Author: Aditya Srivastava, United University
Abstract
The advent of cryptocurrency has transformed the global financial system by decentralizing the flow of capital and eliminating traditional intermediaries. Bitcoin, Ethereum, and numerous other digital currencies have introduced new paradigms in financial transactions, raising unprecedented legal, regulatory, and ethical questions. Despite their innovative nature, cryptocurrencies operate within a legal vacuum in many jurisdictions, creating ambiguities around their use, taxation, consumer protection, and enforcement of legal rights. This article aims to explore the major legal issues that arise from the use and regulation of cryptocurrencies. It will analyze the existing legal framework in key jurisdictions, including the United States, the European Union, and India, and propose potential pathways to regulate this evolving technology while preserving its benefits.
Introduction
Cryptocurrency, a subset of digital assets, is powered by blockchain technology and is primarily used as a medium of exchange or investment. Unlike traditional currencies, cryptocurrencies are decentralized, meaning they are not issued or controlled by a central authority. This decentralization, while revolutionary, poses significant legal and regulatory challenges for governments and financial institutions globally.
As the popularity of digital currencies continues to grow, legal systems across the world are grappling with how to classify, regulate, and control these digital assets. While some nations embrace them with open arms, others have taken a more cautious or prohibitive approach. In this context, understanding the legal issues surrounding cryptocurrency is essential for users, investors, policymakers, and legal professionals.
Classification of Cryptocurrency: Currency, Commodity, or Security?
A primary legal issue is how to classify cryptocurrency. Different jurisdictions categorize digital currencies differently, leading to inconsistencies in regulation and enforcement.
Currency: In some jurisdictions like El Salvador, Bitcoin is recognized as legal tender.
Commodity: The U.S. Commodity Futures Trading Commission (CFTC) treats Bitcoin and decentralized application product .
Security: The U.S. Securities and Exchange Commission (SEC) considers many Initial Coin Offerings (ICOs) as securities, applying the Howey Test to determine their nature.
The lack of a consistent global definition creates confusion in taxation, investment laws, and anti-money laundering (AML) enforcement.
Regulatory Uncertainty
There is no uniform international legal framework for implimenting cryptocurrency. While countries like Switzerland, Singapore, and the UAE have adopted crypto-friendly regulations, others like China have imposed stringent restrictions or outright bans.
India: The legal status of cryptocurrency in India remains ambiguous. The Reserve Bank of India (RBI) banned banks from dealing in crypto in 2018, a decision later overturned by the Supreme Court in Internet and Mobile Association of India v. RBI (2020). The introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill is still pending as of 2025.
USA: Multiple regulatory bodies like the SEC, CFTC, IRS, and FinCEN regulate different aspects of cryptocurrency, leading to jurisdictional overlaps and confusion.
EU: The Markets in Crypto-Assets (MiCA) Regulation seeks to provide a cordinated system for crypto-asset regulation across the EU.
Regulatory uncertainty deters legitimate businesses, exposes consumers to fraud, and makes enforcement difficult.
Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance
Cryptocurrencies are often criticized for facilitating money laundering, terrorism financing, and illicit trade due to their anonymity and cross-border nature.
The Financial Action Task Force (FATF) has established guidelines to combat money laundering and terrorism financing through crypto.
Many countries now require crypto exchanges to follow strict KYC/AML protocols.
Privacy coins like Monero and Zcash present additional challenges as they are specifically designed to obfuscate transaction trails.
Failure to comply with AML/KYC requirements can result in legal penalties and blacklisting from financial networks.
Consumer Protection
The absence of clear legal safeguards for consumers is a major issue in the crypto ecosystem.
Fraud and scams: ICO scams, Ponzi schemes, and exchange hacks are rampant.
No recourse: In traditional banking, fraudulent or unauthorized transactions can be reversed; this is generally not possible in crypto.
Volatility: The high price volatility of cryptocurrencies can lead to substantial financial losses for uninformed investors.
Legal frameworks must evolve to ensure disclosures, dispute resolution mechanisms, and minimum standards for crypto service providers.
Taxation Challenges
Taxation of cryptocurrencies is complex and varies widely across jurisdictions.
Capital gains tax: In many countries, profits from crypto transactions are subject to capital gains tax.
Mining income: Crypto mining is considered a taxable event in most jurisdictions.
Tracking and reporting: Due to the pseudonymous nature of crypto, governments struggle to track taxable events.
Failure to report crypto earnings can lead to legal results including fines and audits.
Smart Contracts and Legal Enforceability
Smart contracts are self-implementing contracts with the terms written into code. While they offer automation and efficiency, they raise several legal questions:
Validity: Are smart contracts legally binding under contract law?
Jurisdiction: Which country’s law applies in a dispute involving a smart contract?
Errors: If there is a error , who is responsible for damages?
Traditional legal doctrines need to evolve to recognize and regulate smart contracts effectively.
Intellectual Property and Tokenization
With the rise of Non-Fungible Tokens (NFTs), intellectual property (IP) issues have come to the forefront.
Copyright infringement: Many NFTs are created using copyrighted content without permission.
Ownership vs. license: Owning an NFT does not necessarily mean owning the underlying intellectual property.
Cross-border enforcement: The digital nature of NFTs complicates IP enforcement across jurisdictions.
A global consensus on digital IP rights in tokenized assets is urgently needed.
Jurisdiction and Conflict of Laws
The decentralized and borderless nature of cryptocurrencies creates issues in determining jurisdiction.
Which court has jurisdiction in a crypto fraud?
Which country’s laws govern a smart contract executed globally?
These questions make dispute resolution and law enforcement extremely complicated in the crypto space.
Central Bank Digital Currencies (CBDCs) vs. Private Cryptocurrencies
Governments around the world are developing CBDCs as a regulated alternative to private cryptocurrencies.
Legal implications: How will CBDCs coexist or compete with private cryptos?
Data privacy: CBDCs may give governments unprecedented access to personal financial data.
Displacement risk: CBDCs may undermine the value and utility of decentralized currencies.
The legal framework must balance innovation with public interest and financial stability.
Conclusion
Cryptocurrency is no longer just a buzzword—it’s a fast-growing financial reality that’s changing how we think about money. Whether it’s Bitcoin, Ethereum, or other digital coins and tokens, these assets are now part of a global conversation. They’re exciting, innovative, and offer new ways to trade, invest, and store value. But along with all this excitement comes a fair share of confusion, risk, and legal grey areas.
Imagine using money that isn’t issued by a government, stored in a wallet that isn’t your traditional bank, and transferred across borders instantly without any paperwork. That’s the power of cryptocurrency. But because it operates outside traditional systems, governments and regulators around the world are still trying to figure out how to handle it.
One of the biggest challenges is the lack of clear rules. In some countries, crypto is embraced; in others, it’s restricted or outright banned. Some regulators treat it like property, others call it a currency, and some see it as a security—this inconsistency creates a lot of uncertainty. As a result, businesses and everyday users often don’t know what’s allowed and what’s not.
Then there’s the issue of safety. The crypto space has seen countless scams, frauds, and exchange hacks. Since there’s often no customer support or legal protection if something goes wrong, many users have lost their hard-earned money with no way to recover it. This has made it even more important to have strong consumer protection laws in place.
Another concern is tax. Many people still don’t realize that trading or earning in cryptocurrency can be a taxable event. Governments are now working on ways to track and tax crypto transactions, but the lack of clarity in how these digital assets should be reported only adds to the confusion.
Let’s not forget about smart contracts—computer programs that automatically execute agreements when certain conditions are met. While they sound cool and efficient, what happens if there’s a bug in the code? Who’s responsible if something goes wrong? The legal system hasn’t fully caught up with how to treat these types of contracts.
The anonymity of crypto also poses risks. While privacy is a great feature, it can be misused for illegal activities like money laundering or funding terrorism. That’s why regulators are pushing for exchanges and platforms to follow strict Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, even though this sometimes clashes with the idea of decentralization that crypto stands for.
Looking ahead, it’s clear that cryptocurrency isn’t going away. In fact, with central banks around the world launching their own digital currencies (called CBDCs), the landscape is about to get even more complex. These government-backed digital coins will likely compete with private cryptocurrencies, and new laws will need to strike a balance between innovation, security, and public interest.
In short, crypto is here to stay, but its future depends on how well we handle the legal challenges. Governments, businesses, and users need to come together to build a legal framework that protects people without stifling innovation. We need smart laws, better education, and global cooperation. Because only then can we truly unlock the potential of cryptocurrency while keeping everyone safe and informed.
FAQS
1. Is cryptocurrency legal in India?
Yes, cryptocurrency is legal to own and trade in India, but it’s not officially recognized as money (like rupees). That means you can’t use Bitcoin to buy groceries just yet. The Reserve Bank of India had banned banks from working with crypto back in 2018, but the Supreme Court struck down that ban in 2020. Now, the government taxes crypto gains and takes a 1% deduction on every transaction (TDS), but we’re still waiting for a proper law or bill that explains everything clearly.
2. Can the government ban crypto completely?
In theory, yes. But in practice, it’s very hard to ban something that runs on the internet and doesn’t depend on a central authority. Even if a country tries to block exchanges or websites, people can still use peer-to-peer platforms or VPNs. Instead of banning, most governments are now focusing on regulating it—setting rules to make it safer and tax-compliant.
3. Do I have to pay tax on cryptocurrency?
Yes. If you make money from crypto—whether by trading, investing, mining, or staking—you’re supposed to pay tax on it, just like you would for stock market profits. In India, for example, there’s a 30% tax on crypto gains and a 1% TDS on each transaction above a certain limit. You should definitely keep a record of your trades and talk to a tax advisor if you’re dealing with large amounts.
4. Is crypto safe to use?
It can be—but only if you’re careful. Unlike banks, crypto wallets and exchanges don’t come with government protection. If your account gets hacked or you lose your private keys, there’s usually no way to recover your funds. Always use trusted platforms, enable two-factor authentication, and never share your private keys or seed phrases.
5. What is a smart contract, and is it legally binding?
A smart contract is a program stored on a blockchain that runs when certain conditions are met—no middlemen needed. They can be used for things like automatically paying someone once a job is done. But while they’re super efficient, they aren’t always recognized in court like traditional contracts. So whether they’re legally binding depends on the country and the specific case.
6. Can crypto be used for illegal activities?
Unfortunately, yes—just like cash. Some people use crypto for things like drug deals or money laundering because of its anonymity. That’s why governments are now making crypto platforms follow strict rules like KYC (Know Your Customer) and AML (Anti-Money Laundering) to track who’s using what.
