What are the Legal Risks to Cryptocurrency Investors?

While new financial technologies may have disrupted the way in which traditional systems worked, they have also brought forth many new legal problems for investors. As a result, it becomes imperative for investors and entrepreneurs to monitor and make changes according to these new regulations. There has been a growing demand for clarity relating to legal implications of such new technologies. With governments, banks, regulatory agencies, and financial organizations everywhere trying to make sense of the situation, investors are having a field day investing in the crypto space. However, to be safe, you need to be aware of the legal risks involved before you start investing or trading cryptocurrencies.

Key legal risks that cryptocurrency investors should know about:

Digital currency, like fiat currency, may help you buy products but unlike conventional money, it does not exist physically. This is what makes the legal status of such currencies rather murky. Here are some of the common legal issues that are associated with crypto investing:

  • While cryptocurrencies are popular because of their decentralized nature, this feature can be a threat too. Bitcoins and other crypto coins have no physical existence and are not regulated or supported by any centralized authority. Since BTC is not attached with any institution or jurisdiction, it can trigger complications. Values assigned to digital currencies are therefore entirely dependent on those that are ascribed to them by investors.
  • Other legal issues stems from the manner in which centralized institutions will view crypto holdings. In the US, cryptocurrencies are held as property by the IRS making people liable to abide by capital gains tax regulations. This creates a lot of complexity and confusion for American tax-payers. It is not clear yet whether investors who have bought holdings have to face extra reporting measures when taxation time comes. So, you should ideally consult tax professionals in your region before investing.
  • Cryptocurrencies, it is widely believed, have encouraged criminal outfits to commit frauds and thefts, money laundering, and a plethora of illegal activities. While this might not affect every investor, it can prove to be disastrous for a handful that gets caught in such scams. This problem is related to Bitcoin’s decentralized nature; since this currency is not recognized, it cannot be legally recovered if lost or stolen. Although wallets continuously upgrade their security features, investors have not been able to do away with these legal risks completely.
  • In regular currencies, the money changes hands during transaction. But with electronic money that does not have a physical presence, there is a trusted authority that is accountable for setting up and facilitating transactions. No surprises then why there can be legal controversies between parties. There remains no legal recourse for such situations.
  • Many new businesses are using Bitcoins for payment. These companies have to obtain licenses for certain activities and jurisdictions. But because of the complex legal nature of cryptocurrencies, there is not enough clarity in the matter. For instance, companies accepting crypto coins might not need licenses or registrations. It becomes the responsibility of businessmen to ensure that proper legal processes are followed. Even at a federal level, the financial institutions have to ensure certain activities are carried out for protection against possible forgery and money laundering.