Cryptocurrency is a unique and interesting corner of modern-day technological innovation, especially within the ever-growing field of financial technology or ‘fintech’.
Since the launch of Bitcoin in 2009, global interest in the concept of decentralised digital currencies has grown and grown; from the initial concept of a stable currency unmoored from the movements of tangible assets and international currency.
Though the initial intent of Bitcoin to act as electronic cash was undermined by the volatility of its value, the concept as a ‘store-of-value’ asset, and the potential for exponential returns on investment, has spawned a vibrant market of new cryptocurrencies and decentralised exchanges.
However, the essential philosophies on which the cryptocurrency market is based also present unique legal issues and challenges, which new businesses in the sphere must pay careful attention to.
What exactly are these challenges, and how should you address them in the formation of your own cryptocurrency start-up?
The Growing Cryptocurrency Market
The cryptocurrency market has exploded in recent years, as new technological developments have given rise to new capabilities – and new digital products with widespread appeal.
Cryptocurrency does not just have inherent market value owing to its use as a speculative asset; the technology behind cryptocurrencies is also a crucial building block behind innovations in tech-based markets.
The proof is in the pudding concerning the cryptocurrency market, though, with the UK emerging as the biggest crypto economy in Europe; according to reports in late 2021, the UK saw over £120 billion in cryptocurrency transactions between Q2 2020 and Q2 2021.
The stratospheric increase in cryptocurrency investment is largely due to innovations in other corners of the fintech sphere, with new retail exchange services and user-friendly wallets democratising access to an otherwise inscrutable system.
Legal Issues in the Crypto Sphere
But working with and around crypto also poses several legal problems, chiefly regarding tax avoidance, money laundering, and even fraud. The decentralised nature of cryptocurrency enables the anonymous mining, purchase, and trading of currencies between individuals and exchanges.
This can make it difficult to track the flow of money, representing a useful system for organised criminals to ‘clean’ their money. The anonymous nature of cryptocurrency can also enable individuals to skirt the tax obligations they would otherwise have regarding their investments.
Managing Legality as a Crypto Start-Up
The legal challenges faced by start-ups in the crypto sphere are varied and, in many cases, ill-defined. The UK government, despite its pro-crypto outlook on the market, has been slow to institute proper regulatory frameworks over the management and trade of cryptocurrencies.
The first and most effective approach new businesses can take regarding their cryptocurrency plans is to seek professional legal counsel; cryptocurrency experts can properly coach a new business through the transparency and documentation necessary to meet shifting legal requirements.
While cryptocurrency remains a strong market with significant investment, recent news about the merging of popular currency Ethereum threatens to throw a spanner in the works for a sub-community of ‘miners’ – that is, cryptocurrency investors who ‘mine’ blocks of currency using computational power and sell onto the market.
The elimination of profitability from mining poses its own risk – and additional legal risk – to new start-ups. As the market moves away from ‘proof-of-work’ and towards ‘proof-of-stake’, how will you legitimize the validation of cryptocurrency?