Eternity Law International News Legal issues surrounding cryptocurrency

Legal issues surrounding cryptocurrency

Published:
November 9, 2022

Although crypto may still be in a bear market, this doesn’t mean people have stopped talking about it. According to BitInfoCharts, tweets mentioning Bitcoin are higher than they’ve been at any point in the cryptocurrency’s 13-year history. As a strong base of public interest in crypto remains, despite a bearish trend, and new crypto uses emerge, so too do its potential legal liabilities. In this overview, we consider some common legal issues surrounding cryptocurrency.

Cryptocurrencies: the legal issues

Legal and regulative concerns

Since 2020, virtual currencies such as Bitcoin have been legal in the US and most other developed countries, such as the UK, Japan, and Canada. But the truth is that although the US Internal Revenue Service deems Bitcoin and other virtual assets legal, some legal issues in cryptocurrency still exist – mainly referring to their legal validity.

Virtual currencies are not supported by any centralized monetary authority and intrinsic goods, such as gold. On the opposite, their value as a whole is contingent on the value that other owners and investors ascribe to them. Given the fact that they are not backed by any centralized regulator, investors may face some legal resources if any difficulties emerge from their crypto operations or ownership.

Tax ramifications

For US federal tax purposes, cryptocurrency is defined as a property, meaning that US taxpayers are not eligible to use crypto as a functional currency for IRC purposes. Instead, taxpayers are required to report transactions engaging virtual assets in USD on their yearly tax returns. To do this, the taxpayers should determine their cryptocurrencies’ fair market value (using the conversation of the virtual currency into dollars) on each transaction date.

Also, the USA classifies cryptocurrency as capital assets. Thus, individual investors should pay capital gains taxes on any profits they get via crypto. This rule applies whether or not investors bought their currency from the US or another jurisdiction. But it’s unclear whether US investors who acquired their crypto holdings on foreign exchanges must fulfill extra reporting obligations in filing their taxes.

Contractual issues

One of the crypto’s most prominent characteristics is its self-executing “smart contracts”. Smart contracts are arrangements specified in a digital form, that act as the foundation upon which the parties are bounded to carry out their specific promises. It pays the other party when they execute their contractual duties through automatic algorithms. However, it is not so easy to determine whether they fit into the legal mechanism of traditional contract law, given its unique nature and inherent complexity.

Jurisdictional issues

The key concept behind blockchain that underpins virtual assets is that it has no way to show a ledger’s actual location. Therefore, transactions executed on blockchain feature higher privacy than those executed on traditional platforms. However, this, at the first sight, beneficial feature poses a complex jurisdictional challenge, creating new legal issues in cryptocurrency.

  • Firstly, provided that the nodes of a crypto-payment operation are domiciled in different jurisdictions, they may fall within opposite legal mechanisms.
  • Secondly, the “domicile” for crypto software is hard to determine because of the ledger’s lack of an actual location.
  • Third, blockchain’s character makes determining relevant legislation and choosing the correct jurisdiction for blockchain disputes extremely complicated due to the technology’s cross-border outreach.

Data safety and financial crime

Data leaks and crimes regarding illicit money circulation and funding terroristic organizations are additional legal concerns surrounding cryptocurrencies. As blockchain ensures a strong level of anonymity—and its apparent freedom from legal oversight, some users may use it for conducting illegal activities.

Final words

The above-mentioned legal issues in cryptocurrencies are to become even more explicit as no third party or governmental authority has the mandate to resolve crypto-related disputes. For instance, in a traditional transaction, if a party states that their account data was stolen and that funds were illegally transferred from their account, their financial institution can act as an intermediary and solve the matter. But, when considering blockchain, no system has been set to settle such a dispute as virtual currency has a decentralized nature and no third parties. Hence, victims of crypto crimes will likely have no legal possibility to get compensation for their losses.

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