Cryptocurrencies, despite their many benefits, have come with an array of legal issues. The popularity of these virtual currencies has made some governments seek to regulate them, while others have banned them altogether.

The use of cryptocurrencies for illegal activities is a major concern for regulators. The anonymity of cryptocurrency transactions can make them attractive to criminals, who may use the coins for money laundering or terrorist financing. They also may buy illicit drugs, forge documents or ransomware using cryptocurrencies, since these digital assets can mask the identities of users. Cryptocurrency developers have responded to these concerns by developing privacy-enhancing cryptos, such as Monero and Zcash.

In addition to money laundering, financial fraud is another reason that some governments are seeking to regulate cryptocurrencies. Some states have created their own crypto exchanges and trading platforms, while others are requiring businesses that operate these services to obtain a state license. New York, for instance, has launched a licensing framework called BitLicense that requires cryptocurrency and business exchanges to comply with anti-money laundering and know-your-customer laws.

One of the main legal challenges posed by cryptocurrency is that it does not come with standard consumer protections. For example, credit card payments have a built-in dispute process that allows customers to get their money back in the event of a fraudulent transaction. In contrast, if someone pays for something with a cryptocurrency, it is often impossible to get your money back, unless the person who received the payment is willing to send it back.

Another concern is that cryptocurrencies can be hard to track. This difficulty in tracking the location of cryptocurrencies has led some countries to outlaw the trade and transfer of these assets. However, some states have taken a more flexible approach to the regulation of these assets, allowing them to be traded in some instances if they are regulated as securities or commodities.

Lastly, it is important to note that the tax treatment of cryptocurrencies can be confusing for investors. The gains and losses that are realized on cryptocurrency investments are taxable as capital gains, but the tax treatment of cryptocurrencies depends on how they are sold. In some instances, if a cryptocurrency is purchased and then sold at a profit, the investor will be required to pay a wash sale tax.

While some states have sought to create detailed definitions of cryptocurrencies, most have opted for more technology-agnostic approaches, which will allow them to regulate the cryptocurrency industry as the technology evolves. For instance, New York recently amended its Uniform Commercial Code to include a new Article 12, which defines virtual currency. This amendment makes it easier for the state’s securities and commodities regulators to regulate the growth of these emerging assets. New Jersey is another state that has taken a proactive approach to crypto regulations. The regulators there have brought action against several unregistered cryptocurrency exchanges, including a lawsuit against BlockFi for violating the law by offering interest-bearing crypto accounts.