The Most Common Legal Risks For Cryptocurrency Investors

Is Cryptocurrency Available Around The World

The rising interest and public hype surrounding cryptocurrency have led to a growing number of investors gearing up to try their hands into this popular digital investment. However, like any financial decision, cryptocurrency comes with its set of risks which shouldn’t be overlooked by focusing on wild success stories. All potential investors should be well-informed before pouring their money to avoid getting entangled in legal disputes over their holdings.

Cryptocurrencies as Property

The primary legal concern of cryptocurrency investors is how authorities view their assets. This varies from country to country, for instance, the US defines cryptocurrencies as property instead of proper, requiring investors to be liable to the capital gain tax laws when reporting cryptocurrency gains and returns.

In addition to the complexities of cryptocurrency space, investors have to also pay added tax on holdings purchased through foreign exchange. CNBC reported that “anyone with more than $10,000 abroad usually needs to fill out the Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department each year.  Furthermore, the Foreign Account Tax Compliance Act, or FATCA–requires certain U.S. taxpayers to disclose their overseas accounts on Form 8938, when they file their taxes with the IRS.”

Therefore, Cryptocurrency investors must bear these implications in mind when reporting their cryptocurrency dealings. It is highly recommended to seek advice from tax professionals to take all the necessary precautions.

Decentralized Status

The decentralized status of bitcoin means that it lacks a physical presence and has no government backing or central bank authority. Though this comes with its advantages, investors aren’t accountable to any institution or jurisdiction. This comes with a price, cryptocurrency values are determined by the other investors or proprietors. Without a central authority to standardize these values, any complications with ownership or transactions become difficult to resolve.

Cryptocurrency’s decentralized status means that it doesn’t exchange hands like physical money or handled by a trusted financial institution like electronic money. As a result, legal confusion may arise between parties regarding digital currency transactions. This in turn makes it difficult to find legal solutions to such issues given the decentralized status of cryptocurrency.

Business Registrations and Licensing

Businesses are required to be registered and licensed to authorize certain jurisdictions and activities. However, because of the ambiguous and often complex legal nature of cryptocurrency, the requirements may differ. Some businesses don’t require registrations or licenses at all especially those exclusively dealing in cryptocurrency. While others need to apply for special considerations depending on the jurisdiction.

With the rising number of businesses dealing with cryptocurrency, the responsibility to adhere to legal procedures during dealings falls on the shoulders of the business owners and managers themselves. Therefore businesses dealing with cryptocurrency must take measures to protect themselves against money laundering, fraud, and fund transmission.

Cybersecurity Risks like Fraud and Money Laundering

In August 2016, US$72 million worth of bitcoins were stolen from the Bitfinex exchange in Hong Kong, leading to an immediate 23% drop in pricing. A year before, in September 2015, a phishing attack cost BitPay $1.8 million worth of bitcoins.

Media and public mistrust have long fueled fears regarding the increased risks of money laundering, fraud, and other grave financial crimes associated with cryptocurrency. Moreover, the lack of legal help as victims of these crimes compared to traditional investors has only added to the concerns of cryptocurrency investors.

The cause of this risk can again be traced back to the decentralized status of cryptocurrency. Unfortunately, there is no standard protocol to recover any stolen funds if the holder’s cryptocurrency exchange is hacked. Despite the growing efforts to ramp up the security of wallets and other commendable measures, the legal risks are yet to be fully eliminated.

Peer-to-peer Transactions come with Risks

Digital currencies are exchanged on multiple online platforms for transactions that often lack standard regulations or intermediary services. The transactions are also settled through third-party service providers, all these run the risk of double-selling for the parties involved.

Regulations Preventing Trading Digital Currency Conversion

The lack of standardization of the legal status of cryptocurrency by regulators has deterred potential investors interested in cryptocurrency. As the regulations vary throughout jurisdictions, there are rising concerns that countries may impose restrictions on the right to acquire, own, hold, sell or use digital currencies to fight use by criminal and terrorist organizations.

Currency Conversion Risks

Deposit or withdrawal of fiat currency into or out of the trading platforms due to policies may deter potential investors. For example, in February 2017  two of the largest trading platforms in China stopped margin lending and withdrawals by implementing stricter anti-money laundering policies pricings and trading volumes hit rock bottom almost instantly.

Legal Help

Navigating the cryptocurrency is complex and difficult especially for beginners. The legal side associated with it is even trickier, more so given the decentralized nature and lack of physical presence of the currency itself. Thus it is imperative to be well-informed and equipped with beneficial advice when it comes to dealing with the legal matters of cryptocurrency.

Trusted professionals like a Kelman-cryptocurrency lawyer, will ensure that investors handle their digital currency legally and efficiently to avoid disasters like money laundering and issues like tax evasion. When handled properly, the risk factors and horror stories associated with cryptocurrencies are more likely to be avoided in the future.

Mitigating Risk Factors

Cryptocurrency comes with its own set of risks despite all the success stories. However, by managing to keep the risks at bay is key to make your investment a success story as well. Here is a summary of a few essential tips to keep in mind with further elaboration on the Bitcoin Market Journal.

  • Amp up protection. Take advantage of offline storage options, two-factor authorization when available, and avoid accessing or storing wallets through mobiles.
  • Vet all vendors such as news aggregators, wallet providers, exchanges, and charting/analysis services. Be well-informed regarding their grievance processes and customer service, and look out for hidden fees or requirements.
  • Know the rules and laws for your jurisdiction regarding altcoins which frequently change without any notice. Always look it up.
  • Stay updated on market activity and on the coins before investing.
  • Patience is key. Trust your guts and get out at the first sign of trouble. Remember, your own pace is the right place. Finally, investors must be aware that investing comes with losing because there are two sides to every “coin”.


Although cryptocurrency runs the risk of legal issues among other disadvantages, it isn’t necessarily always a sure downfall to invest in digital currencies. Digital currency investment comes with its set of drawbacks like any other investment. However, investors should always be well-informed and up to date with any changes in market activity as well as seek professional legal help to minimize these risks. Lastly, the world of investment comes with pitfalls no matter the platform. Investors should be willing to take such risks to make any gains.

Raj Hirvate
Hi, I'm Raj Hirvate and I am a Tech Blogger from India. I like to post about technology and product reviews to the readers of my blog. Apart from blogging i'm a big Anime fan I Love Watching Naruto, One piece and Death Note.

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