turkey.  Electrum coins were soon adopted as the State currency by Lydia’s King Alyattes, who is often regarded as the originator of coinage.  As states developed, there was a need for the government to collect revenue, so they adopted legal tender for citizens to pay taxes, fees, and fines.  Currency issued and controlled by the state or central authority advanced, and today government-issued legal tender is the predominant source of currency.  

Coins transitioned to paper currency during the Tang dynasty (618–907 AD) in China, eliminating the need to carry heavy strings of metallic coins.  Coins and paper currency were the primary means of exchange until the Song dynasty (960–1279 AD) when checks were introduced. This payment method later spread to Europe when trade with the Muslim world increased and Europeans began using checks themselves. Nevertheless, it took several hundred more years for the banking system to mature and checks to become ubiquitous.  Checks had become the primary means of exchange in the U.S. by the mid-nineteenth century; by the 1950s, more than 28 million checks were written every day.

While coins, paper money, and checks were the leading currency media over the past few centuries, several technological inventions revolutionized how money was exchanged.  In the 1800s, the telegram was invented, which transformed long-distance communication.  In 187160, Western Union introduced the electronic fund transfer (“EFT”) using the telegraph, marking the beginning of electronic money.  Over the next century, Western Union’s “wire” service became the leading means to send money instantly over long distances.  Western Union implemented new technologies to improve speed and efficiencies as technology advanced, such as when the microwave radio beam system was introduced in 1964. Western Union’s presence grew to a network of hundreds of thousands of locations in over 200 countries, serving many unbanked customers.  

In the second half of the twentieth century, a revolutionary development would forever disrupt the financial industry and later change the form of currency—the computer was invented.  The computer is arguably the most significant invention—ever—and it marked the beginning of a new technological era.  By 1983, Time Magazine named the computer its “Person of the Year,” stating, “the entire world will never be the same.” In that article, Harold Todd, Executive Vice President at First Atlanta Bank, predicted, “[m]anagers who do not have the ability to use a terminal within three to five years may become organizationally dysfunctional.  That is to say, useless.” Todd was right: the financial industry increasingly went electronic.  Computers allowed financial transactions, such as currency exchange, to happen with speed, accuracy, and traceability.  For example, the aforementioned 28 million checks processed daily in the 1950s grew to 49.5 billion checks processed in 1995 via automated electronic means. Moreover, computer advancements facilitated other innovative means of currency exchange, such as debit and credit cards, which far exceeded checks and automated clearing house (“ACH”) payments.

As electronic currency exchange grew, the use of cash declined.  In most developed countries, their economies transitioned from all cash to a mix of cash, check, and traditional electronic exchange (debit, credit, and ACH).  In 2016, cash only accounted for 31 percent of all transactions in the U.S., and traditional electronic transactions accounted for 56 percent of transactions.  Although the use of cash has declined, some experts have repeatedly projected cash’s obsolescence and disappearance.  For example, when the Mondex machine and cards were initially rolled out in a 1995 trial, newspapers headlined, “Cash Died Today.” However, despite its initial excitement, the trials ended without a nationwide launch of the service.  Likewise, a 2019 report from the U.S. Congressional Research Service, titled “Long Live Cash,” acknowledges the decline of cash but cites its robustness and staying power, stating, “[c]ash has a number of advantageous features that has made it a simple and robust payment system throughout most of human history.  It is difficult to imagine conditions under which cash would be replaced entirely, and disappear from the economy, at least in the near future.” 

While currency exchange has evolved from coins to paper to checks to electronic, one feature has remained consistent throughout most of modern history—the currency exchanged has been legal tender and controlled by the government. Any form of payment recognized by a government that is used to pay debts or financial obligations is considered legal tender.  This includes not only taxes or other government payments, but all parties are generally obligated to accept the legal tender and settle debts.  Therefore, legal tender status gives the currency value because anyone who wishes to engage in basic economic activities must have and use this type of money.  National currencies, such as the U.S. dollar, and multinational currencies, such as the Euro, are considered legal tender within their respective jurisdictions.  Some countries with weak governments, institutions, or financial systems also use another country’s currency as their legal tender, such as Panama with the U.S. dollar and South Georgia with the Sterling Pound.  However, the government’s exclusive control over the tender is more important than simply the recognition of legal tender.  

In the U.S., Congress is granted the exclusive power by Article 1, Section 8 of the U.S. Constitution “[t]o coin Money, [and] regulate the Value thereof.” The Department of the Treasury creates and distributes coins and dollars to the public through its Bureau of Engraving and Printing.  The Federal Reserve acts as the central bank and creates monetary policy.  Its primary responsibilities include implementing national monetary policy, supervising and regulating banks, ensuring financial stability, and providing banking services. Likewise, in Great Britain, the money supply is controlled by the Bank of England (“BOE”), and the Monetary Policy Committee (“MPC”) makes monetary policy decisions. In essence, the government has a powerful monopoly on money, which was a driving factor leading to the creation of cryptocurrencies.  This control became especially important as governments transitioned from commodity-based currencies with an inherent value to currency where value is derived from government decree. 

While the first government coins used for currency from China and Lydia had intrinsic value because they were created from a commodity, such as metal or Electrum, this had limited scalability and the concept could not be transferred to paper currency.  Instead, governments began to issue currency that was backed by a commodity.  For example, the United Kingdom adopted a gold standard for the Sterling in 1717.  The gold standard backed the government-issued paper and coins with a promise to pay the currency holder a certain amount of gold on demand, and it established a fixed price for gold at which it buys and sells gold. Master of the Mint, Sir Isaac Newton, established the gold price of £4.25 per fine ounce, which lasted two centuries. This practice of backing a currency with gold spread beyond England to France, Germany, Switzerland, Belgium, and the U.S. during what is known as the “classical gold standard era.” In the United States, a bimetallic gold and silver standard existed in its early days, but the U.S. transitioned to an all-gold standard in 1879. The Gold Standard Act of 1900 fixed the value of a dollar to the equivalent of $20.67 per troy ounce. Most of this gold was stored at the Fort Knox Bullion Depository, where it held up to 650 million ounces of gold in reserve, which is the equivalent of $1.2 trillion in April 2022. 

However, in the early 1930s, a historic shift occurred that unwound millenniums of convention.  No longer was a medium of exchange either made from or backed by a commodity—fiat money was introduced.  The term “fiat” comes from the Latin “fieri,” which means an arbitrary act or “a decree, command, order.” During the Great Depression, most developed countries that followed the gold standard began to abandon it for a fiat currency.  The gold standard was abandoned due to its volatility and the constraints it imposed on governments. Governments were hampered in pursuing expansionary policies during the Depression by maintaining a fixed exchange rate. Japan was the first large economy to make the switch in 1931, followed by much of Europe in the following years.  The United States partially followed suit in 1933, eventually abandoning the gold standard in 1973.  

Today, the gold standard is not used by any major government—currency does not have an intrinsic value and is not backed by a physical commodity, such as gold or silver.  Instead, its value is derived from the “full faith and credit” of the issuing government.  The U.S. Congressional Research Service notes, “[t]he currency is neither valued in, backed by, nor officially convertible into gold or silver.” The history described above of currency and technology created the perfect conditions for developing cryptocurrencies.  Computing power has advanced exponentially since the invention of the computer, facilitating innovation in the financial markets.  Additionally, the transition from the gold standard to a fiat currency has left a void for a medium of exchange that an omnipotent government does not control, paving the way for the adoption of cryptocurrencies.  Today, despite its novelty, significant risks, and lack of regulation, an estimated 27 million Americans and 2.3 million Britons own cryptocurrency.

The 2008 Global Financial Crisis eroded confidence and trust in banks and financial institutions and was a catalyst for introducing cryptocurrencies. It appears to be more than a mere coincidence that Bitcoin, the inaugural and preeminent cryptocurrency, was introduced in January 2009 at the pinnacle of the Global Financial Crisis. While Bitcoin and other cryptocurrencies continue to advance, government regulators have moved to begin regulating them.  However, regulatory efforts have been disjointed and uncoordinated as regulators strive to comprehend the innovative developments in cryptocurrency and its associated implications. Government proponents of cryptocurrency are going even further, exploring the adoption of cryptocurrencies as a central bank product, such as a Central Bank Digital Currency (“CBDC”).  While the history of cryptocurrency is yet to be written, in less than a decade, it has accelerated from a little-known, niche technology to a mainstream financial asset that is primed for regulatory intervention before it expands further and poses a systemic financial risk. 

Having a thorough understanding of the historical and contextual backdrop of traditional currency that prompted the inception of cryptocurrencies, the following section of this paper will explore the features of cryptocurrency in-depth, especially those features which make it prone to regulation.  In the next section, this paper will examine the U.S.’s efforts to regulate cryptocurrency, reviewing current and proposed regulatory efforts.    Lastly, this paper will conclude with an analysis of the research and provide suggestions to lawmakers and regulators.  The fundamental premise of this analysis is to assert that cryptocurrencies, along with their related components such as the crypto-ecosystem, are progressively posing a systemic risk to global financial markets, and little has been accomplished to protect against this from a regulatory lens. Therefore, there is an imminent need for regulatory action, clarification, and harmonization. Nevertheless, it is essential to maintain a balance in regulatory measures, ensuring that they do not stifle the nascent crypto markets and the flourishing of financial technology innovation. While it is imperative to regulate the cryptocurrency sector, it must be acknowledged that the benefits of innovation cannot be overlooked.