Legal Challenges of Blockchain Technology: What Are the Most Common Problems?

In all honesty, Blockchain technology is powerful, exciting, and has multiple uses. The first use case of blockchain was with cryptocurrency, other use cases range from online transactions to decentralized apps and common supply chain processes. As good as blockchain technology is, there are some legal challenges. 

Before institutions begin to utilize blockchain technology for their needs, they need to understand the legal challenges that blockchain has to overcome. Let’s dive a bit deeper into how blockchain works and what legal challenges of blockchain.

How does Blockchain Works?

Blockchain technology is a ledger, a decentralized ledger of information that is publicly owned. The information stored on the ledger can be shared and viewed by anyone. Once any information has been added to the ledger, it can’t be changed, that’s what makes blockchain so secure. That’s why blockchain is used in online document verification, online ID verification, and data management.

The immutability and the transparency of the blockchain make it extremely crucial for decentralization, privacy, security, and eliminating the need for ledgers. Cryptocurrency is supported by blockchain technology, as it offers a huge level of privacy and anonymity that centralized currency can’t compete with. But because of the uncertainty and lack of education around blockchain technology, not all the top institutions want to rely on it. Thus, causing numerous blockchain legal challenges.

Legal Challenges Faced by Blockchain

KYC and AML compliance regulators make sure that criminals don’t exploit blockchain and cryptocurrency for money laundering. The extreme level of privacy offered by blockchain-based cryptocurrency makes it easier for fraudsters to exchange money anonymously. This feature can be exploited by criminals who want to hide their fraudulent activities from governments and regulatory bodies. legal challenges of blockchain

This is one of the major reasons why a lot of countries don’t allow cryptocurrency transactions. Countries that do allow it is trying to make cryptocurrency transactions less private. Companies that offer blockchain services may be pressured to find a balance between privacy and anonymity. They also have to follow a strict level of regulations to reduce or eliminate the risk of crime. Some of the most common legal challenges of blockchain technology are:

1. Privacy Issues

The fight around blockchain privacy and the legality of this don’t seem to settle down anytime soon. As lawmakers are trying their best to prevent crime by removing the tools that can assist fraudsters in moving money from one place to another without being caught. While the cryptocurrency companies are pointing out that every individual has the right to privacy. The cryptocurrency community makes a fair point, but unfortunately, this also works in the favor of money launderers and other criminals. 

2. Regulatory Challenges

One of the biggest regulatory issues revolving around blockchain technologies is if the cryptocurrencies are considered securities, they’ll be bound by the SEC regulatory rules. That’s not an ideal situation for cryptocurrency companies as they will need to follow a wide range of legal obligations that they currently don’t.

The biggest example of this situation is Telegram. In 2019, they launched an ICO, which was shut down by the SEC because they claimed the tokens were sold unlawfully. In June 2020, Telegram finally settled with the SEC and had to return more than $1.2 Billion to investors. 

3. Federal Laws

When it comes to federal laws, a lot of organizations govern how cryptocurrency is regulated. These organizations include:

  • The Securities and Exchange Commission (SEC)
  • The Commodities and Futures Trading Commission (CFTC)
  • The Federal Trade Commission (FTC)
  • The Department of Treasury
  • Internal Revenue Service (IRS)
  • The Financial Crimes Enforcement Network (FinCEN)

Although, regardless of this spade of organizations, there’s very little federal lawmaking on this issue. State laws on the other hand are a completely different deal.

4. State Laws

While there aren’t a lot of federal laws regarding cryptocurrencies, there are a lot of state laws. There’s a big difference in how the technology is treated on a state level as opposed to a federal level. Some states have a favorable stance and others are much tougher. 

Wyoming is one such example of a crypto-friendly state. Just recently, Wyoming passed a law where cryptocurrencies are exempted from property taxation. Arizona and Georgia have also legalized Bitcoin as a type of payment method for taxes. State laws are one of the biggest blockchain legal challenges.

However, there are more than a dozen states that have issued warnings for investors regarding cryptocurrencies. New York is probably the biggest example of a state that’s highly restrictive with its crypto laws. 

5. Anti-Money Laundering and KYC 

One huge legal challenge for crypto and blockchain companies is following anti-money laundering laws. There are other laws that crypto companies and blockchain companies have to vary as well. American residents aren’t allowed to do business with foreign nationals who are on the blocked entities list.

And of course, companies that fail to follow the regulation laws can suffer from huge penalties. The new AML directive 5 included some laws regarding cryptocurrency that some cryptocurrency exchanges have to follow. 

How to Fix Blockchain Legal Issues?

Solving the legal challenges around blockchain and crypto isn’t easy at all. In upcoming years, a lot of changes will be made which will probably change the environment around crypto. Cryptocurrency exchange and blockchain companies are trying hard to find a way around the legal complications.