Emerging Trends in Laws Affecting Digital Currencies and Blockchain

Public interest in Bitcoin, Ethereum, and other cryptocurrencies has significantly grown in recent years with multiple industries and investors recognizing the advantages of cryptography and blockchain technology. The use of blockchain and digital currencies is on the rise. With new use cases emerging, potential legal liabilities are becoming visible too.

A competent business law attorney with experience in blockchain technology and cryptocurrency can help you identify common legal issues unique to your industry and business and provide the right legal advice and representation.

Contractual Concerns

One of the most striking features of cryptocurrencies and blockchain technology is their self-executing smart contracts. These are a set of digitally-specified promises that usually act as a basis on which the various parties to a transaction fulfill their obligations. Smart contracts are used to automatically pay the other party after they have fulfilled their contractual obligations.

The inherent complexity and unique nature of smart contracts make it difficult for legislators to fit them into the legal framework of traditional contract law. There is no single federal contract law in the US, which applies to the entire nation. The Electronic Signatures in Global and National Commerce Act of 2000 is currently the only exception that provides limited legal validity to these contracts.

Privacy Concerns

The chief reason for introducing Bitcoin and other cryptocurrencies was to provide anonymity in user transactions. However, privacy concerns related to data theft have become a main concern in the digital currency space. Continuous improvement in blockchain analytic tools is only adding to the threat of this anonymity.

There is no comprehensive federal data protection framework in the United States. Instead, the existing privacy and data security laws are very sector specific. This includes the California Consumer Privacy Act (CCPA), the Health Insurance Portability and Accountability Act (HIPAA), and the Gramm-Leach-Bliley Act.

Privacy concerns arising from existing privacy and data security laws are not entirely addressed by these existing laws. For instance, distributed peer-to-peer network architecture in blockchain technology is known to contradict the traditional notions held under the CCPA. In fact, the CCPA is ineffective and inapplicable to digital currencies because it is a centralized, controller-based data processing system.

Financial Fraud and Data Theft

Financial fraud and data theft add to the existing legal concerns surrounding digital currency. Many users engaged in illegal activities get enticed into using blockchain by the promise of anonymity and freedom from regulations.

A Cornell University researcher identified a key security flaw in the Ethereum blockchain in 2017. This flaw places $250 million at risk of theft. Ledger, a crypto wallet maker compromised over a million email addresses in one of the largest data security breaches involving the crypto market.

Tax Implications

Cryptocurrency is considered to be property and not currency for US federal income tax purposes. This means that US taxpayers cannot use blockchain currency for purposes listed under the Internal Revenue Code. Furthermore, taxpayers are obligated to report financial transactions involving digital currencies on their annual tax returns. This reporting needs to be done in US dollars.

This means that US taxpayers are required to determine the fair market value of cryptocurrencies by converting them into US dollars at the time of each transaction. It can get burdensome to report cryptocurrency holdings to the IRS. Individual taxpayers need to keep diligent records of the price at which the digital currency is purchased and sold.

Cryptocurrency is classified as a capital asset by the United States. This makes individual investors liable for paying capital gains taxes on any profits realized. Unfortunately, the obligation applies even if you purchase cryptocurrency from another country. Additional reporting requirements for US investors purchasing their digital holdings on foreign exchanges are still unclear.

Intellectual Property

Cryptocurrency has gained widespread popularity among intellectual property-intensive industry verticals. This includes the automotive, pharmaceutical, consumer goods, and luxury industries. Goods traceability in these industries is important and “grey” or counterfeit goods is still a primary concern.

The use of cryptocurrencies in IP-intensive industries has raised concerns involving:

• IP authorship and ownership
• Tracking and controlling the distribution of IPS (registered and unregistered)
• Establishing and enforcing licenses, exclusive distribution networks, and licenses through smart contracts

Money Laundering

There is an ongoing debate about cryptocurrency enabling criminal organizations to get away with money laundering, fraud, and other financial crimes. This stems from the ability of traders to remain completely anonymous. Digital currency has been in use for a while on dark market sites to buy and sell illegal items.

Different governmental agencies have accepted a “new generation of criminals” for drug dealers that use cryptocurrency for exchanges. According to the Chainalysis, Bitcoin exchanges had $2.8 billion in criminal activity-related transactions in 2019. There are several anti-money laundering rules in place to prevent criminals from converting their crypto into cash. However, these are not always helpful or useful.

Businesses can easily get roped into illegal dealings if they are not careful. An experienced attorney can help in conducting due diligence and identifying the potential threats related to different types of transactions.

Our Reputable Business Law Attorneys are Ready to Help You

At the BHM Law Group, our skilled business law attorneys strive to keep up with emerging trends in the fast-paced business world. You can count on us to be aware of all relevant laws that apply to your business and to help you strategize for maximizing profits. To schedule your consultation, call us at (205) 994-0902 or fill out this online contact form.