Cryptocurrency: Problems of Legal and Regulatory Nature

Although cryptocurrencies were old-established, they first gained incredible attention a few years ago. Initially, there were only Bitcoins, but hundreds of different crypto assets can now be used to purchase a great array of goods or services. A digital asset that is encrypted, cryptocurrency is a form of cryptographic cash. 

When trading, it is vital not only to know how cryptocurrency exchange works but also the problems of crypto’s legal and regulatory nature. Nowadays, there are various legal challenges to cryptocurrency. National administrations are concerned about government regulation of cryptocurrency due to the industry’s rapid boom. Mature economies are already drafting and putting regulatory guidelines that control cryptocurrency-related activity, laying the groundwork for bringing more tax money to the nation’s coffers. Nevertheless, countless countries have yet to decide on the legal status of virtual assets, resulting in a patchwork of worldwide experience in using digital assets.

The Lack of Legal Clarity for Cryptocurrency

The absence of legal standards that can be applied to crypto is now the fundamental issue with regulating legal interactions with these digital assets. Regulatory challenges in the cryptocurrency market are the vital issue with their legal oversight. Cryptocurrency is becoming more widely accepted as a form of money or a financial asset among advanced nations. Countries with fragile economies and volatile currencies attempt to maintain their domestic currency by limiting the use of crypto as a form of payment while permitting them as a medium of exchange. For instance:

  • The payment system in several US states allows for the transmission of money using cryptocurrencies. 
  • Bitcoins are accepted as a form of currency in Germany. 
  • Cryptocurrencies are also accepted as legal money in Japan. 
  • In Europe, cryptocurrencies are primarily compared to electronic money, although they are also viewed as a form of exchange and not as legal cash. 
  • Crypto transactions are illegal for banks in China but legal for private parties. 
  • Bitcoin is also acknowledged as payment in Canada. 
  • The cryptosystem is accepted as a legitimate payment method in Spain. 
  • In Bolivia, Ecuador, Thailand, and Vietnam, the usage of cryptocurrencies is outright forbidden.

The European Union is the most advantageous legal system for crypt oactivities. There is no one method for comprehending the legal cryptocurrency regulatory framework around digital assets among the most powerful nations globally. While some countries treat cryptocurrencies equally with fiat money, most do not.

It is important to note that while discussing the possible effects of a lack of transparency for cryptocurrency users, it may expose investors to volatility, issues with redemption, and even outright losses when uncontrolled cryptocurrency exchanges go out of business.

The financial system in developing economies may be in danger due to poorly regulated cryptocurrency marketplaces. Among other things, cryptocurrency dealers and exchanges lack statutory reserve balances. It increases the likelihood of insolvency, frequently resulting in ordinary investors losing their savings and income. Additionally, there is a higher likelihood of increased institutional participation in the cryptocurrency market, partly supported by the growing correlation between the performance of cryptocurrencies and technology stocks.

Issues Surrounding Consumer Protection

Many countries attempt to regulate digital assets, but their efforts take different paths. It imposes various challenges on consumers. Ordinary users and institutional investors find it challenging since they need to be familiar with local laws to avoid breaking them. Cryptocurrency regulations must be standardized for ordinary customers and crypto businesses to reach their full potential. The ability to work to the same standards and provide a clear understanding of what is permitted and what is not will result from this.


However, illegal crypto behavior is more common than ever, especially cryptocurrency fraud and theft, and those who engage in it use more creative techniques to hide their actions. Cryptocurrencies are used as a means of exchange for a variety of unlawful and dishonest activities, including:

  • Money laundering
  • Fraud
  • Drug trafficking
  • Human trafficking
  • Child exploitation
  • Dark marketplace trading
  • Cybercrime
  • Terror funding

To follow illegal transactions and identify the persons involved, government security groups are devoting their resources to crypto criminal investigations. Maximizing consumer protection, preventing fraud and abuse, and ensuring well-ordered markets are the three main objectives of financial regulation and cryptocurrency. The primary goals of the measures are the same regardless of the jurisdiction or financial regulator. Legislators may also prevent cryptocurrency fraud by enacting disincentives. The SEC has revealed that it has indicted multiple promoters of a platform that drained $2 billion by defrauding investors in the massive multi-level BitConnect Ponzi scheme that rocked the sector in 2018. These charges demonstrate that if market players cheat enough others, they will be caught and punished. The SEC does not track petty cryptocrimes; thus, prosecuting violators takes time and is not the best course of action.

The Need for Anti-Money Laundering (AML) and Know-Your-Customer (KYC) Regulations

Criminals use various services and procedures that route money via several locations or companies to conceal their origins. The assets are then transferred from a source that appears to be authentic to a destination address or an exchange where they will be liquidated. It is highly challenging to link the laundered money to illegal activity using this procedure.

AML is a process for identifying fraud in users. The information is validated and saved after being received. Data regarding the user’s income and spending is included. According to AML/CFT legislation, regulated firms must comply with AML requirements, which include KYC. In a variety of situations that are outlined under national AML legislation, KYC/CDD is necessary. Businesses may protect their reputation and avoid costly fines and other penalties from authorities by adhering to AML requirements. Moreover, it is possible to stop even the most inventive fraud efforts by ensuring that only authenticated individuals may become clients with the help of KYC.

Cryptocurrency compliance with the demands of the complete complex of activities and processes that would interfere with terrorism and its existence as a phenomenon is known as CFT (Combating the Financing of Terrorism). The primary cause of the numerous fatalities from terrorist attacks is terrorist finance, which serves as the terrorist movement’s material backing. Crypto firms frequently carry out these audits. Because taking away the license from the firm and its manager is the least severe sanction if the stock market sponsors terrorism.

Every month, launderers move billions of cash, and much of it ends up in the accounts of criminals. It is employed to finance criminal operations worldwide, including the trade in illegal drugs, human beings, terrorism, and counterfeit goods. AML laws make life challenging for criminals while helping to limit part of this flow. Companies working with cryptocurrency must do due diligence following AML requirements. Knowing your clients and where their money originates from is crucial. 

Anti-money laundering policies and procedures support an organization’s compliance culture and assist financial institutions in complying with AML and counter-terrorism funding laws and regulations. Because of the number of bank transactions, financial institutions rely on technology to prevent, identify, investigate, and report suspicious activities. Effective AML/CFT controls prevent criminals from using legal firms to launder money obtained via fraud, drug sales, tax evasion, and other crimes. Additionally, they make it simpler for law enforcement to track the proceeds of crime, making it more straightforward for officers to charge offenders and seize assets and money obtained illegally.

Summing Up

For any country, establishing cryptocurrency legislation is a crucial first step. After all, the unpredictability of such procedures does not impede the operation of crypto businesses; rather, it deprives the state of additional budgetary revenues and a promising investment platform. It is vital to decide whether to define cryptocurrency as a legal form of payment or limit it to a few specific uses, identify the risk minimization of implementation, and determine whether it fits into any of the categories that have already been recognized by legislation.

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