Legal Guide

Legal Risks Surrounding Cryptocurrency

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The initial craze over cryptocurrency has worn off. But even with its all-time high values followed by the big drops recorded in the last two years, investor interest in the market is still not going to go away soon.

Crypto’s popularity is still drawing more and more entities to find more unique ways of taking advantage of the technology. But as more new uses for these digital currencies begin to surface, so do its possible legal issues.

Cryptocurrency uses digital files as money. As it is decentralized, no singular entity can control it. All users have collective control. Plus, it is kept secure by cryptography which prevents counterfeit transactions.

Despite these, or maybe because of these, there are potential legal liabilities surrounding cryptocurrency, and they include the following:

Tax Issues

In the US, for example, cryptocurrencies are considered property. They cannot be used as currency for Internal Revenue Code purposes. But taxpayers must report transactions involving cryptocurrencies in US currency on their tax returns.

This becomes a big responsibility because the taxpayer must record the prices at which their cryptocurrencies were purchased and sold. In addition, cryptocurrencies are considered capital assets. As such, investors are liable to pay capital gains taxes on any profits they make from them, whether bought within or outside the US.

Some investors may also use cryptocurrencies to conceal their properties and evade taxes. Founders of Crypto ICO did just that, and they pled guilty to tax evasion in September 2021. In March 2022, they were sentenced to combined eight years imprisonment.

Money Laundering and Fraud

Cryptocurrency has provided a new way of committing fraud, money laundering, buying and selling illegal items, and other money crimes. Because cryptocurrency traders remain anonymous, it is easier to do unlawful dealings.

According to the blockchain data company Chainalysis, criminals laundered 8.6 billion dollars of cryptocurrency in 2021, an increase of 30% from the previous year. To exchange their illegally obtained cryptocurrency for cash, criminal organizations first need to convert it into liquid funds.

These exchanges are subject to anti-money laundering regulations and require entities to identify their clients. However, Chainalysis cited that criminals have found a way to bypass these laws through over-the-counter trading.

DAO Issues

A DAO or Decentralized Autonomous Organization is a new organizational structure operating under blockchain technology. It is like a crypto co-op or a chat room that has a bank account.

Presently, most states in the US do not recognize DAOs as legal entities. This can prove to be difficult if someone files legal action against them.

For instance, if a case is filed against a DAO, the process can immediately be impeded, as it can be hard to identify the person or entity who represents the organization. The plaintiff must confirm if the entity is suitable to stand for the DAO and is under the court’s jurisdiction.

However, if you wish to form a DAO in the US, check which state allows its legal incorporation. This way, you can rest assured that your DAO is a legal entity with the same benefits afforded to a limited liability company (LLC).

Jurisdictional Problems

Cryptocurrencies operate under a technology that cannot determine a financial account’s physical location. This presents a complication. Since crypto dealings may be located in multiple jurisdictions, the legal frameworks governing these jurisdictions may be at odds with each other.

There is a challenge in pinpointing the residence country and its consequent pertinent laws. Because of blockchain technology’s jurisdictional scope, it can be an uphill climb to impose regulations on crypto users and their transactions.

Data and Privacy Concerns

In July 2020, a hacker breached Ledger’s database, which compromised customer information. Based in Paris, France, Ledger is a company that develops hardware-based security products such as the hardware wallet that protects digital currency users and blockchain applications.

Initially, the company revealed that about 9,500 customers were affected. However, it was exposed a few months later that about a million email addresses and 272,000 names, addresses, and phone information of people who had ordered Ledger’s products were compromised.

The implication here is that it’s not clear whether current data regulations have any control over data and financial fraud that came from cryptocurrencies. The US data and privacy laws do not encompass privacy concerns from blockchain technology.

Intellectual Property

Currently, auto, luxury goods, pharmaceuticals, and other consumer products belonging to the intellectual property sector are taking notice of cryptocurrencies. These industries, however, put a lot of value on the traceability of goods to ascertain their authenticity.

Using cryptocurrencies creates substantial uncertainty and raises issues on ownership, control, and tracking of the distribution and upholding of IP licenses via smart contracts.

The legal issues mentioned here are just some of the concerns surrounding cryptocurrencies. In the face of the surging popularity of digital currencies, the fact that there is no specific authority to handle crypto-related conflicts and issues is the main problem.

International organizations and countries must make a concerted effort to create a legal framework and regulate digital assets. In this way, they can address potential threats. They can also protect investors in the long run and prevent misrepresentations and scams within the crypto industry.

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