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Three obstacles, one legal and one regulatory, surround cryptocurrency use

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    Bitcoin and crypto assets have been around for more than a decade, but there have been increasing efforts recently in terms of regulation and legalization. This is because the spectacular pace of adoption and the rise in market capitalisation of Bitcoin and crypto assets have resulted in them moving from a niche product used by cypherpunks to having a more mainstream presence as instruments for savings and investments.

    It can often be quite challenging to apply existing regulatory frameworks to crypto assets or developing new ones. For a start, the crypto ecosystem is evolving rapidly and monitoring it can get quite tricky in a global environment with a large number of players

    Let’s look at some of the legal and regulatory issues that need to be considered:

    1. Legal characterization of crypto & taxation

    Legal characterization of Bitcoin and crypto assets plays a key role in determining how they are likely to be taxed. The main distinction is whether these assets should be defined as a commodity (in which case capital gains rules apply), a currency or given a whole new different category.

    Crypto transactions are also subject to tax like any other asset.

    For example, in India, Bitcoin and crypto assets are still caught up in a legal limbo — not illegal but with the legality still undefined. The Finance Minister of India, Nirmala Sitharaman, had proposed to tax digital assets last year and this move has increased the debate on the legality of crypto in the country. However, at present, the government is yet to pass any official clarification on this matter of legality of Bitcoin or any of the other crypto assets.

    2. Consumer Protection
    Transactions on the Bitcoin network are based on trust between peers and the underlying blockchain network. However, the absence of basic consumer protection laws presents a risk.

    For example, there is no provision of refunds arising from disputes between merchants and customers. In case of any breach, the victim may not be able to produce acceptable legal evidence for damage recovery.

    Also, in the case of any fraud, the victim is clueless on the legal remedies available to them. Due to anonymity, it may also get difficult to figure out details on the perpetrator like their jurisdiction.

    Data theft and financial fraud are also additional pressing legal concerns. Existing data laws may be unable to address data theft and financial fraud originating from crypto assets.

    3. Crypto-driven illegal activities
    Another challenge for legislators is the use of crypto assets for money laundering, tax evasion, terrorism, corruption and political funding. While illegal activities can happen with other financial assets, the fact that crypto assets provide anonymity, are global, easy to store and by and large difficult to be accessed by law enforcement agencies makes it a favourable means of payment for illegal actors.

    There is also no intermediary or authority who has the exclusive jurisdiction to settle disputes or make a judgement on these issues.

    Undoubtedly, assets like Bitcoin are the future. To address these challenges, several measures can be taken by legislators such as having a clear regulatory and taxation framework and consumer protection measures.

    Doing so will bring more acceptability and order to the markets, help instill consumer confidence and lay out the limits of what is permissible.

    It is also vital that the legal and regulatory issues are addressed sooner rather than later, to ensure investors and other stakeholders in the crypto ecosystem are protected, and we have a safe space for innovation to continue.

    (The author is Co-founder & CEO of GoSats)

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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