The legal implications of digital money: What you need to know

Digital money, digital currency, most popularly known as cryptocurrency, has seen its rise to fame over recent years. Despite its popularity, many remain skeptical of cryptocurrency and its impact on society.

According to the World Economic Forum, cryptocurrency helps continue, stabilize, and substitute existing money. However, cryptocurrencies operate totally differently than legal tender, and the authorities are concerned about a non-existent monetary policy for this digital money. This article will discuss digital money, its impact, and all the legal implications of cryptocurrency transactions.

What is Digital Money?

Digital money, or digital currency, is any form of currency that only exists electronically. This means these are intangible forms of currency that lack the physical presence of bills, coins, or other forms of legal tender.

Digital currency existed as early as the 1990s and has popularized what we now call cryptocurrency -- the most popular being Bitcoin. As the world speedily transitioned to online financial transactions, cryptocurrency has grown because of its ability to transact this 'money' without using middlemen like banks, payment systems, and SWIFT systems.

Where can you use digital money?

Cryptocurrency as digital money exists in the form of 'digital tokens' through blockchain technology -- a sort of electronic ledger.

It uses cryptography to enable secure payments and fund transfers to any entity that honors digital money faster, more securely, and cheaper than it would cost you if you had made traditional electronic international wire payments.

According to reports, the world’s biggest online retailer, Amazon, is rumored to have been preparing to utilize cryptocurrency in its transactions.

Legal implications of digital money

According to the International Monetary Fund, only 40 of the 174 IMF members are legally allowed to issue digital currencies. This raises concerns about the legal implications of digital currency as a form of currency that cannot be easily received and transferred by the majority of the population.


The lack of a global legal framework for digital currency and establishing a Central Banking Digital Currency (CBDC) remains a major legal issue in transacting and using digital currency.

If these digital currencies are to be embraced by a CBDC, there needs to be a global consensus on how the transactions for these currencies are treated, which will most likely affect traditional and existing frameworks of local banks and traditional banks.

Bitcoin is already a legal tender in El Salvador. On the other hand, the treatment of these digital currencies remains to be considered by other countries like the United States, who, as of September 2022, have published a discussion on the technical possibilities of a U.S. CBDS to make a digital form of the U.S. Dollar.

Without an international agreement on the treatment of digital currency, they will remain an area of concern in the financial sphere, especially in regulating cryptocurrency issuers.

Privacy and security issues

With digital money being kept in electronic form, these digital currencies are highly prone to security, safety, and privacy issues by third parties, including hackers.

Cryptocurrency, like Bitcoin, isn’t anonymous but pseudonymous -- masking one’s identity instead of making it unknown. Because blockchain technology as a ledger is available to anyone, users with substantial digital asset possessions are likely to be identified and subject to hacking and transaction transparency, especially using crypto romance scams.

Catherine Schwartz, Content Creator at LoanFolk, says, "Privacy is an important issue to society nowadays, especially when technology has already become an avenue for data breach and identity fraud. Cryptocurrency is no exception."

Financial fraud

Relating to the case of privacy issues, the transparency of cryptocurrency can significantly allow a platform for money laundering. Because of the transparency of blockchain technology, public cryptocurrency transactions are widely visible in the blockchain network.

A proposed remedy is using privacy cryptocurrencies which can protect user privacy while doing transactions through blockchain technology. Users who want to keep utilizing cryptocurrency while still taking into account their privacy would switch to private coins to mask their transactions -- a great avenue to commit money laundering.

How? You can easily move funds from one destination to another through cryptocurrency without the traditional bank trail and documents. This means its original source cannot be traced when private coins are used, straight to a service where this cryptocurrency can be exchanged for actual cash.

According to Chainalysis, there have been $2.8 billion of illicit cryptocurrency transactions in Bitcoin alone, accounting for 27.5 percent of total financial frauds committed through cryptocurrency exchanges.

According to Anthony Martin, Founder, and CEO of Choice Mutual, "Government agencies must carefully weigh the advantages and disadvantages of implementing CBDCs, and whether or not cryptocurrencies should be accepted as legal tender under their jurisdiction. The ballooning cases of money laundering will most likely increase even more when regulators fail to implement protective measures in financial technology."


The 'fluidity' of cryptocurrency makes it hard to determine which country, jurisdiction, framework, or responsibility it’s supposed to fall into.

Because digital assets have the option to privatize the information of their transactions, as well as the blockchain technology or the crypto 'ledger' not having an actual physical location, it makes it harder to know which laws should be enforced in regulating such transactions -- especially those with conflicting legal frameworks (those who have established crypto as a legal tender versus those who haven’t).

Mark Pierce, CEO of Cloud Peak Law Group, says, "Jurisdiction covers the legal right of a certain court to hear a case, which is usually based on geographical location. Cryptocurrency transactions occur only electronically and with no trail of its source and origin, is a difficult task because of its scope and reach."


For the IRS, digital assets are not considered a real currency but are treated as property. For this matter, digital money should be included in an individual's tax return. The tax rules on property transactions apply, including taxable gain or loss in the sale, receipt, exchange, disposition, or transfer of digital money.

Because these cryptocurrencies aren’t considered ‘real currency’ by the IRS, owners should report these digital assets correctly and accurately on their financial and tax returns by their fair market value -- like how property is reported on the financial statements.

Simply put, you can consider valuing cryptocurrency like stocks and investments for the amount at which they were sold and bought and their current value at the time of the report. While this is easy to say, common individuals may find this procedure burdensome without the help of a knowledgeable individual.

Colin Palfrey, CMO at Crediful, says, "Because of the lack of regulatory framework for digital money, considering and valuing them as properties like land, building, and equipment helps in determining the gain or loss of these assets, especially when cryptocurrency is a very volatile asset to begin with."

Contractual issues

Because money is digital, contracts concerning cryptocurrency remain electronic, called smart contracts.

Smart contracts are self-executing codes written into the blockchain to complete a transaction written in the code. When you execute a smart contract, you send digital money to an address written in that contract which is automatically done when all the conditions of the smart contract are met. When sent and executed, this smart contract cannot be revoked or changed, and only the parties involved are able to see the completion of the contract.

These smart contracts raise an issue on the legality of these smart contracts as they do not inherently belong to any federal law protection or framework compared to traditional contracts. Smart contracts depend highly on how well the codes are made and executed, and bringing failed contracts to authorities may yield unfavorable results.

Amy De La Fuente, Director of Public Affairs at Bosco Legal Services, says, "Contracts, especially notarized ones, hold so much power in front of the court. In the case of smart contracts, they are transacted in the belief that these ‘contracts’ are accurately and properly coded. At the end of the day, when problems arise, who will we hold accountable when these smart contracts fail?"

Why digital money is still an area of concern

As one of the most significant innovations in financial technology, the hype with digital money and cryptocurrency is understandable: faster payments, blockchain technology, privatized transactions, and fewer costs for international fund transfers.

However, current and future crypto investors need to understand the legal challenges of dealing with electronic money. Together with their potential benefits are even bigger risks and costs, from lack of a legal framework to potential financial fraud -- and assessing whether investing in cryptocurrency, technology-based money, is worth risking, especially with the cyber threats that the digital world is facing.

Roman Shvydun writes informative articles mainly about everything related to marketing, business, productivity, workplace culture, etc. His articles focus on balancing information with SEO needs, but never at the expense of providing an entertaining read. See a few more examples of Roman’s articles by visiting his Twitter:

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