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Laws To Stop Loss

A look at cryptocurrency from a legal standpoint

A popularity surge in Bitcoins and cryptocurrency, in general, has caught the interest of many first time retail investors. While the industry is highly dynamic in its legality around the world, here are some legal challenges retail investors must be aware of.

A decentralized approach

Cryptocurrency lacks a physical form and is not controlled by a central authority. This very independent approach based on which the whole cryptocurrency system works can cause legal and jurisdictional implications. 

The value associated with cryptocurrency is highly volatile but is ascribed to by owners and investors, just like traditional currency. However, there is no central authority that legitimizes the value of the digital currency, should complications with ownership and transactions arise. In such instances, investors are left with little to no legal avenue.

The blockchain technology that makes the cryptocurrency ecosystem uniquely trust-less also poses major complications when it comes to jurisdiction. The blockchain is a ledger that holds a record of all transactions in a digital format. It has no physical copy that can be pinpointed to a certain location. Servers that make entries on these ledgers are scattered around the world and fall under various jurisdictions that may have a conflicting legal framework. This cross-border framework makes it extremely difficult to determine the correct jurisdiction for blockchain disputes.

Smart contracts

Smart contracts are self-executing contracts that work without the interference of an external party on a blockchain network. These can be thought of as terms and conditions in a digital format that all parties involved have agreed upon. Smart contracts can automatically fulfil transactions when specified conditions are met. 

These contracts are independent of the legal framework of the society at large, thus raising a question of their legal validity. In case of disputes, the validity of smart contracts may get challenged.

Cryptocurrency taxations

The most integral decision in holding a cryptocurrency for any investor must involve its tax implications, as it directly affects the profits one hopes to achieve. Some countries such as the U.S. consider cryptocurrency holdings as assets and not currency, making the holdings eligible for capital gains tax on any profit realized by cryptocurrency.

Things get even more complicated when cryptocurrency is purchased on foreign exchanges and a tax system of multiple countries is involved. Such purchases might be subject to additional reporting measures at taxation.

Given the discouraging stand, some countries take on cryptocurrency and the constantly evolving rules around them, investors must practice caution and seek the expert advice of tax professionals.

Money laundering

The anonymity that the blockchain offers can be abused to commit fraud, money laundering and other financial scams. Cryptocurrencies have found their way on the dark market as well where they are used to buy and sell contraband. Systems also hold the potential to be hacked putting the holdings at risk of theft.

Investors may find themselves a victim to these frauds. There is a lack of standard practice in case of such misfortune along with very little support from the central governing authority. Existing data laws may not suffice when it comes to financial frauds and data thefts from cryptocurrency networks. This is why platforms such as MARS constantly upgrade their wallets to ensure improved security measures.