When Satoshi Nakamoto first envisioned a digital currency that would use a decentralized network of computers to keep track of transactions, no one could have ever imagined that his idea would evolve into what it is today.
This was the seed that would later germinate into the cryptocurrency market as we know it. Bitcoin is perhaps the most familiar of them all. The current market value of a single unit is more than $11,000 and rising. The total number of Bitcoin users in the US alone is 6.2 percent of the population, which represents roughly 20 million people.
Cryptocurrency and other digital assets, alongside the technology used to run them, present a convenient and efficient means of transacting online. On the flip side, they also carry an unprecedented amount of risk that stems from manipulation and fraud since the industry isn’t as regulated as conventional capital markets.
With that being said, this article takes a deep dive into the mystical world of cryptocurrency, the legal framework surrounding this market, and the recent lawsuits plaguing the crypto space.
What Is Cryptocurrency?
Cryptocurrency is essentially a digital medium of exchange that uses cryptography to facilitate, secure, and verify financial transactions. It leverages blockchain technology to create a decentralized network of computers for immutability and transparency.
Blockchain is the “record-keeping” technology that powers the cryptocurrency network. You can think of it as a decentralized and distributed public ledger. Each “block” on the “chain” has three main pieces of digital information.
- Transaction details like the date, time, and the amount of the most recent purchase made from a specific website or other digital location.
- Details on the individual engaging in the transaction. But rather than use your actual name, the identifying information is a unique digital signature that works a lot like a username.
- Information that sets a particular “block” apart from the rest on the “chain.” Each block has a “hash” – which is a unique cryptographic code generated by special algorithms.
Today, several merchants – both online and offline – accept payment in cryptocurrency. You’ll come across bars, restaurants, local stores, and even airlines that take cryptocurrency.
While many believe it to be the hottest investment vehicle available today, keep in mind that it is a high-risk investment. The market value of cryptocurrencies can fluctuate dramatically overnight. But, as they say – the higher the risk, the higher the return if all factors remain constant.
Where Is Cryptocurrency Stored?
Several different types of cryptocurrency exist. The most common ones you’re likely familiar with include Bitcoin, Litecoin, and Ethereum. These were among the first ones that emerged back when the concept of digital currency was still new.
Since then, however, Ripple, Stellar, NEO, Cardano, and IOTA are some of the others that are quickly gaining traction in the crypto marketplace. Cryptocurrencies are stored in what is referred to as a blockchain wallet. It is essentially an address contained on the blockchain.
Each wallet has a public key and a private key, both of which allow you to access your coins from wherever you are, using an online tool. The problem with these keys is how hard they are to remember.
Losing or forgetting your private key makes it impossible to recover your crypto assets. Thankfully, third-party custodial services exist to ensure that this doesn’t happen. They also offer cryptocurrency protection against getting hacked and having your digital assets stolen.
Moreover, the US Securities and Exchange Commission (SEC), as part of the Dodd-Frank Act, requires institutional investors holding crypto customer assets worth $150,000 or more to store them with qualified crypto custodian services.
Is Cryptocurrency Legal
At the time of publication, cryptocurrency, more specifically Bitcoin, was legal in most developed countries like the US, UK, Canada, Japan, and several others. In other countries like China, the use of cryptocurrency is a highly regulated affair.
Although its use is technically legal, it is generally categorized as an asset (for tax purposes) as opposed to legal tender. According to the IRS, the cryptocurrency tax laws surrounding Bitcoin, Litecoin, Ethereum, and any other digital asset are the same as those for other forms of property like real estate, stocks, or gold.
So, you’ll need to report your capital gains and/or losses from all the transactions you make using crypto. Failure to comply with these directives amounts to tax fraud in the eyes of the IRS.
Cryptocurrency Lawsuits
Recent years have seen a rising number of class-action suits filed against cryptocurrency firms. One notable one is the AT&T cryptocurrency lawsuit, where the company is accused of being involved in the theft of millions of dollars’ worth of cryptocurrency.
Crypto criminals use a hacking method known as “SIM swapping” to steal unsuspecting users’ phone numbers and use them to access their crypto accounts before proceeding to transfer the assets to themselves.
According to Mr. Michael Terpin – the plaintiff in this particular suit, the telecommunications company allowed hackers to access his SIM card on two separate occasions, leading to the loss of $24 million worth of cryptocurrency. Terpin is suing AT&T for $200 million in punitive damages.
The JPMorgan Chase cryptocurrency lawsuit is yet another example. In 2018, the bank decided to charge higher fees on crypto transactions made using Chase credit cards, classifying them as “cash advances.”
Sixty-two thousand affected customers sued the bank for unlawfully charging them. The bank reached a settlement deal agreeing to refund them about 95 percent of the amount the plaintiffs allege they were unfairly charged in fees.
Finally, there’s the cryptocurrency class-action lawsuit against Facebook and other internet giants like Twitter and Google. Cryptocurrency business owners are suing the companies for damages amounting to $600 million for the losses they suffered when the tech firms banned cryptocurrency-related ads on their platforms in 2018.
The total amount being sought in damages could rise as more litigants join the class-action suit.
Understand the Legal Implications of Cryptocurrency
As the crypto market continues to expand, state and federal authorities continue to grapple with their regulation since there’s no legal, regulatory framework applicable to them.
For the time being, cryptocurrencies will continue to be classified as digital assets rather than legal tender. So, investors are bound by capital gains tax laws when reporting their crypto profits and expenses on their annual returns to the IRS.
Keep in mind that investing in digital currencies means that you assume all the legal risks involved when trading in them.
If you have any legal questions surrounding cryptocurrency, feel free to chat online with a Laws101.com attorney.