The relationship between crypto and the law becomes even more pronounced because no intermediary or authority has exclusive jurisdiction to settle cryptocurrency-related disputes.
- Public interest in cryptocurrencies has surged recently, with different people and businesses looking to capitalize on the new technology.
- Different nations, including the United States, have classified crypto as property or digital assets to simplify taxation.
- Chainalysis estimated that illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022.
The relationship between crypto and the law
Public interest in cryptocurrencies has surged recently, with different people and businesses looking to capitalize on the new technology. With interest surging, new cryptocurrencies also come up every day. With different use cases for digital assets emerging, people must understand the relationship between crypto and the law. Understanding this relationship will help address the prevailing legal challenges regarding cryptocurrency transactions.
Regulatory and legal issues
Regulation is among the key factors affecting crypto prices. Currently, authorities are grappling with the emerging regulatory ‘chaos’ in the crypto industry. Thus, understanding the relationship between crypto and the law remains crucial. Also, without clarity on bringing the crypto industry to speed with the existing laws, countries have taken varying approaches to crypto regulation, sometimes with detrimental effects.
For instance, in November 2019, bitcoin hit an all-time low when China fast-tracked a crackdown on crypto businesses, echoing what happened when South Korea also moved to regulate crypto trading back in 2017.
By their very nature, cryptocurrencies are freewheeling, not beholden to country borders or specific agencies within a government. However, this nature presents a problem for policymakers dealing with clear-cut asset definitions.
Most parts of the world have legally embraced cryptocurrencies. Nevertheless, some nations remain defensive on the issue and have placed explicit bans on cryptocurrencies. These bans prove that concerns still surround the legal validity of crypto.
Crypto lacks a centralized issuing authority. Still, intrinsic commodities, such as silver or gold or silver, do not underly the value of crypto. Instead, crypto’s value relies wholly upon the importance ascribed by owners and investors. Without backing from a centralized regulatory body to address the relationship between crypto and the law, investors may confront several legal issues if any complications arise from their crypto ownership or transactions.
Intellectual property (IP) legal issues
Cryptocurrencies have become rather popular among IP–intensive sectors. These include the luxury, automotive, and consumer goods businesses, where the traceability of goods is crucial, and counterfeit commodities are a concern. Cryptocurrencies’ usage in IP-intensive industries raises questions on IP authorship and ownership, tracking and controlling the distribution of unregistered and registered IPs, and creating and enforcing IP licenses, agreements, or exclusive distribution networks using smart contracts. For instance, it remains uncertain who is the original creator of crypto and blockchain technologies.
Crypto and the law on taxation
The issue of crypto taxation remains controversial. Different nations, including the United States, have classified crypto as property or digital assets to simplify taxation. This classification makes crypto income and capital gains taxable, with crypto losses becoming tax deductible.
Many of cryptocurrency’s most passionate advocates emphasize the decentralization of the blockchain. Still, it is worth noting that governments continually strive to keep tabs on crypto earnings to make it possible to levy taxes where applicable.
Kenya is among the African countries that have explored the possibility of taxing cryptocurrencies. The Capital Markets Act (CMA Bill 2022) amendment aims to tax crypto transactions in all Kenyan exchanges. The amendment imposes a 20 per cent excise tax on all crypto transaction charges and transaction taxes comparable to the excise duty charged on bank transactions.
In South Africa, standard income tax rules apply to crypto assets, and the law requires affected taxpayers to declare crypto assets’ gains or losses as part of their taxable income. The burden is on taxpayers to declare all crypto assets-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.
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Several critics have suggested that crypto has offered criminal establishments a new route to commit money laundering, fraud, and many other financial crimes. This reproach stems from crypto traders’ ability to remain anonymous. Undeniably, some people have used crypto for “dark-market sites” by buying and selling illegal items with minimal chances of being nabbed. Different governmental authorities have branded drug dealers exchanging drugs for crypto as the new generation of criminals.
Chainalysis estimated that illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022. This was a 68 per cent increase from 2021. The mainstream centralized exchanges are the biggest recipient of illicit crypto, taking in just under half of all funds sent from illegal addresses. Crypto exchanges generally contain compliance measures for reporting this suspicious activity and taking the necessary action.
Crypto exchanges are fiat off-ramps where illicit cryptocurrency can be converted into cash. The popular exchanges for such conversion remain subject to anti-money-laundering rules requiring firms to identify their customers. However, Chainalysis has suggested that criminals have found ways to circumvent these rules.
Criminals now send illicit funds to DeFi protocols, not because DeFi helps obscure the flow of funds. In fact, unlike with centralized services, all activity is recorded on-chain. Moreover, DeFi protocols do not allow cryptocurrency conversion into fiat. Thus, most of those funds likely move next to other services, including fiat off-ramps. This means that almost all usage of DeFi protocols for money laundering is carried out by a criminal group of hackers stealing cryptocurrency.
Crypto and the law on jurisdictions
The primary impression of blockchain technology underpinning cryptocurrencies is that it cannot identify a ledger’s actual location. Thus, transactions undertaken on blockchain offer a higher degree of privacy than those on traditional platforms. Nonetheless, this advantage has a complex jurisdictional challenge.
First, crypto transaction nodes are located in different jurisdictions. Thus, the nodes may be subject to conflicting legal frameworks. Second, determining crypto software’s “host country” is challenging since the ledger lacks a physical location. Third, the transnational nature of blockchain makes choosing the applicable laws and the proper jurisdiction for blockchain disputes exceedingly tricky. Legal enforcement among blockchain projects, transactions, or users is arduous for national regulators, considering the technology’s cross-border reach.
The relationship between crypto and the law of contract
Self-executing smart contracts represent the most striking features of crypto and blockchain technology. Smart contracts refer to a set of promises, typically specified in a digital format. These act as the basis for the parties to a transaction to fulfill their specific promises. |A blockchain smart contract automatically executes payment to the parties once they complete their contractual obligations. The unique nature and inherent complexity of smart contracts make them whether they fit into the legal framework of traditional contract law.
The relationship between crypto and the law becomes even more pronounced because no intermediary or authority has exclusive jurisdiction to settle cryptocurrency-related disputes. For instance, in a conventional financial transaction, if a party claims theft of their account credentials and fraudulent transfer of money from their account, their financial institution (such as a bank) can intervene and help resolve the matter.
However, suppose a parallel situation occurs on a blockchain platform. In that case, no mechanism is in place for settling such a dispute because cryptocurrency is decentralized and has no financial institutions that act as intermediaries. Accordingly, victims of cryptocurrency theft will likely have no legal avenue to compensate for their losses.