Exploring Digital
(Crypto) Assets
Disclaimer
The information presented in this course does
not constitute legal, tax, investment, financial, or
other advice.
This course is intended as an informational
resource to assist you in identifying or exploring
resources and options for managing your
personal financial situation.
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Agenda
Types of Digital Assets
Investing in Digital Assets and the Associated Risks
Frauds, Scams, and Unlawful Practices
How to Report Frauds, Thefts, and Scams
Potential Tax Implications
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Types
Types of
of Digital
Digital
(Crypto)
(Crypto) Assets
Assets
What is a Digital Asset?
3 Primary Characteristics:
Stored and transmitted electronically
Has ownership or use rights
Has value
Includes things like:
Cryptocurrencies
Nonfungible tokens (NFTs) Newer
Central Bank Digital Currency
Digital photos
Websites Older
Electronic files, Logos
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The Digital Asset Ecosystem
Digital Assets
Broadly called General
Central Bank
cryptocurrency Crypto Assets
Digital Currencies
Built on its own Layer 1 coin
blockchain network (native tokens)
Built on an existing Layer 2
Smart contracts
blockchain network (fungible) tokens
Specific
Governance Nonfungible
Stablecoins Utility tokens Others
tokens tokens (NFTs)
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Terms to Know – Bitcoin
Bitcoin
Created in 2008 as a peer-to-peer
payment system
One of thousands of
cryptocurrencies in existence
Currently the largest cryptocurrency
by market share
Limited in its total availability
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Terms to Know – Blockchain
Blockchain
Append-only digital ledger of
unchangeable blocks of
transactions distributed across a
computer network
Underlying technology makes it
trustable without a central authority
or middlemen
All cryptocurrencies exist on a
blockchain
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Terms to Know – Non-Fungible Token
Non-Fungible Token (NFT)
One-of-a-kind digital asset
Proof of ownership, which is
recorded on a blockchain, of a
unique asset
Potential uses:
Establishing a record of purchase
and potentially ownership and
authenticity of a digital asset
Digital art
Digital collectables (e.g., virtual
real estate)
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More Terms to Know
et
w all
pt o
cry
Crypto Wallet Native Coin Crypto Token
Stores a digital asset A digital currency that exists A digital representation of
owner’s private key – on its own blockchain and an asset which can, but
needed to use or spend the represents a digital doesn’t have to be, a digital
digital asset. currency. currency. (e.g., NFTs)
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More Terms to Know (cont.)
Central Bank
Stablecoin Digital Currency
A cryptocurrency whose A CBDC is a digital form of
value is tied to that of central bank money that is
another currency, widely available to the
commodity, or asset general public
Note: The U.S. does not have a digital currency backed by our central bank.
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Topic 1 Group Discussion
WHAT IS A DIGITAL ASSET? WHAT IS A CRYPTO ASSET?
WHAT ARE THE CHARACTERISTICS
OF DIGITAL ASSETS?
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Investing
Investing in
in Digital
Digital Assets
Assets
and
and the
the Associated
Associated Risks
Risks
General Risks of Investing
Why Invest?
To try to earn a greater return
on your money than you could
by keeping it in a savings
account
Biggest Risk:
You could lose some, or
all, of your money
The greater the potential return, the greater the risk.
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Investing or Gambling
Investing attributes: Gambling attributes:
Having at least a basic understanding of Having only a limited understanding of
what you’re buying what you’re buying
Having a hypothesis of why you think your No good hypothesis of why you think your
investment will generate greater returns investment will generate greater returns
Understanding and accepting the specific Not truly understanding the risk you’re
risk/potential reward tradeoff taking
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The Investment Spectrum
Characteristics Characteristics
• Lower risk • Higher risk
• Lower return • Potentially higher
return
CASH BONDS EQUITIES SPECULATIVE
Safety Lending Ownership Riskier Ownership
Examples: Examples: Examples: Examples:
Savings Accounts U.S. Government Small, Mid-sized, Startup Companies
and Large U.S.
Money Market Accounts Municipal Unregistered Investments
and Foreign
Note: This is simply an Certificates of Deposit Corporate Company Stocks Unregulated Investments
illustration of the general
Foreign Gov’t/Corp. Futures and Options
relationship between
various asset classes. Digital Assets
Some investments will
not align with model. Cryptocurrencies
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Digital Asset Investing – Market Risks
Market Risks
Market Risks
New and novel
□ It is hard to predict market reactions
Operational Risks
High volatility
□ Market values can rise or fall sharply
Liquidity risk Fraud Risks
□ Selling assets can be difficult
Cybersecurity
Risks
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Digital Asset Investing – Operational Risks
Operational Risks
Market Risks
Unsupervised trading
□ Buying and selling of digital assets are
not supervised by regulators Operational Risks
Inconsistent customer protections
□ Some virtual currency platforms may
be missing critical system safeguards Fraud Risks
Commingled customer assets
□ Assets may be mixed with other Cybersecurity
customers’ assets Risks
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Digital Asset Investing – Fraud Risks
Fraud Risks
Market Risks
Social media anonymity and scams
□ Most digital asset scams begin on
social media or messaging apps Operational Risks
Data can be manipulated
□ Criminals can hack social media
profiles or easily create new aliases Fraud Risks
Fake websites and trading platforms
Cybersecurity
Risks
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Digital Asset Investing – Cybersecurity Risks
Cybersecurity Risks
Market Risks
Hacker attacks
□ Assets can be stolen by hackers
Operational Risks
Phishing attacks
□ People can be misled into providing
key information used to steal their
assets Fraud Risks
Lost or stolen private keys
□ Can’t access your assets Cybersecurity
Risks
□ Stolen private keys or seed phrases
can be used to seal your assets
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Activity: Match the Risks
Commingled assets
Market Risks
Data manipulation
Hacker attacks
Operational Risks
High volatility
Liquidity risk
Fraud Risks
Lost or stolen keys
Cybersecurity Social media scams
Risks
Unsupervised trading
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Frauds,
Frauds, Scams,
Scams, and
and Unlawful
Unlawful
Practices
Practices
Frauds, Thefts, and Scams Examples
Business, Government, Online Gaming and
Investment Scams Blackmail Scams
or Job Scams Social Media Scams
Scammers promise a Scammers claim they Scammers pretend to Scammers create
big return without risk have embarrassing or be someone you trust legitimate-looking
personal information to and ask for games that require you
threaten you cryptocurrency to deposit
cryptocurrency or
promise to send you a
product, but only after
you deposit
cryptocurrency
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“Red Flags”
Be on the lookout for these “Red Flags”
“Guaranteed, oversized returns”
“The more money you commit, the more you are
guaranteed in return”
Loan offers, excessive margin, or matching funds
“You can only open an account with digital assets”
Claims that customer assets are federally insured
You’re invited to trade/invest by someone you met online
There is no physical address or phone number
Search for “digital asset scams” for current trends
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Personal Impact of Digital Asset Fraud
Potential impact:
You could lose all that you invested
You could experience identity theft which
could:
□ Cause short-term damage to your
credit reputation which could:
□ Impact your ability to get and
maintain clearances
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If You Experience Digital Asset Fraud
6 Steps Recommended by the
CFTC
1. Don’t pay more
2. Collect all pertinent information
and documents
3. Protect your identity and records
4. Report the fraud to authorities
5. Check your insurance and explore
other financial recovery steps
6. Change future behaviors
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Be Cautious and Beware!
The relative newness of the
digital asset universe means:
It’s an easier environment in which
to perpetuate fraud because a lot of
how it works isn’t understood by the
public
It lacks a lot of the consumer
protections more established and
regulated financial markets provide
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Activity 1: Identify the Type of Scam
Scenario 1: You receive a text from what appears to be DFAS or (PPC
if in Coast Guard) saying there is a legal issue with your pay. They say
you owe money from an overpayment, and they tell you to solve the
problem or protect your money by buying cryptocurrency. They might
say to send it to a wallet address they give you — for “safe keeping.”
What type of scam is this?
Business, Government, Online Gaming and
Investment Scams Blackmail Scams
or Job Scams Social Media Scams
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Activity 2: Identify the Type of Scam
Scenario 2: You are on your phone spending what idle time you have,
looking at items on the web. You see a pop-up window claiming invest
here! Big money! And is endorsed by a reality tv celebrity, with them
flashing big stacks of cash. It claims if you click that link within the next
5 minutes, that celebrity can multiply any cryptocurrency you send
them.
What type of scam is this?
Business, Government, Online Gaming and
Investment Scams Blackmail Scams
or Job Scams Social Media Scams
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How
How to
to Report
Report Frauds,
Frauds,
Thefts,
Thefts, and
and Scams
Scams
Submitting a Complaint
What information is required to
submit a digital asset consumer
complaint?
Account information
Anyone you corresponded with
Contracts and related paperwork
Your attempts to resolve any issues
Contact:
Commodity Futures Trading
Commission (CFTC)
Federal Bureau of Investigation (FBI)
Image source: Extracted from the PDF version of the CFTC's 2006 Performance Report
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Reporting Frauds and Scams
Report to the following
agencies:
The CFTC:
[Link]
FBI’s Internet Crime Complaint
Center: [Link]
The Securities and Exchange
Commission:
[Link]
The Federal Trade Commission:
[Link]
Your state regulator, attorney
general, and local law enforcement
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Group Discussion: Filing a Complaint
Who should you file a consumer complaint
with?
What information do you need to file a
complaint?
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Potential
Potential Tax
Tax Implications
Implications
Tax Treatments
What are some potential tax
treatments for digital assets?
IRS Notice 2014-21 provides guidance
on the tax treatment of transactions
using convertible virtual currencies.
Currently, the IRS considers
cryptocurrency to be a property.
□ General tax principles applicable to
property transactions apply to
transactions using virtual currency.
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Common Transactions to Report
Sale of a digital asset for fiat currency
Using digital asset to purchase
property, goods, or services
Exchange or trade of one digital asset
for another digital asset
Receipt of a digital asset as payment
for goods or services
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Common Transactions to Report (cont.)
Receipt of a new digital asset from
mining or staking activities
Receipt of a digital asset as a result of
an airdrop
Any other disposition of a financial
interest in a digital asset
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Tracking Your Potential Tax Liability
The Internal Revenue Code and You must maintain sufficient
regulations require taxpayers to records documenting all receipts,
maintain records to support what sales, exchanges, or other
is reported on their tax returns. dispositions of digital assets and
the fair market value of the digital
assets at the time of the
transactions.
Examples of records that can support digital asset activity:
Records documenting receipts, sales, exchanges, transfers or other digital assets transactions
Records showing the fair market value of the digital assets at the time of the transaction
Digital wallet records, transaction history, and ledgers
Exchange/kiosk records
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Group Discussion
What are some potential tax treatments for
digital assets?
What can you do to track your potential
personal digital asset tax liability?
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Summary
Summary and
and Review
Review
Questions?
Types of Digital Assets
Investing in Digital Assets and the Associated Risks
Frauds, Scams, and Unlawful Practices
How to Report Frauds, Thefts, and Scams
Potential Tax Implications
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