The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. While some countries have explicitly allowed their use and trade, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are legal, it is illegal to actually purchase goods with any currency other than the Russian ruble.
On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes as opposed to currency. This means bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. No longer do investors need to worry that investments in or profit made from bitcoins are illegal or how to report them to the IRS. In a paper published by researchers from Oxford and Warwick it was shown that bitcoin has some characteristics similar to the precious metals market more than to traditional currencies, hence in agreement to the IRS decision even if based on different reasons.
Legal issues not dealing with governments have also arisen for cryptocurrencies. Coinye, for example, is an altcoin that used rapper Kanye West as its logo without permission. Upon hearing of the release of Coinye, originally called Coinye West, attorneys for Kanye West sent a cease and desist letter to the email operator of Coinye, David P. McEnery Jr. The letter stated that Coinye was willful trademark infringement, unfair competition, cyberpiracy, and dilution and instructed Coinye to stop using the likeness and name of Kanye West.
Concerns of an unregulated global economy
As the popularity of and demand for online currencies increases since the inception of bitcoin in 2009, so do concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.
Cryptocurrency networks display a marked lack of regulation that attracts many users who seek decentralized exchange and use of currency, however these very same lack of regulations have been critiqued as potentially enabling criminals who seek to evade taxes and launder money.
Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex (and in some cases impossible) to track.
Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins stands outside institutions and can be achieved through anonymous transactions. Laundering services for cryptocurrency exist to service the bitcoin currency, in which multiple sourced bitcoins are blended to obscure the relationship between input and output addresses.
Arrests
There have been arrests in the United States related to cryptocurrency. A notable case was the arrest of Charlie Shrem, the CEO of BitInstant.
Fraud
On August 6, 2013, Magistrate Judge Amos Mazzant of the Eastern District of Texas federal court ruled that because cryptocurrency (expressly bitcoin) can be used as money (it can be used to purchase goods and services, pay for individual living expenses, and exchanged for conventional currencies), it is a currency or form of money. This ruling allowed for the SEC to have jurisdiction over cases of securities fraud involving cryptocurrency.
GBL, a Chinese bitcoin trading platform, suddenly shut down on October 26, 2013. Subscribers, unable to log in, lost up to $5 million worth of bitcoin.
In February 2014, cryptocurrency made national headlines due to the world's largest bitcoin exchange, Mt. Gox, declaring bankruptcy. The company stated that it had lost nearly $473 million of their customer's bitcoins likely due to theft. This was equivalent to approximately 750,000 bitcoins, or about 7% of all the bitcoins in existence. Due to this crisis, among other news, the price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.
On March 31, 2015, two now-former agents from the Drug Enforcement Administration and the U.S. Secret Service were charged with wire fraud, money laundering and other offenses for allegedly stealing bitcoin during the federal investigation of Silk Road, an underground illicit black market federal prosecutors shut down in 2013.
On December 1, 2015, Homero Joshua Garza stands accused of securities fraud following his development of the cryptocurrency known as Paycoin. Garza was the owner of the now defunct GAW Miners website that sold mining equipment for cryptocurrency. Garza is accused of masterminding an elaborate ponzi scheme under the guise of "cloud mining" with mining equipment hosted in a data center. Garza purported the cloud miners known as "hashlets" to be mining cryptocurrency within the Zenportal "cloud" when in fact there were no miners actively mining cryptocurrency. Zenportal had over 10,000 users that had purchased hashlets to the tune of over 19 million U.S. dollars. GAW Miners was co-founded by Homero Joshua Garza and Stuart Fraser of Cantor Fitzgerald, a well known securities company.
Darknet markets
Cryptocurrency is also used in controversial settings in the form of online black markets, such as Silk Road. The original Silk Road was shut down in October 2013 and there have been two more versions in use since then; the current version being Silk Road 3.0. The successful format of Silk Road has been widely used in online dark markets, which has led to a subsequent decentralization of the online dark market. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings doubled from 18,000 to 32,000.
Darknet markets present growing challenges in regard to legality. Bitcoins and other forms of cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labelled as "virtual assets". This type of ambiguous classification puts mounting pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.
Since most darknet markets run through TOR, they can be found with relative ease on public domains. This means that their addresses can be found, as well as customer reviews and open forums pertaining to the drugs being sold on the market, all without incriminating any form of user. This kind of anonymity enables users on both sides of dark markets to escape the reaches of law enforcement. The result is that law enforcement adheres to a campaign of singling out individual markets and drug dealers to cut down supply. However, dealers and suppliers are able to stay one step ahead of law enforcement, who cannot keep up with the rapidly expanding and anonymous marketplaces of dark markets.
