What Are the Legal Risks to Cryptocurrency Investors?

Shriya Sarang

28th Oct'22
What Are the Legal Risks to Cryptocurrency Investors? | OpenGrowth

Cryptocurrency investments are growing in popularity. Many such investments have been doing quite well lately, with Bitcoin leading the way. A real buzz has been generated by the cryptocurrency market, which is at the forefront of financial technology and is luring both professional and amateur investors to spend billions of pounds annually. All investors should know the significant dangers of investing in cryptocurrencies before making purchases.


What are the risks of Cryptocurrency - The Jurisdictional Issue with Cryptocurrency



The fundamental tenet of blockchain technology that powers cryptocurrencies are that there is no way to identify the precise location of a ledger. As a result, transactions made on blockchain offer more privacy than those made on conventional platforms. However, this benefit presents a problematic legal hurdle. Contradictory legal frameworks may govern the nodes of a crypto transaction because they are dispersed throughout many jurisdictions. 


Second, because the ledger has no physical location, it is challenging to identify the "residence nation" for bitcoin software. Third, because blockchain is a global technology, it is incredibly challenging to choose the appropriate jurisdiction for blockchain disputes and determine which laws apply. Due to the technology's global reach, enforcing rules among blockchain users, transactions, or projects is a mammoth task for any national government.


7 Cryptocurrency Disadvantages


1. Market Risk 


Cryptocurrency assets are subject to risks brought on by changes in the market, just like traditional commodities. Trading cryptocurrencies carries two different kinds of risks: systematic risks and unsystematic hazards. Because it is a component of cryptocurrency markets, systematic risk is present in all cryptocurrencies. Unsystematic risk, unique to one cryptocurrency asset, may involve a shift in the business's fundamentals.


2. Changing Laws and taxes


There is some confusion regarding the tax position of bitcoin investments and returns. Bitcoins and other cryptocurrencies may be categorized as assets or currencies in different countries, depending on the jurisdiction.

For instance, Bitcoin is now accepted as legal money in El Salvador. Contrarily, it is legal to trade virtual currencies in nations like the US and Canada. China and Russia, on the other hand, have even outlawed certain business practices.

Furthermore, digital currency purchases and transactions could be liable to sales or value-added taxes (VAT). Depending on where they tango, investors in digital currencies may need regular tax guidance.


3. Cyber Financial Fraud


Theft of data and financial fraud are two more urgent legal issues relating to cryptocurrency. Many users who engage in criminal activities may be persuaded to adopt cryptocurrencies for their financial transactions by the blockchain's promise of anonymity and its apparent lack of rules.

A severe security hole in the Ethereum blockchain was discovered in 2017 by a Cornell University researcher, putting $250 million in danger of theft. Similarly, 1 million email addresses were recently exposed in a data security breach at cryptocurrency wallet company Ledger. Ledger's 9,500 customers' personal information, including complete names, addresses, and phone numbers, was also taken. Uncertainty exists around the ability of current data rules to manage data theft and financial crime emanating from cryptocurrency.


4. Privacy Concerns


Privacy issues and data theft in the bitcoin industry are closely intertwined. As we've seen, one of the key motivations behind creating cryptocurrencies like Bitcoin was to offer user transactions with complete anonymity. However, Chainalysis demonstrated that this anonymity was in danger due to the ongoing development of blockchain analytic tools. The term "privacy currencies" is misleading, according to the blockchain analytics company, which claims to be able to track the great majority of Zcash and Dash transactions.


5. The Dark Web element


According to several experts, cryptocurrencies give criminal gangs a new avenue for fraud, money laundering, and other financial crimes. This argument is based on the complete anonymity that bitcoin traders can maintain. In fact, "dark-market sites" where criminals may buy and sell illegal goods with little possibility of being caught have been created using bitcoins. Several governmental organizations have dubbed cryptocurrency-exchanging drug dealers the "new generation of criminals."

According to blockchain analytics company Chainalysis, criminal organizations exchanged Bitcoin for $2.8 billion in 2019, up from about $1 billion in 2018. Criminals must first transform their illicitly acquired cryptocurrency into liquid cash to turn it into cash. Anti-money-laundering regulations that mandate businesses identify their customers apply to the well-known exchanges for this conversion. But Chainalysis researchers claimed that by employing over-the-counter trading, criminals discovered a way to get around these regulations (OTC).


6. Intellectual Property rights


In industries that rely heavily on intellectual property (IP), such as those in the pharmaceutical, automotive, luxury, and consumer goods sectors, where product traceability is crucial and "grey" or counterfeit items are an issue, cryptocurrencies are becoming increasingly popular. 

Concerns about IP ownership and authorship, tracking and controlling the distribution of registered or unregistered IPs, and establishing and enforcing IP agreements, licenses, or exclusive distribution networks through smart contracts are raised by using cryptocurrencies in sectors that rely heavily on intellectual property. For instance, there is a great deal of ambiguity regarding the ownership of cryptocurrencies and blockchain technologies. Check out these legal tips for entreprenuers.


7. Lack of strong jurisdiction around cryptocurrency


Since February 2020, the United States and most other industrialized nations, including the United Kingdom, Japan, and Canada, have legalized cryptocurrencies like Bitcoin. Although the IRS regards Bitcoin and other virtual currencies as legitimate, there are still some questions about their legality.

Any centralized issuing authority does not back cryptocurrencies, and their value is not derived from intrinsic assets like gold or silver. Instead, how much other owners and investors are willing to pay for them determines their entire value. Investors may not have many legal options if issues develop with their cryptocurrency transactions or ownership because any centralized regulatory authority does not support them.


The Conclusion


Future legislation intends to clarify the unclear state of crypto rules. However, getting ahead of the rules and their enforcement will help you improve your compliance program and prohibit illegal money from passing through the blockchain. Working groups on crypto compliance are currently being established to prevent crime from occurring across the crypto industry. To combat the illegal usage of cryptocurrency, exchanges, law enforcement, and tool providers have joined forces to form the Cryptocurrency Compliance Cooperative.


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Writing has been my natural get-away and peace-place. Eventually, I have been drawn to the depths of the world of writing with numerous topics which have fascinated me through time like -
- Business and Finance
- Professional Communication and Skill Development

Through writing, I hope to find the bigger and better purpose of our lives beyond the work-life bitter banter and truly feel worth living in every breath.