Since the invention of blockchain technology, there has been a consistent rise in the cryptocurrency market. As a result, more businesses are accepting digital currencies like crypto as means of payment. This has drawn the attention of the masses to this wave of technology.
Now, there is a growing demand for information about the legal implications of cryptocurrencies. As a result, central banks, and regulatory bodies all around the world are attempting to understand the impact digital currency would have on the global economy.
Meanwhile, private investors can profit greatly from investing in them, but when they trade cryptocurrencies, they also run into some legal dangers.
Unlike physical money, cryptocurrencies are not backed by banks or governments and are highly speculative. So, if you want to invest in this new form of currency you should understand what are the legal risks to cryptocurrency investors.
To help you understand the various legal risks to cryptocurrency investors, we’ve put together this article. But before we delve into the risk let’s have an overview of what cryptocurrency is about.
What is Cryptocurrency?
A cryptocurrency is a sort of digital money that is stored on the blockchain network and is used as a medium of exchange. They enable secure online payments without the use of third-party agents.
Cryptocurrencies are decentralized networks built on blockchain technology, which is a distributed ledger enforced by a network of computers.
In addition, cryptocurrencies are saved in the cryptocurrency wallet. Wallets are the tools that you use to store your encryption keys, which prove your identity and link to your cryptocurrency. These wallets can be computer programs that are saved on your computer or mobile device, as well as cloud-based services.
You Can Also Read: How to Make Cryptocurrency A Part of Your Portfolio
What Are the Legal Risks to Cryptocurrency Investors?
Although the blockchain might help with crypto security, however, the decentralized structure of cryptocurrencies and the anonymity they offer present some risks. So, before you invest your money in this market, you should consider the following legal risks to cryptocurrency investors.
#1. Volatility
Volatility is one of the most basic indicators of an asset’s financial health, and cryptocurrencies are one of the most volatile investment options available.
The cryptocurrency market is driven by speculation, thus, investors may immediately buy and sell their assets when there is a sign of a price drop. In April 2019, Elon Musk tweeted “Dogecoin might be my fav cryptocurrency. The cryptocurrency gained immense traction and plummeted in price as a result of this tweet.
This shows that a single or positive negative news or tweet from a prominent influencer could have an immediate impact on the price of a cryptocurrency. As a result, it is vulnerable to manipulation by key players.
#2. Contract Issues
One of the unique features of blockchain technology and cryptocurrencies is smart contracts. Smart contracts are programs stored on a blockchain that run when predetermined conditions are met.
They are often used to automate the execution of an agreement or contract so that all participants can be certain of the conclusion instantly, without the involvement of a third party.
They can also automate a workflow by initiating the next action when certain conditions are met and verified. These activities could include transferring payments to the proper parties, providing alerts, or issuing a ticket.
The blockchain is then updated when the transaction is completed. Due to the unique structure and intrinsic complexity of smart contracts, it is difficult to assess whether they belong within the legal framework of traditional contract law.
#3. Money Laundering
In 2020, blockchain analytics firm Chainalysis estimated that criminals transacted $33 billion worth of cryptocurrency. They tracked $2.8 billion in Bitcoin from criminal organizations to exchanges over a year.
Because of cryptocurrency’s anonymity, numerous observers argue that it provides criminal groups with a new way to perpetrate fraud and a variety of other financial crimes.
Also, cryptocurrencies have been used to power “dark-market sites,” where criminals may buy and sell illegal goods without fear of being caught.
#4. Decentralization Risk
In most online financial transactions, electronic money transfer is usually backed and facilitated by a financial institution. As a result, you may simply get in touch with them and address any issues that arise throughout the transaction.
But because the cryptocurrency market is decentralized and lacks a centralized authority, it can be challenging to identify the right party to dispute a transaction when mistakes are made. Thus, it’s advisable for cryptocurrency investors to invest through reputable digital currency exchanges.
This is because most reputable exchangers feature top-notch customer support that can help with practically any issue.
#5. Cybertheft and Hacks
Cryptocurrencies are stored in digital wallets and traded on cryptocurrency exchanges. Because of their internet dependency and anonymity, cryptocurrencies are extremely enticing to fraudsters making it vulnerable to hacking or other malicious activities.
Typically, criminals utilize a variety of phishing tactics to obtain access to cryptocurrency wallets and trading sites. Therefore, individuals and businesses interested in investing in cryptocurrency may need to follow tight internet security protocols to protect their assets.
#6. The Risks of Peer-to-Peer Transactions
A peer-to-peer (P2P) platform is a marketplace for cryptocurrencies that links buyers and sellers of cryptocurrencies directly. This is one of the simplest ways to convert cryptocurrency into fiat money.
Any cryptocurrency transaction on a P2P exchange is settled directly between the two parties. Although it has limitations where errors or carelessness can result in the loss of your asset.
Additionally, frauds and fraudulent schemes are always a possibility. For example, a buyer may refuse to pay for cryptocurrency purchases made or a seller may decline to deliver tokens.
The simplest approach to steer clear of the majority of these scams is to choose a P2P platform that offers a digital asset escrow service. When using this service, the platform holds the cryptocurrency during the transaction and releases the tokens to the buyer after every agreement demand has been meet.
#7. Misplacement of Private Keys
Cryptocurrencies are based on a cryptographic mechanism that authenticates transactions using pairs of keys. The first is a publicly accessible public key, while the second is a private key that is kept hidden and used for identification and authentication. When you open a crypto wallet, a private key is automatically generated, granting you ownership of the funds in that wallet.
The loss of a private wallet key means that you no longer have control or access to the cryptocurrencies stored in that wallet. Private key loss or destruction accounts for around 20% of all crypto losses. Hence, you must back up your private keys regularly, preferably on a secure and isolated computer. Also, never store your private key online, especially if it isn’t encrypted.
#8. Unregulated Trading Exchanges
Because cryptocurrencies have grown in popularity, the number of cryptocurrency exchanges and trading platforms has skyrocketed. As a result, picking a credible exchange has become more difficult.
The lack of governmental control, on the other hand, has fostered the proliferation of scam exchanges and market manipulation in cryptocurrency trading. Some trading platforms charge exorbitant trading costs and have no controls in place to prevent manipulative or suspicious trading. Others’ security may be weak, making it easy for scammers to take your money.
The ideal strategy is to look for trading exchanges and platforms with reliable security and great reviews. Always study their terms of service and avoid platforms that make unrealistic claims.
FAQs About What Are the Legal Risks to Cryptocurrency Investors?
Yes. Since cryptocurrencies are decentralized, neither a governing body nor a central authority can control them. This is one of the most important ethical issues for governments regarding cryptocurrencies. It’s one of the main causes for which numerous nations have banned Bitcoin.
The risks associated with cryptocurrencies are as follows:
Price fluctuation.
Liquidity risk.
Risk of losing the private key or Password of the external wallet services.
Risk of hacking and fraud.
Bankruptcy risk.
The benefits of cryptocurrencies include decentralized networks, as well as cheaper and quicker money transfers. The drawbacks of cryptocurrencies include volatility, significant energy usage during mining, and use in illegal activities.
Cryptocurrency exchanges are the most common platform for buying cryptocurrencies. There are several different exchanges available; the most well-known ones are Coinbase, Binance, and Huobi. These exchanges let you use a debit card to buy digital assets like Bitcoin and Ethereum.
Cryptocurrency is intangible money so it does not exist in physical form and is not issued by a central authority. As opposed to a central bank digital currency (CBDC), cryptocurrencies often employ decentralized control.
Conclusion
Because of its volatility, cryptocurrency can be a very dangerous investment even though it has the potential to yield high returns.
Investors in cryptocurrencies face a variety of legal concerns, including volatility, exchange risk, fraud and theft, and decentralization risk.
To prevent financial loss, you should be sure to perform the necessary research and consult with a financial expert before considering putting your money into this asset.