Cryptocurrency investments pose several risks, such as volatility, cybertheft and hack, decentralization, Peer to Peer transactions, loss of private keys, unregulated investment platforms, regional regulation, currency conversion, and taxation risks to investors. However, in this article, we will focus on the legal risks of cryptocurrency investment that the investor may encounter. 

In general legal risks refer to damage or any loss incurred to an investor due to negligence in compliance with laws related to the business. It can be encountered at any stage of investment proceedings. There may be complicated issues arising due to a misunderstanding of laws. Most importantly, there may also be a lack of law or regulation, which pose a legal risk that happening in the cryptocurrency market.

Types of risks such as compliance risk, regulatory risk, and operational risk may contribute to the term legal risk. The whole reputation of a business depends upon these risks as they may result in an immense loss. It may result in the failure of a business too. Unfortunately, cryptocurrency investment is highly attached to the legal risk because the cryptocurrency market is unregulated internationally.Also, without a central authority backing the value of the cryptocurrency, investors participating in the cryptocurrency market are left in a disadvantage situation should complications with transactions or ownership arise.

In some countries, regulators have struggled with the idea that cryptocurrency might become an alternative to a sovereign currency and thus pose a threat to central banks’ power over monetary policy.

In many cases, cryptocurrencies and blockchains conflict with some country’s existing law. The simplest cases of conflict arise when cryptocurrencies and blockchains are designed, implemented, and used in ways that are illegal for a particular local constitution. Other cases arise when cryptocurrencies and blockchains are designed to be in some way legal. For instance, Decentralized Autonomous Organizations (DAOs) and smart contracts are often legal. They, therefore, challenge the jurisprudence of contract law, intellectual property law, business and private law, tax and accounting law, and so on. 

The following are explanations of what legal risks could arise against cryptocurrency investors for the lack of regulations.

• Regulatory risks

For the lack of regulation, cryptocurrency participants are vulnerable to regulatory risks, which arise from the lack of dynamic behavior of laws and regulations that significantly affect both businesses and investors. 

The lack of rational, fair, and safe financial regulation for cryptocurrencies and blockchains is perhaps the greatest and most visible risk facing investors in cryptocurrencies and blockchains. The immensity of this challenge requires its own consideration, as there is high demand in the legitimate market for a fair regulatory system for all participants. 

• Compliance risk 

Compliance risk covers risk which arises due to non-compliance with statutes, smart contracts, internal policies and best practices applied to cryptocurrency investment. Compliance risk may result in financial losses. 

Contractual risk

Contractual risk is incurred when there is some failure in the fulfilment of contractual liabilities. In the cryptocurrency market, there are several failures to meet the terms of the contract, failure to provide services in compliance with the contract, failure to include risk-mitigating clauses in the contract etc. All this results in a cryptocurrency contract risk.

The blockchain solutions raise important legal questions in both financial and non-financial applications. For example, it is true that blockchain solutions could substantially simplify the process of clearing and settling. However, the participants in such a solution would need legal safeguards that any settlement on a blockchain has the same legal status as in previous solutions. 

Similarly, experiments with blockchain solutions in trade finance suggest that a reduction in transaction costs is possible. However, most experiments duplicate the blockchain solution with standard exchanges of the respective legal documents. For it to fully work, the transfer of the property of say, a container on the blockchain would need to be legally recognized and binding. Otherwise, severe legal uncertainty prevails. 

• Dispute risk

It is difficult to resolve any dispute arising in the cryptocurrency investments, due to the lack of both regulation and central authority. Dispute risk results when there is a disruption caused by the stakeholders, customers or partners to the investment. These disputes often result in litigations and put the investment onto unpleasant. It would be easier to resolve the disputes by regulating the cryptocurrency market, as there is no opportunity to get the disputed case transformed into litigations.

Challenges For Criminal Investigation And Prosecution 

For the same reasons that the cryptocurrency market lack regulation, cryptocurrencies are widely used for money laundering, tax evasion, cybercrime, and illegal exchange. As a result, cryptocurrencies frustrate criminal investigation and prosecution. Given their global nature, cryptocurrencies are also used by a wide range of criminal actors, including known terrorist organizations and some authoritarian governments, such as North Korea. 

According to some law enforcements and intelligence organizations, most recognize the reality that cryptocurrencies are out of law and will continue to provide legal challenges during criminal investigations. Unfortunately, because of lack of regulation, most investigations focus on the traditional investigative contexts surrounding cryptocurrencies. 

Cryptocurrency use for money laundering and tax evasion 

Due to pseudonymous or fully anonymous accounts, a censorship-resistant network, and global reach, cryptocurrencies are ideal tools for money laundering and tax evasion. Similarly, it is relatively easy to avoid paying taxes on income generated from cryptocurrency investments. However, it is true that many legitimate cryptocurrency businesses comply with Know Your Customer KYC and Anti-Money Laundering AML regulations, but it is not difficult to find illegitimate businesses, which are usually domiciled overseas that are willing to exchange cryptocurrency for another one or state-issued currency for cryptocurrency. 

Some cryptocurrencies, such as Monero or Zcash, have strong privacy protection to enhance investors’ privacy by further obfuscating transactions.

 Also, cryptocurrencies have been and are used for illegal activities. As transactions in cryptocurrencies can be done anonymously, they are been misused. The strong market reaction to the value of bitcoin after the shutdown of Silk Road, a major digital market for illicit drugs, suggests that illegal activity is indeed an important feature of cryptocurrencies. As is the case for cash, where many measures are in place to limit its abuse, careful policy action is needed to limit and prevent illegal activity in cryptocurrencies. 

Cryptocurrency use for cybercrime and illegal exchange 

Illegally buying drugs, weapons, stolen identity documents, credit card data, and cybercrime tools are the most well-known and infamous use of cryptocurrencies. While law enforcement agencies have recently made a number of high-profile crackdowns on these online illegal activities that exchange goods for cryptocurrencies, their widespread use persists. 

Cryptocurrencies are also widely used for ransomware, blackmail, and extortion due to their anonymity and the inability to reverse transactions. Naturally, illegal activities have and would continue to exist without cryptocurrencies, but the availability of cryptocurrency in the market, greatly aids them. Regulating the cryptocurrency market would reduce crimes and illegal transactions.

 

 

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