This article is written by Ankita Ghosh, Brainware University.
Blockchain technology and cryptocurrency have become an innovative technology that is disruptive in finance, commerce, and governance. Bitcoin and Ethereum and other digital assets are set to be decentralized, transparent, and efficient, but they also threaten the established legal systems. Regulators all over the world are struggling with the issue of balanced innovation and risks against piracy, money laundering, consumer protection and systemic instability. This is one of the intriguing fuses of technology, economics, and jurisprudence to law students and scholars.
The Character of Cryptocurrency and Blockchain
Cryptocurrency: A digital value which uses cryptography to be secured, which operates in decentralized networks without a central authority.
Blockchain: This is a distributed ledger technology that allows transparent but permanent records of transactions.
The virtue features include: Decentralization, pseudonymity, borderless transactions and programmability (via smart contracts). These characteristics, though being revolutionary, make the regulation of such products very difficult since they do not fit in the traditional definition of money, securities or commodities.
International Regulatory Practices
Dissimilar jurisdictions have different positions:
United States: Regulatory fragmentation; SEC regulates part of the tokens as securities, CFTC as commodities, FinCEN enforces the anti-money laundering (AML) regulations.
European Union: The Markets in Crypto-Assets Regulation (MiCA) aims at harmonization, which puts an emphasis on consumer protection and market integrity.
India: This was initially doubtful, and limited by RBI, but eventually modified by the Supreme Court. The latest developments categorize Virtual Asset Service Providers (VASPs) as the subject of the Prevention of Money Laundering Act (PMLA), which obligates them to meet the requirements of reporting.
China: Tough prohibitions on the sale and extraction of cryptocurrencies, but vigorous investment in blockchain applications. This variety shows that there is no single international framework, which makes it difficult to enforce across the borders.
Key Legal Challenges
Definitional Ambiguity
Is cryptocurrency, money, or property, security or commodity?
The difference between different courts and regulators brings about uniformity in treatment.
Examples: Bitcoin is being considered property in certain jurisdictions, whereas others consider it as substitute currencies.
Jurisdictional Complexity
Blockchain transactions are inter-border. It is not easy to establish applicable law and forum of disputes. Smart contracts being performed in nodes globally cast doubts of governing law and enforceability.
Consumer Protection
Investors are exposed to risks due to the high volatility.
Regulatory gaps are used to perpetrate Fraudulent Initial Coin Offerings (ICOs) and Ponzi schemes.
Inability to provide means of redress to people who have fallen victim to hacking or exchange collapse.
Laundering of Money and Illicit Uses
Identities can be hidden with the use of pseudonymity.
Cryptocurrencies are typically being used to pay a ransom, dark web, and evade tax.
Know Your Customer (KYC) and AML requirements are placed on the regulators, yet their implementation is less than even-handed.
Taxation Issues
Valuation complications as a result of volatility.
Capital gains vs. income: capital gains tax opportunity.
The transfers involving cross-border make it difficult to enforce the tax laws.
Liability and Smart Contracts
The issue of self-executing code leaves questions of validity when it comes to contract law. Consent, mistake and remedies in case of code fail.
Courts find it difficult to apply the doctrines of offer, acceptance and consideration to the algorithms of agreement.
Data Privacy and Security
The immutability of blockchain is incompatible with the right to be forgotten as provided by the EU.
Transaction metadata is revealed in public ledgers, and this creates privacy concerns. Hacking and wallet cybersecurity threats.
Regulatory Arbitrage
Organizations move to areas which have lax regulations. Provides unfair competitive advantages and compromises international fairness. International cooperation is similar to Basel banking norms.
Current Framework:
VASPs-under PMLA reporting entities. Taxation: taxation on crypto gains at 30%, a 1% transaction TDS. None of this is enshrined in any comprehensive legislation, but there are still talks in a Digital Rupee and regulatory sandbox.
Opportunities for Reform
Extensive Legislation: Well defined to limit ambiguity.
Cooperation at the international level: Co-ordinated standards on AML, taxation and consumer protection.
Regulatory Sandboxes: Becoming an enabling environment.
Adaptation of the Judiciary: Courts will need to develop new doctrines to deal with smart contracts and blockchain court cases.
Striking the right balance between Innovation and Risk: Support the use of blockchains in the supply chain, in healthcare, and in governance and limit misuse.
The Regulatory Environment in India
Recent reports point to a piecemeal strategy on the part of India: taxation regulations (30 percent tax, 1 percent TDS) are maintained along with AML requirements in the Prevention of Money Laundering Act (PMLA).
According to scholars, although the Supreme Court cancelled the ban of RBI in 2020, it remains unclear because there is no federal crypto law. It is now a question of whether India has to follow a MiCA-style scheme (similar to the EU) to align the definitions and investor protections.
Global Comparative Trends
The MiCA (2024) of EU: Sets equal rules to crypto-assets, with elements of consumer protection, regulating the market, and stablecoins.
US: Remains disjointed- SEC vs. CFTC areas of jurisdiction remain uncertain and remain in conflict, placing unknowns on innovators.
China: Has continued to ban crypto trading but invests in blockchain to supply chain and governance.
India: It is mid-way between the nervous regulation and innovation where taxation is high, but investor protection is low.
Future Legal Issue (2025 Focus)
Cross-Border Enforcement: As crypto exchanges are being located worldwide, the enforcement of national laws is a challenge to the regulators.
Smart Contract Liability: Courts all over the world are discussing the question of whether the code-based contracts can satisfy the traditional requirements of the contract law.
Privacy vs. Transparency: Blockchain immutability contradicts the rights to data protection (e.g., GDPR of the EU, the “Right to be Forgotten).
Regulatory Arbitrage: Firms will shift to more permissive jurisdictions, compromising more regulated governments.
Central Bank Digital Currencies (CBDCs): As India is pioneering with the Digital Rupee, it raises concerns whether it is co-existing with privately issued cryptocurrencies.
Opportunities for Reform
Unified Definitions: Proper classification of crypto-assets into securities, commodities or currencies.
Conclusion
Blockchain and cryptocurrency pose legal challenges never seen before. Their decentralized, borderless quality does not accommodate conventional regulations. Although there are fraud, money laundering and consumer harm risks, excessive regulation can discourage innovation. The way is in subtle, adaptive legal frameworks, which place a balance between innovation and accountability. It is a rich area of research, advocacy, and reform to law students, in which technology and jurisprudence meet each other in the digital era.
Frequently Asked Question
Is it possible to use cryptocurrency as ordinary money?
Not really. In the majority of the nations, crypto is not considered a legal tender i.e. you cannot enter the store and ask them to take Bitcoin like they take rupees or dollars. In India, the payment is more of a digital asset that is taxable than money, with some places including El Salvador declaring it official currency.
Why is crypto so difficult to regulate to governments?
This is due to the fact that crypto is not played by the same rules. It is decentralized, borderless and anonymous in most instances. Think about trying to regulate a marketplace that is everywhere and nowhere at the same time that is the dilemma regulators are dealing with. The laws are designed to be applicable to a bank or companies that have addresses and not networks that run across thousands of computers and are located all around the world.
Crypto: the criminal tool?
Such a fear is common, and that is not everything. Yes, money laundering or ransomware can be performed through cryptocurrencies since one can remain unidentified during transactions. But regulators are retaliating with tough KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations of exchanges. Simultaneously, crypto is used by millions of regular citizens to invest, send or even send money (remittances), or even buy art (NFTs).
What is all about smart contracts, are they real contracts?
Smart contracts are lines of code which can be executed automatically under specific conditions. Under smart contracts, the agreement is coded, and thus the judges will need to reconcile old doctrines with new technology. They are already recognized in some jurisdictions, and it remains a gray area in the world.
Will this ever have a single world rulebook on crypto?
That is the dream, and we have not yet gotten there. It is currently a very divided situation in nations: EU MiCA (harmonized framework), US splintered, China prohibits crypto trading, and India taxes it a lot without having a specific law. The international organizations such as the Financial Action Task Force (FATF) are attempting to establish the global standards particularly in the area of anti-money laundering yet one global rule book is yet to be developed.
References
The legal landscape of cryptocurrency in India: Challenges and prospects
Blockchain and Cryptocurrency: Regulatory Challenges & Opportunities | Springer Nature Link
