What Are The Legal Risks to Cryptocurrency Investors?

Cryptocurrency has taken the world by storm, with investors flocking to buy up Bitcoin, Ethereum, and other digital assets in hopes of making a profit and investing for the future.

However, cryptocurrencies are a largely unregulated market. There are many legal risks that investors should be aware of before putting their money into this volatile market.

Here are 6 risks with legal implications for cryptocurrency investors:

1. Fraud.
2. Theft.
3. Regulatory changes.
4. Taxes
5. Not being able to convert crypto to fiat currency.
6. Lack of legal resources.

Cryptocurrency investors need to be aware of these risks. Let's go over each one in more detail and provide some tips on how to protect yourself.

1. Fraud

Fraud is a significant risk for cryptocurrency investors. There are many scams out there, and it can be hard to spot them. Some scams involve fake exchanges or wallets, while others involve fake ICOs.

Always do your research before investing in anything, and be wary of anything that seems too good to be true.  Start by researching the individual team members of a project before you invest in it.

If you can’t find any information on them, this may be a red flag. Take a look at their whitepaper. All respectable startups have one. If they don’t, there’s another red flag.

Overall, legitimate endeavors make their crowdfunding process transparent. If they’re not clear about how much money is going in and what it’s going to be used for, that’s another good reason to be suspicious.

2. Theft

Theft is another big risk for cryptocurrency investors. There have been many high-profile hacks of exchanges and wallets, and this is likely to continue. 

Always store your cryptocurrencies in a safe and secure wallet, and don’t leave them on an exchange for longer than necessary.  The safest way to store your crypto is in a cold wallet, which essentially works like a thumb drive.

Of course, this means that if you lose your wallet, you also lose all of your money. If you’re new to cryptocurrency, you might want to stick to online wallets.

3. Regulatory Changes

Governments around the world are starting to crack down on cryptocurrencies, and this could lead to stricter regulations. This could make it difficult or even impossible to buy, sell, or use cryptocurrencies.

Always keep up with the latest news and be prepared for changes in the regulatory landscape. For example, if you live in the United States, you should know that the SEC has been cracking down on ICOs.

Right now, there aren’t specific licenses businesses need to apply for to be able to use cryptocurrencies. However, they still have to follow federal regulations on things such as fraud control.

When it comes to the ability to receive cryptocurrencies, the responsibility falls on the business owner and managers.

4. Taxes

It’s not clear whether investors have to declare their cryptocurrency assets to the IRS. So far, there hasn’t been a definitive court ruling.

US taxpayers need to report all foreign assets to the FBAR and FATCA if their holdings surpass a specific threshold. Not doing so can lead to hefty $10,000 fines, which is why many lawyers recommend declaring your crypto assets to these government agencies.

It’s hard to say whether cryptocurrencies are considered foreign currencies, but unless you know what you’re doing, it’s best to play it safe.

If you plan to do something different, then you may want to consult a tax professional.

5. Not Being Able to Convert Cryptocurrency to Fiat Currency

Fiat currencies, such as the Euro and the US dollar, are much more stable than cryptocurrencies. Even if you amass a fortune on cryptocurrencies, you may be able to get much use out of it if you can’t convert it to a fiat currency.

Some businesses accept Bitcoin or other cryptocurrencies as payment, but this is far from being the norm.  There are many ways to convert your cryptocurrency to fiat currency. 

The most common one is probably crypto exchanges. They usually let you withdraw funds with little to no fees. However, they’re also not the safest place to keep your crypto.

A bit of general advice is to use exchanges only for trading and withdrawing.  But what if for some reason the exchange you’ve been using becomes illegal or breaks down?

Don’t worry: there are other ways of withdrawing crypto.  One of them is peer-to-peer exchanges, where third parties accept your requests for transactions.

These platforms require the most trust and can also have pretty high fees.  Other methods include crypto ATMs. These are straightforward and safe, but also have high commissions of as much as 25%.

A word of advice for keeping your investments as liquid as possible: invest in several different cryptocurrencies.

This way, if one currency goes down or its exchanges are having issues, you’ll have some of your eggs in a different basket.

6. Lack of Legal Resources

Unlike normal cryptocurrencies, fiat currencies are centralized. They are backed by the trust and authority of institutions, which regulate the currency and settle any disputes that may arise regarding it.

For example, banks take responsibility for making sure an electronic transfer happens without confusion. And if we take a step back, fiat currencies depend on the strength and stability of the government that issues them.

Cryptocurrencies have none of that. They are entirely decentralized, which means transactions happen directly between users, and the validity of these transactions is corroborated by other, anonymous users.

This poses the biggest advantage, but also the biggest risk for investors. On one side, they’re not tied to the whims of institutions. On the other side, they don’t have any legal resources at their disposal if there’s even confusion regarding a transaction or if they were victims of fraud.

This also means that if you were accidentally part of a larger illegal operation using cryptocurrency, such as money laundering, you may not be given the same legal protection as if it had happened with fiat currency.