A chunk of Washington has been working to figure out what to make of cryptocurrencies. For some, the question is how to regulate the digital assets; for others, it’s how to cash in on them by influencing the debate. Lawyers and lobbyists have reinvented themselves and new trade associations have sprouted up across town. But Congress has been reluctant to pass new rules, financial regulators are still sorting out jurisdiction and the White House has yet to weigh in forcefully. That’s left confusion and legal risks for U.S issuers and investors. Here are some of the key policy questions:

1. What does the government think cryptocurrencies are?

It depends which agency you ask. The nation’s main swaps regulator, the Commodity Futures Trading Commission, has since 2014 defined virtual currencies as commodities and has asserted jurisdiction over their derivatives. Tax authorities consider them property for tax purposes. But all eyes in the crypto world are on the Securities and Exchange Commission. The SEC has said many coins are likely unregistered securities that violate the law, but hasn’t weighed in on specific currencies or introduced a bright-line test. Meanwhile, the Treasury Department says firms must comply with its anti-money laundering rules under the Bank Secrecy Act.

2. What does the crypto industry think of that?

Many in industry have complained that the lack of regulatory clarity is stunting innovation, but many are also lobbying against regulations because it could hit their business models. The standard test for whether something is a security is whether investors are pooling money in a common enterprise in the expectation of profits from the work of others. Crypto promoters say that doesn’t fit the realities of digital coins well, but the SEC hasn’t provided a new test for whether tokens are securities or not, and hasn’t so far agreed to industry calls for a “safe harbor.” The regulator also hasn’t blessed any new type of crypto asset.

3. Does that mean Bitcoin is a security?

No, the issue is less gray for Bitcoin, the world’s most-traded virtual coin. That’s because unlike many cryptocurrencies, Bitcoin wasn’t initially used to raise money for a specific purpose or company. That, plus it’s relatively dispersed -- global ownership appears to make American regulators comfortable that it isn’t legally a “security.”

4. How is jurisdiction being sorted out?

Through a lot of meetings. SEC and CFTC officials are trying to working out these issues, and a Treasury Department-led council of financial regulators has formed a working group. The upshot has been enforcement actions against crypto players alleged to be involved in wrongdoing, a rash of subpoenas to companies seen as operating in the gray area and stern warnings from SEC Chairman Jay Clayton to lawyers and accountants facilitating potentially sketchy deals. With the absence of a national strategy, states have also stepped in, creating another web of rules.

5. What is the crypto industry doing?

Lobbying a lot, and doing even more to sell their wares. Firms raised about $12 billion in initial coin offerings through the first quarter of 2018. Many did so by assuring investors they were selling so-called utility tokens that were not technically securities, because they were designed to be used for goods and services once the startup being funded came into operation. Other firms are selling so-called security tokens, which attempt to comply with securities laws, by limiting sales to wealthy investors. Others are selling agreements to

buy future tokens, known as SAFTs.

6. What’s at stake?

A lot of money. If the SEC were to classify a large cryptocurrency like Ether as a security its price could plunge, costing retail investors who have been piling in since last year. That’s because none of the biggest U.S.-based cryptocurrency trading platforms are registered with the SEC as securities exchanges. Offering only Bitcoin and un-listing other cryptos could hurt the exchanges’ trading revenue and hit those coins’ prices as fewer people will be able to trade them. Stricter rules could also cause this source of funding for startups to dry up in the U.S., and for firms to seek friendlier jurisdictions.

7. How and when is this all likely to get sorted out?

It could be a long while. U.S. regulators haven’t set a specific deadline to make a policy determination on cryptocurrencies, so it might be that institutions pushing to trade these assets, for example in ether futures or ETFs, will help clear up their status. Even if U.S. regulators did sort out jurisdictional questions around what is a security, lawsuits would certainly follow. In general, American regulators have taken a less aggressive stance than some nations where trading has been outlawed, LIKE CHINA??, and businesses have been raided. But, without clear rules, it may that for the foreseeable future cryptocurrency policy will be made largely by looking at whom regulators sue for violating long-standing rules.

To contact the reporters on this story: Ben Bain in Washington at bbain2@bloomberg.net, Camila Russo in New York at crusso15@bloomberg.net.

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, John O’Neil

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