Looking Beyond The Blockchain: Legal Challenges Surrounding Cryptocurrency

Although cryptocurrency has been around for over 10 years, there have been increasing efforts made in terms of legalising and regulating different areas. With such widespread adoption of cryptocurrency in recent years, new uses for the digital currency have been found and, as such, not all are legitimate or morally right. As such, cryptocurrency has moved from being a niche tech product to something that has developed a more mainstream presence.

It’s proven difficult to apply pre-existing regulatory frameworks and legal studies to cryptocurrencies, particularly new ones. With that in mind, let’s take a look at some of the legal challenges that surround cryptocurrency, and what can be done about them.

Contract Issues

One of the most interesting features of cryptocurrency is the automated smart contracts which are generated alongside transactions. Smart contracts are a set of promises which are typically specified within a digital format - they act as a basis to which the parties involved in the transaction are required to fulfil their specific obligations and promises.

When a party carries out the duties outlined in the contract, the smart contract then allows for the payment to be made automatically. As a result of the unique name and obvious complexity, smart contracts don’t fit into the traditional legal framework, therefore contract law is then difficult to determine.

Data Theft

Trading scams are very common within the world of cryptocurrency and, as well as this, data theft and financial fraud are further legal concerns which surround the widespread use of cryptocurrency. Because of the blockchain’s promise to uphold anonymity, as well as its freedom from strict regulations - this can entice users who have interests in illegal acts and activities to use cryptocurrencies for the majority of their transactions.

There have been untold numbers of crypto wallet hacks, theft and scams, with one of the most notable recent cases being Binance fraud, as well as the theft of personal information, in the years that cryptocurrency has increased in popularity and it is still unclear as to which data laws can address data theft in this way, or whether regulations need to be created and maintained to protect users. There is no provision for refunds which arise from disputes between merchants and customers with cryptocurrency and, in the case of fraud, victims of data theft or fraud may find it difficult to figure out details of what has happened and, therefore are unable to get the required legal evidence for recovery.

Tax Implications

Cryptocurrencies are deemed as being property not currency when it comes to income tax purposes. As a result, this means that US taxpayers are unable to use crypto as a functional currency. However, taxpayers are required to report transactions which involve cryptocurrencies within their annual tax returns. This requirement means that taxpayers have to determine the cryptocurrency’s fair market value on each date a transaction was made. This means that properly declaring and reporting on crypto transactions becomes a burden for taxpayers as they are required to record the price at which their cryptocurrencies were sold or bought.

The US classified cryptocurrencies as being a capital asset. This means that investors are therefore liable to pay capital gains on profits they generate via cryptocurrencies. This applies no matter if investors have purchased cryptocurrency from the US or not.

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