Since digital currencies have entered the financial market, their popularity has grown immensely with time. Like any coin has two sides, these digital currencies have two facets; one is full of advantages, and the other possesses some drawbacks. Many platforms offer trustworthy trades, like the And yet, as the consumption of these digital currencies is increasing, the risks are also increasing. A Crypto consumer or investor must recognize the challenges to secure himself from illegal practices and activities. 

A traditional tangible currency requires a system and a set of regulations that aid in practical and legal transactions, exchanges, and purchases. Specific platforms like banks and government organizations manage these systems to secure legal trades in the stock market. Similarly, these digital currencies require a legal system to ensure their honest revenue; otherwise, a crypto investor might face many legal challenges. This blog will enlist the legal challenges a crypto investor might encounter while using cryptocurrency.

Cryptocurrency and the Taxation

The government is still evolving and finding the most suitable regulations for cryptocurrencies’ operations. In the US, cryptocurrencies are property, not a currency. Therefore, crypto users cannot use their digital cryptocurrency as a functional currency. 

Moreover, they must give the government an annual statement of their transactions on their tax returns. This requirement entails that the users evaluate every transaction regarding their cryptocurrency’s fair market value in US dollars. This feature causes inconvenience to the crypto users as they have to calculate the market value price of each cryptocurrency used in transactions up to the date.

Additionally, the crypto users have to pay taxes on each revenue multiplied through their digital currency because the US law categorizes it as capital and not a currency, as mentioned above. The tariffs are mandatory even if the goods are purchased outside the US. Similarly, if you have received payment as a salary in a cryptocurrency, it is taxable, just like other currencies.

Cryptocurrency: A Decentralized Currency

Cryptocurrencies are decentralized because there is no authority, like banks or government firms, backing up the transactions going on digitally. Unlike online banking transactions, where a bank controls every trade, cryptocurrencies lack this feature, which can lead to many legal issues. There has to be an intermediary to solve such legal matters. If several dollars are stolen from a bank account, the victim can directly contact the bank and solve the issue. Whereas, if a similar situation occurs in a cryptocurrency’s dealings, there is no institution to back up. Only an authoritative firm can solve disputes around digital investments or trades. There will be no compensation for the theft, and it will be an individual’s loss. 

Settlement Issues

In traditional investments that use real and tangible money or assets, contracts are a way to avoid any mishap between partners, buyers, and sellers. In the market of intangible cryptocurrencies, ‘smart contracts’ are conducted between sellers and buyers. Smart Contracts are a digital layout with a set of promises by both parties. The contract is digital evidence to fulfill those agreed promises. The question remains about the validity of these contracts compared to traditional contracts’ legal structure. 

Security Concerns

Unlike traditional currencies, Cryptocurrency is an intangible and virtual currency where manipulators can easily produce many illegal transactions under no authority or supervision. It is easily accessible to hack anyone digitally. Hence, the risk factor among these digital currencies upsurges with every single digital advancement in the industry.

Digitization has helped the world constructively but has also affected it destructively. Digital currencies have tried to simplify our transactions on screen-based platforms, but they also face such drawbacks as security issues. Even with the highest protection and security of the blockchain system, it is manageable for cyber-attackers to hack a crypto-wallet, and the owner might not be able to recognize it due to false information.

This issue was mentioned in the article published by International Finance Corporation (IFC) in January 2019 that a fifteen-year-old boy hacked a crypto wallet. The other way in was permitted to the attacker through the development of proof-of-concept code that enabled him to enter and relocate the wallet’s destination and transfer the total tokens to his account.

Also Read: Why Everyone Is Talking About Bitcoin?