by Cantrell Dumas, Senior Researcher for Financial Regulation and Policy
For years, cryptocurrency was promoted as something that could operate without relying on the traditional financial system. It was seen as decentralized and innovative. Many supporters viewed government regulation as an obstacle rather than a protective measure. Yet regulatory clarity has become increasingly important to the industry’s future.
In an environment where this Administration has emphasized reducing regulatory barriers, the crypto industry has invested heavily in political advocacy and lobbying to support a federal regulatory framework for digital assets. The Senate’s failure last week to advance the Digital Asset Market Clarity Act of 2025 (CLARITY Act) is widely viewed as a major setback for the industry.
It is understandable why. Companies want clearer rules. They want to know which regulator has jurisdiction over which products. They want greater access to banks, institutional investors, payment systems, and traditional financial markets. But the setback may matter for another reason.
For crypto to continue growing, the industry must continue attracting customers. And one of the most powerful things government can give the industry is not just regulatory clarity. It is legitimacy. Calling crypto a regulated financial product can change how ordinary consumers perceive it. “Regulated” sounds like “safe.” Those words are not interchangeable, and research suggests that distinction matters.
In an experiment published by the United Kingdom’s Financial Conduct Authority, researchers examined how consumers responded when they were told that crypto assets were regulated. The result was striking. On average, consumers invested 13 percent more in crypto when they were told it was regulated. At the same time, participants generally had a poor understanding of the protections the regulatory framework would provide. Even after receiving additional information, many still misunderstood which protections they would have.
Separate FCA consumer research cited in the study found that 25 percent of adults who did not own crypto said they would consider purchasing it if it were regulated. Among existing crypto owners, 72 percent said they would purchase more if crypto were regulated.
That is the paradox policymakers must confront. Regulation can protect consumers. But regulation can also encourage consumers to enter a market because they believe government oversight has made the underlying product safer.
This distinction matters because regulation does not eliminate the fundamental risks associated with digital assets. It does not guarantee an asset’s value or prevent market volatility. It does not necessarily provide deposit insurance. And depending on the product and regulatory framework, investors may not receive the same protections they associate with traditional bank accounts or securities. That is why the substance of the rules matters as much as the existence of the rules.
FTX and Celsius illustrate the point. Former Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson said FTX’s collapse exposed serious gaps in customer protections, including inadequate safeguards for conflicts of interest, risk management, transparency, and oversight. The CFTC also alleged that Celsius marketed itself as a safe alternative akin to a traditional bank while using customer assets in increasingly risky strategies.
These were not simply price collapses. They showed what can happen when firms hold customer assets without the protections and guardrails that have long been part of regulated financial markets. That is precisely why the protections behind the label “regulated” matter.
That history helps explain why regulation is necessary. But it also explains why the word “regulated” cannot become a marketing slogan. Traditional financial regulation developed over generations in response to financial failures and the risks that arise when firms hold other people’s money without sufficient safeguards.
There is nothing wrong with firms wanting regulatory clarity. They need to know the rules under which they operate. Investors benefit when markets have clear rules as well. But policymakers and consumers should recognize that regulation provides something else that is extraordinarily valuable to an emerging financial industry. It provides credibility. And credibility can bring customers.
That raises the stakes for Congress. A new regulatory framework will do more than establish rules for the industry or settle jurisdictional lines. It may also shape how consumers perceive crypto and how much confidence they place in it.
The CLARITY Act did not advance. Whatever comes next, lawmakers should recognize that millions of Americans may see a federal regulatory framework as Washington’s seal of approval.
If federal regulation confers that legitimacy, the protections behind it should be strong enough to justify the confidence it creates.
