Cryptocurrency: An Investigation into its Legal Implications Sriram Arunachalam Legal Article Thu, Jun 22, 2023, at ,01:48 PM IntroductionCryptocurrency has recently gained widespread attention with the prevalence of Bitcoin and Ethereum individually multiplying users’ money far greater than any stock or commodity has in the past decade. For example, Bitcoin was available for as cheap as $0.3 in 2010, and in 2021 it reached a staggering value of $64,400, which is a return of almost 215000%. This means that a sum of $10,000 invested in Bitcoin in the year 2010 would have generated a sum of $2.1 billion in the year 2021. This ROI is much greater than any stock or commodity. So, what is cryptocurrency? It is a form of currency that operates on a digital medium outside the ambit and regulation of banks, whose records of transactions are rather maintained by a decentralized system. This decentralized system that records the transactions is precisely blockchain technology. This blockchain technology further exercises means of cryptography in order to secure transactions between any two entities. This is effectively cryptocurrency in a nutshell. However, in this paper, my focus will pertain to investigating the legal implications of cryptocurrency. Why is this important? Laws and regulations ascertain that operations don’t encroach the boundaries of illegality and that it adheres to a scale of fairness, justice and reasonability. However, in today’s time, as cryptocurrency has come to be used by a larger population in comparison to a decade ago, it has come to be associated with a plethora of legal issues and it has been used to further illegal means for mere benefit, stepping into the terrain of illegality. Subsequently, several laws and regulations have also been passed in response whose effectiveness is yet to be determined. It is therefore important and rewarding to explore the implications of such a widespread phenomenon in today’s time to yield valuable insights on this matter. In this paper, I will first explore the legal issues cryptocurrency has given rise to, I will then move on to its utilization as a front for illegal activities, and I will finally discuss the reforms brought about in order to remedy these issues.Legal Issues Created by Cryptocurrency Cryptocurrency has created several legal issues that cannot be resolved by existing legal frameworks, and it calls for changes in the legal framework to fit in its features. The first of these issues concerns contract law. One of the most central features of cryptocurrency and blockchain technology is their self-executing smart contracts. These contracts operate by automatically paying the other party when the contractual duties have been performed. In distinction to the way normal contracts operate, smart contracts infuse automation into the concept of contracts. However, the use of automation can present itself to be violating the tenets of traditional contract law. In all contract laws around the world, consensus ad-idem is an essential tenet. However, smart contracts and the automation associated with it, work based on predefined rules and conditions and doesn’t take into account real-time communication between the two parties (usually established through verbal or written communication in traditional contracts), and therefore doesn’t always fulfill this essential tenet. If such a contract was brought to court, establishing consensus ad-idem can prove to be difficult. It is therefore of utmost importance to regulators and lawmakers to deliberate upon this matter. The second issue concerns jurisdiction. More often than not, the parties of a crypto transaction are in different jurisdictions, which brings up a question of which legal framework applies to the transaction. Moreover, there is no international legal framework that is binding on these transactions, and therefore if any dispute were to occur, adjudication would prove itself to be difficult. However, prior to this, lies another problem. The blockchain technology underlying cryptocurrency does not track physical locations, so it may be a herculean task to even decide what two legal frameworks are conflicting in order to successfully apply one legal framework of one jurisdiction. This therefore makes it nearly impossible to seek relief if any dispute has occurred. The third issue is the tax implications. Throughout most of the world for income tax purposes, cryptocurrencies aren’t considered to be ‘currency’ but rather ‘property.’ This is because cryptocurrencies are decentralized, and they don’t fall under the ambit of the central bank. The implication of such an act is that the taxpayers must record the value of the cryptocurrency on every date of transaction. This task can therefore present itself to be burdensome and likely to result in faults, causing further audits. Furthermore, cryptocurrencies are considered to be capital assets and therefore taxpayers are subject to paying capital gain taxes on any realized profits even though cryptocurrencies are essentially currency rather than property. This therefore calls for amendments in the legal framework in order to smoothen this process and aid the general public who have begun to use cryptocurrencies on a daily basis for transactions. Other than these issues, there are several others as well, pertaining to intellectual property law, securities law, etc. Next, I will explain how cryptocurrency is used as a front for illegal activities.Utilization of Cryptocurrency as a Front for Illegal Activities The widespread utilization of cryptocurrency has also seen an increase in the illegal activities associated with it. The first of these activities is money laundering. In the field of cryptocurrency, there are cryptocurrency tumblers which are essentially mixing services that mix funds from multiple sources to increase the anonymity of the transaction and obscure the source from where the money is being transferred. Users can send their cryptocurrencies to this service, which will combine and redistribute the funds to make it appear as if it has been received from various sources, and therefore make it appear legitimate even though it is illegal. This therefore aids the illegal act of money laundering. An example of such a cryptocurrency tumbler is “ChipMix which has been accused of laundering and hiding the origin of billions of dollars in bitcoin for criminal organizations, North Korean hackers and the Russian Intelligence Service.” (Coote, n.p.) Furthermore, cryptocurrency also allows the transfer of funds across borders from one country to another, outside the ambit of the central bank and other financial institutions. Traditionally, money would have to be transferred under the ambit of these institutions and there would be checks and controls to regulate it. However, with cryptocurrencies, all these checks and controls can be bypassed and this further aids money laundering. Therefore, this matter presents itself to be one of high priority to regulators and legislators in order to prevent such activities. Secondly, cryptocurrency is being used as a means to aid ransom threats. One of the central features of cryptocurrency is the anonymity of the transactions. Criminals have increasingly exploited this threat in the recent past to hide their identities during ransom threats. They provide instructions to the victim as to how much of cryptocurrency they must buy and where they’re supposed to send it to, and they successfully conduct ransom threats via these means. On account of the anonymity, it becomes an extremely difficult task to identify the criminals. This is therefore another matter of high priority in the eyes of regulators and lawmakers. Thirdly, cryptocurrency is subject to data theft. One of the largest examples of this was when $50 million were stolen from an investment fund called DAO on the Ethereum blockchain in 2017. Unlike traditional investment funds, this one operated in the form of cryptocurrency and without the traditional intermediaries that usually provides regulation and security. Rather, this investment fund operating in the form of a cryptocurrency was subject to a security vulnerability as most cryptocurrencies are, and this was exploited by an attacker in 2017. He was able to drain $50 million despite having the potential to steal the entire $250 million. Furthermore, owing to the absence of statutory provisions and laws concerning the same, a suit couldn’t be filed and the $50 million of the general public’s money remains stolen. This example further illustrates the urgency of amending legal frameworks to fit in the global phenomenon of cryptocurrency.Reforms Brought in to Remedy these Issues. Two of the most widely implemented regulatory processes in response to the issues discussed above are Anti-Money Laundering (AML) and Know Your Customer (KYC) which attempt to prevent financial crime and promote transparency. I will further explain both these regulatory processes in depth. As the name AML suggests, it is specifically in response to the heightened use of cryptocurrency for money-laundering. “It prevents criminals from using cryptocurrency to cover the tracks of their proceeds from illegal activities.” (Afolabi, n.p.) This scheme strives to do so by verifying the identities of the parties transacting, monitor their transactions and allow users to report any activity that may appear to be suspicious. The government agencies that oversee these regulations throughout the world are the FinCEN (US), FCA (UK), FIU (EU), FIU-IND (India), etc. KYC on the other hand refers to an in-depth process of collecting information of all customers using cryptocurrency in order to verify that they are who they claim to be. It involves processes such as collection of personal information, risk assessment in order to verify that the customer wouldn’t resort to any financial fraud in the future while using cryptocurrency, a due diligence process, etc. This would further reduce the anonymity of cryptocurrency transactions and would uphold transparency. However, AML and KYC have only achieved very minimal results, with most criminals being able to bypass these regulatory processes. But gradually these processes are being developed and their efficacy rates are improving. However, this issue is still in dire need of more effective regulations for immediate results. Other than implementing regulations, there have been attempts by countries to either amend legal frameworks to fit in cryptocurrency or advocate for a cryptocurrency ban as I have stated previously. India is one of the major countries whose central bank called for a ban in cryptocurrencies. In 2020, the RBI advocated for a ban in cryptocurrencies taking into account the legal issues it has given rise to, as well as the potential of using it for illegal means. The RBI governor further cited that cryptocurrency could replace the original currency completely and regulation would move out of the hands of the RBI, posing a grave threat to the economy. However, this attempt by the RBI was struck down by the Supreme Court in 2020 in the case IAMAI v. RBI. But debates continue till date regarding this very matter with considerable support for banning cryptocurrency. On the other hand, countries like the US have gone the other way and have worked to amend their legal framework in order to fit in cryptocurrency after factoring in the benefits it provides despite the potential threats it poses. For example, in 2016, New York legislated a licensing framework for businesses and individuals using cryptocurrency called ‘BitLicense’ in order to counter some of the legal issues it has posed. Amongst these two widely implemented approaches, I lean towards the approach of amending the legal framework to deal with this situation owing to its viability. While banning cryptocurrency may be the result of an intention to deter the use of cryptocurrency owing to its legal issues, it may not achieve this very intention. Cryptocurrency would rather continue to be used illegally, and the government and financial institutions would further be unaware of all the activities. The government would also face severe backlash from citizens owing to the advantages cryptocurrency presents to the common man. Despite its legal issues, it has several advantages (especially for the common man). On the other hand, effective regulations and amendments of the existing legal framework can slowly dispense the legal issues, and the government and financial institutions will continue to be aware of the activities. While this may be a herculean task, its results will be everlasting and, in my opinion, presents a better substitute to banning cryptocurrency as a whole. Conclusion The modern phenomenon of cryptocurrency has been gaining widespread acceptance and utilization. However, it is vital to scrutinize this situation from a legal perspective, which has been my aim throughout this paper. Alongside cryptocurrency’s growth, there have been several issues of redressal that have arisen in light of various grievances resulting from the use of cryptocurrency. However, as existing legal frameworks aren’t yet in line with the usage of cryptocurrencies, several of these grievances can’t be substantially resolved. Examples of this as I’ve stated previously are in the fields of contract law, tax implications, jurisdictional issues, IP laws, etc. Furthermore, cryptocurrency is also used as a channel to further illegal activities such as money laundering, ransom threats and data thefts. It is obvious from here that the usage of cryptocurrencies is saddled with several issues and unlawful activities. In response to this, there have been two courses of action that have widely been adopted by countries. One of them was to amend their legal frameworks in order to fit cryptocurrency while the other was to attempt to ban cryptocurrency as a whole. Both sides have seen support. However, I lean further towards amending legal frameworks owing to its viability over banning cryptocurrency as I have stated previously. Furthermore, regulations such as KYC and AML have been widely implemented throughout the world to fix specific legal issues resulting from cryptocurrencies. However, these regulations and reforms implemented only constitute the tip of the iceberg. There still remains a long way of legislation to go in order to successfully curb the legal implications cryptocurrency poses. To conclude, I vehemently believe that if there forms a consensus among countries to choose to amend their legal frameworks to fit in cryptocurrency, the world would be on the right track to solving this issue. ReferencesAfolabi, Oluwademilade. “What Are AML and KYC in Crypto, and How Do They Differ?” MUO, 11 Apr. 2023, www.makeuseof.com/what-are-aml-kyc-in-crypto/#:~:text=Anti%2DMoney%20Laundering%20(AML),transparency%20in%20the%20crypto%20industry. Coote, Darryl. “Int’l Operation Takes down Chipmixer Money Laundering Service.” MSN, www.msn.com/en-us/money/other/intl-operation-takes-down-chipmixer-money-laundering-service/ar-AA18HnDt. Accessed 17 June 2023. 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