After nearly two decades of regulatory uncertainty, digital assets stand at a critical juncture in American financial law. On July 18, 2025, President Trump signed the “Guiding and Establishing National Innovation for US Stablecoins Act,” known as the GENIUS Act, into law, establishing a federal regulatory framework for stablecoins.[1]Two day earlier, the passage of the Digital Asset Market CLARITY Act by the House of Representatives represented the first serious congressional attempt to establish comprehensive regulatory frameworks for this chaotic digital landscape.[2] Yet while these legislative efforts acknowledge cryptocurrency’s growing influence, the CLARITY Act falls short of offering the nuanced classification system necessary to distinguish between legitimate digital infrastructure and speculative excess.

I propose that economist Hyman Minsky’s financial stability hypothesis offers a more sophisticated framework for digital asset regulation than the binary securities-commodities classification contemplated by current legislation. By analyzing digital assets through their cash-flow characteristics and systemic-risk profiles rather than their technological features or promotional language, regulators can craft more effective oversight mechanisms that protect investors while preserving legitimate innovation.

The Regulatory Landscape: From Enforcement to Legislation

The Securities and Exchange Commission’s (SEC) enforcement-heavy approach to cryptocurrency regulation has defined the sector’s legal environment for the past several years. Between April 2021 and December 2024, the SEC initiated 125 cryptocurrency-related enforcement actions, resolving 98 cases with over $6 billion in penalties.[3] This “regulation by enforcement” strategy has drawn substantial criticism from industry participants and legal scholars who argue that enforcement cannot substitute for regulatory clarity.[4]

The CLARITY Act emerged from this regulatory vacuum, seeking to “provide clear rules for the crypto market by drawing bright lines between oversight by the SEC and the Commodity Futures Trading Commission (CFTC).”[5]The legislation establishes a framework for designating digital assets as either securities under SEC oversight or commodities overseen by the CFTC, with particular attention to whether blockchain networks have achieved sufficient decentralization to escape securities classification.[6]

While the CLARITY Act represents meaningful progress, its binary classification system fails to capture the economic complexity of digital assets. A fully backed stablecoin used for cross-border payments bears little resemblance to a meme coin promoted through social media speculation, yet both might qualify as “commodities” under the proposed framework, depending on their underlying network’s decentralization metrics.

Two Blockchains, Two Futures

The evolution of blockchain technology has produced two distinct species with radically different purposes and risk profiles. Permissioned or private blockchains require authorization to participate and have quietly become essential infrastructure for major corporations and governments. These systems succeed because participants are known, standards can be enforced, and governance structures are clear.[7] They focus on improving existing systems through transparency, efficiency, and trust rather than disrupting traditional financial intermediation.

Public blockchains like Bitcoin and Ethereum, by contrast, allow anyone to participate anonymously. After 15 years of development, however, their most common applications remain speculative trading, illicit fund transfers, and meme-based tokens with questionable underlying value.[8] Despite rhetorical claims of decentralization, most public blockchains are dominated by concentrated mining pools, wealthy “whale” investors, and small groups of core developers and venture capitalists.

This technological divergence has created fundamentally different risk profiles that existing regulatory frameworks struggle to address. Current U.S. securities law, developed in the 1930s to govern traditional corporate equity and debt instruments, lacks the analytical tools to meaningfully distinguish between these varied digital asset categories.

The Psychology of Digital Speculation

The speculative frenzy surrounding public cryptocurrencies reflects what scholars have identified as “financial nihilism” among younger investors facing stagnant wages, crushing debt, and housing costs that seem permanently beyond reach.[9] Cryptocurrency offers both the illusion of control and the promise of rapid wealth creation, but token selection often resembles lottery-number picking rather than fundamental analysis.

Empirical research confirms that retail cryptocurrency investors frequently choose coins based on social media trends rather than underlying technology or business models.[10] This behavior suggests that much cryptocurrency activity constitutes gambling disguised as financial innovation, a characterization with significant implications for regulatory classification and consumer protection policies.

Crucially, this speculative activity has unfolded during one of history’s longest bull markets, supported by low interest rates and accommodative monetary policy. Cryptocurrency markets have never been tested by a severe global financial crisis, making their resilience under stress conditions uncertain.

A Minskyian Approach to Digital Asset Classification

Hyman Minsky’s financial instability hypothesis provides a more sophisticated framework for understanding and regulating digital assets. Minsky categorized economic units based on their cash-flow characteristics: (1) hedge units that can meet all obligations with existing cash flows; (2) speculative units that can meet interest payments but require refinancing for principal repayment; and (3) Ponzi units that depend entirely on new investor inflows to maintain operations.[11]

Recent empirical applications of Minsky’s framework to corporate finance have demonstrated striking growth in the share of Ponzi firms in the post-1970 U.S. economy, concentrated among smaller corporations and consistent with increasingly fragile financial structures.[12] This analytical approach has also been successfully applied to non-traditional markets, revealing similar patterns of financial fragility.[13]

Applied to digital assets, Minsky’s taxonomy yields three meaningful categories:

Hedge Units: Fully collateralized stablecoins such as Circle’s USDC, backed by verifiable cash reserves and government securities. Bitcoin and Ethereum may also qualify since they generate transaction fees sufficient to maintain network operations without external funding.

Speculative Units: Algorithmic stablecoins like MakerDAO’s DAI that maintain price stability through complex collateralization schemes, and decentralized finance platforms promising yields that may prove unsustainable during market volatility.

Ponzi Units: Meme coins, revenue-free NFT projects, and explicit Ponzi schemes, like BitConnect and TerraUSD, that require constant new investment to maintain token values.

This functional approach shifts regulatory focus from ideological debates about decentralization to empirical analysis of economic behavior and systemic risk. It enables regulators to apply appropriate oversight levels based on actual cash-flow characteristics rather than promotional language or technological features.

International Regulatory Convergence

Global regulatory approaches increasingly reflect recognition that digital assets cannot be treated as a monolithic category. Japan has licensed cryptocurrency exchanges and approved specific stablecoins under banking regulations while maintaining strict consumer protection requirements.[14] Singapore encourages institutional-grade infrastructure while discouraging high-risk retail speculation through targeted restrictions.[15] The European Union’s Markets in Crypto-Assets (MiCA) regulation similarly adopts a risk-based approach that differentiates between asset types and use cases.[16]

These international frameworks demonstrate growing consensus around functional rather than technological classification systems. They suggest that American regulatory approaches emphasizing arbitrary decentralization metrics may be less effective than frameworks focused on economic substance and risk characteristics.

Structural Challenges and Environmental Concerns

Public blockchain networks face significant environmental and operational challenges that complicate regulatory analysis. Bitcoin’s proof-of-work consensus mechanism consumes energy comparable to entire countries, creating substantial negative externalities that traditional securities law does not address.[17] While Ethereum significantly reduced its environmental impact through its 2022 transition to proof-of-stake validation, Bitcoin has no comparable way to upgrade.

The legal complexity surrounding cryptocurrency’s role in illicit finance adds another layer of regulatory difficulty. Despite improvements in blockchain analytics and transaction-tracking capabilities, the absence of traditional financial intermediaries remains both a technological feature and a regulatory liability.[18]

Recommendations for Reform

Policymakers should move beyond binary thinking about cryptocurrency as either revolutionary technology or elaborate fraud. The reality encompasses both legitimate infrastructure applications and substantial speculative excess requiring differentiated regulatory approaches.

Three priorities should guide legal reform efforts. First, digital-asset regulation should focus on economic function rather than technological characteristics. The Minsky-inspired taxonomy offers a more sophisticated alternative to the CLARITY Act’s binary classification system. Second, regulatory frameworks should differentiate oversight requirements based on systemic risk rather than applying uniform rules across diverse asset categories. Third, regulators must prepare for crises that will reveal which digital asset projects possess genuine economic foundations and which depend entirely on speculation.

Conclusion

The innovations underlying digital asset technology are genuine, but so is the speculative excess that has characterized much of the cryptocurrency market’s development. At this regulatory crossroads, the legal framework chosen will determine whether digital assets contribute to financial system stability or merely replicate traditional finance’s most troubling features in technologically sophisticated forms.

The Minsky framework offers regulators analytical tools sophisticated enough to capture digital assets’ economic complexity but grounded in established financial theory. By focusing on cash-flow characteristics and systemic risk rather than technological features or promotional claims, this approach can guide the development of regulatory frameworks that protect consumers and financial stability while preserving space for legitimate innovation.

ENDNOTES

[1] The White House, Fact Sheet: President Donald J. Trump Signs GENIUS Act into Law, Off. of the Press Sec’y (July 18, 2025), https://www.whitehouse.gov/fact-sheets/2025/07/fact-sheet-president-donald-j-trump-signs-genius-act-into-law/.

[2] House Passes Crypto Bills After Trump Rallies Republicans. Bills establish standards for stablecoins, lay out rules for crypto exchanges and ban central-bank digital currencies, THE WALL STREET JOURNAL (July 17, 2025), https://www.wsj.com/finance/currencies/crypto-bills-congress-43014009.

[3] Beyond Enforcement: The SEC’s Shifting Playbook on Crypto Regulation, GEORGETOWN LAW CENTER ON TRANSNATIONAL BUSINESS AND LAW (2025), https://www.law.georgetown.edu/ctbl/blog/beyond-enforcement-the-secs-shifting-playbook-on-crypto-regulation/.

[4] A Pivotal Case Shaping Cryptocurrency Regulation, THE REGULATORY REVIEW (June 15, 2025), https://www.theregreview.org/2025/06/17/layton-a-pivotal-case-shaping-cryptocurrency-regulation/.

[5] House Passes Crypto Market Structure Bill After GOP Revolt, THE HILL (July 17, 2025), https://thehill.com/policy/technology/5406895-house-passes-crypto-market-structure-bill/.

[6] House Passes CLARITY Act in Major Win for Crypto Regulation, THESTREET (July 17, 2025), https://www.thestreet.com/crypto/policy/the-house-passes-clarity-act-in-major-win-for-crypto-regulation.

[7] See generally MARCO IANSITI & KARIM R. LAKHANI, COMPETING IN THE AGE OF AI: STRATEGY AND LEADERSHIP WHEN ALGORITHMS AND NETWORKS RUN THE WORLD (2020) (discussing enterprise blockchain applications).

[8] See DAVID GERARD, ATTACK OF THE 50 FOOT BLOCKCHAIN: BITCOIN, BLOCKCHAIN, ETHEREUM & SMART CONTRACTS (2017).

[9] See Legal Consciousness and the Crypto Phenomenon: Property Ideologies, Innovations and Potential Ramifications on Financial System Stability, 20 INT’L J. LAW CONTEXT 145 (2024).

[10] See Crypto Assets as a Threat to Financial Market Stability, EURASIAN ECON. REV. (2025).

[11] HYMAN P. MINSKY, STABILIZING AN UNSTABLE ECONOMY (1986).

[12] Leila E. Davis et al., An Empirical Analysis of Minsky Regimes in the US Economy, 43 CAMBRIDGE J. ECON. 541 (2019).

[13] The Effect of Corporate Governance on Financial Fragility in Non-Financial Companies: A Minskyian Approach, INT’L J. LAW CONTEXT (2024).

[14] See Payment Services Act, Law No. 59 of 2009 (Japan).

[15] Payment Services Act 2019 (Singapore).

[16] Regulation (EU) 2023/1114 of the European Parliament and of the Council on Markets in Crypto-Assets, 2023 O.J. (L 150) 40.

[17] See CAMBRIDGE CENTRE FOR ALTERNATIVE FINANCE, CAMBRIDGE BITCOIN ELECTRICITY CONSUMPTION INDEX, https://ccaf.io/cbeci (last visited July 19, 2025).

[18] See U.S. DEP’T OF TREASURY, ILLICIT FINANCE RISK ASSESSMENT OF DECENTRALIZED FINANCE (2022).

This post comes to us from David Krause, emeritus associate professor of finance at Marquette University.