The legal risks of cryptocurrency investors
You may be thrilled at the prospect of investing in cryptocurrencies especially with
more and more businesses showing an active interest in adopting cryptos. But do you
know what the legal risks associated with these new-age currencies are? While
governments and regulatory agencies are still undecided about crypto regulations and
financial institutions and banks are grappling to understand the real nature of digital
currencies, individual investors have been putting their money into the crypto space.
These investors are willing to expose their money to certain legal risks as follows:
A key consideration for any investor is how central authorities will be viewing
their crypto holdings. For example, the IRS in the United States has declared
crypto holdings as property and not currencies per se; so, individual investors
are to be subjected to tax laws like capital gains taxes when they hold crypto
assets. They must report their crypto costs and profits on returns. This has
obviously become a major point of controversy and confusion for American
taxpayers. It has practically become a “black hole” for both tax professionals
and taxpayers here. In short, you need to take advice of tax experts before you
start investing to be well-versed with the rules of reporting cryptos for losses
While decentralization is one of the key attributes that draws investors to
crypto coins, it also remains a legal risk for them. Bitcoins are not physical
coins, and like them, the other crypto coins too have no physical existence and
are not backed by governments or centralized authorities. Moreover, the
trading bots like the news spy help the investors to trade autonomously 24/7
and yield them good profit. This may free the individual investors from being
subjugated to centralized institutions but, at the same time, this also means
that in case of any problem, there is no governmental support. Their values
will be determined by market sentiment and should complications arise, you
may have no one to turn to.
Where transactions happen in physical coins, the money changes hands. Even
for electronic money, there are trusted institutions delegated with the tasks of
creating or settling claims and deposits. However, cryptocurrencies are
different from both these types in that there is no one trusted financial
authority that will create or manage disputes. So, whenever there is any legal
confusion between the parties, it is challenging to ascertain the path of legal
action to be taken.
Since businesses have started embracing crypto coins, they must have
appropriate licenses for this activity in a certain jurisdiction. But because of
the complicated legal nature of the cryptocurrencies, this space is not in the
least clear for businesses. For example, businesses accepting crypto coins
exclusively may not even need to get licenses for this. But they may be asked
to conform to certain specific considerations depending on where they operate.
So, it is actually the responsibility of the entrepreneurs to ensure that they
know and follow legal procedures in their respective jurisdictions.
Finally, it is widely believed that crypto coins have given criminals and illegal
organizations the freedom to commit frauds, cyber thefts, and engage in
money-laundering. So, as an investor, you may become a victim of such
financial crimes that typically have the exact legal options as any traditional
fraud offence. Whenever an exchange gets hacked and cryptos are stolen,
there is usually no process to retrieve the missing funds. This is a huge risk that
a crypto investor must take when he holds and trades crypto coins.