Crypto and Clearances: An Updated Legal Perspective
In early 2018, I wrote an article called Bitcoin and Your Clearance: A Legal Perspective. At the time, cryptocurrencies were still a relatively new phenomenon (at least as far as most of the public was concerned) and the perception in the national security community was that they were the purview of cyber-criminals, tax cheats, and fraudsters.
Suffice it to say, not everyone was happy with my recommendation that clearance holders steer clear of crypto – at least until and unless official guidance was issued to the contrary by personnel security officials. The article generated a few gruff comments, including my personal favorite: “you old folks have a lot to learn.” (I’m still on the right side of 40).
In the five years since, I’ve often been asked whether I’ve changed my views on crypto for clearance holders. In a word, yes – although the recent FTX debacle has certainly made it a closer call. But I stand by my original recommendation as prudent at the time, and I’d note that things have changed considerably since then.
First, and perhaps most importantly, crypto has exploded from a fringe fad into a mainstream investment. That’s not to say that just because something is popular, it’s an acceptable security risk to the government. But the normalization of anything removes much of its mystique and inevitably results in a certain degree of acceptance. People fear what they don’t understand, and security officials are no different.
Second, the DoD, which is the largest issuer of security clearances in the federal government and generally sets the trend for other agencies, issued formal written guidance on crypto in 2021. You can read it here, but the gist is that clearance holders are required to self-report to security “[o]wnership of foreign state-backed, hosted, or managed cryptocurrency and ownership of cryptocurrency wallets hosted by foreign exchanges.” It is the unspoken part of this that’s really important, though. DoD has issued a de facto seal of approval on clearance holders owning U.S.-based crypto and not even banned holding crypto outside the country (although that can still become a security issue, and I don’t recommend it).
Finally, the IRS has now issued regulations pertaining to crypto and introduced a reporting requirement on income tax returns. This eliminates much of the earlier concern about a lack of financial transparency and the ability to dodge taxes. True, someone holding crypto can still use it for illegal purposes or evade taxes, but the mere fact that the tax man is now watching more carefully arguably helps keep the average investor on the straight-and-narrow.
In short, I now believe that owning crypto is not the risk for clearance holders it once was. If crypto is your jam, that’s your prerogative – subject to government policy, the law, and any guidance to the contrary from your agency. Just remember that the same rules of reasonableness apply to crypto as to any other investment. Financial problems remain the number one cause for security clearance problems, so I always recommend that clearance holders diversify their investments and maintain a rainy-day fund lest the market crash, the exchange implode like FTX, or an unexpected life event happen. In those scenarios, the stress of financial problems can be compounded considerably by the risk to livelihood that would come with a clearance revocation.
This article is intended as general information only and should not be construed as legal advice. Although the information is believed to be accurate as of the publication date, no guarantee or warranty is offered or implied. Laws and government policies are subject to change, and the information provided herein may not provide a complete or current analysis of the topic or other pertinent considerations. Consult an attorney regarding your specific situation.
 No reporting is required if the covered individual holds cryptocurrency, but is NOT aware that any such holdings are backed, hosted, or managed by a foreign state, or that a cryptocurrency wallet is hosted by a foreign exchange.
No reporting is required if the covered individual’s investments in cryptocurrency are held in a widely diversified fund (e.g., index funds), unless the investment instrument is entirely composed of holdings in cryptocurrency that is backed, hosted, or managed by a foreign state.
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