Where in the World is Your Cryptocurrency Exchange?
Location, location, location. For the cryptocurrency trader choosing the wrong location could have serious legal consequences.
Cryptocurrency is an international digital asset with popular exchanges located all over the world. A savvy trader hoping to take advantage of international trends may buy their coins with GDAX/Coinbase (U.S.), but will move them between exchanges like Cex.io (U.K.), ShapeShift (Switzerland), CoinMama (Slovak Republic), and Binance (formerly China, now Japan) to maximize their profits. What this savvy trader may not realize is that with each international trade they are exposing their investment to any number of rules or regulations (or lack thereof) in an industry that is frequently described as an “online wild west where sheriffs are largely absent.” So what happens when your foreign based exchange defrauds you or worse? What legal protections do you have?
International law is a complicated topic and the risks associated with trading overseas depend on a lot on the individual trading, the laws of the country the individual is a citizen of, and the laws of the country where the trade occurs. This is not a topic that could be fully discussed in just one article and as stated below (in the disclaimer) this article is not intended to be legal or financial advice.
With such a complicated issue its easier if we divide the world into three categories: green, yellow and red. Each color represents the amount of risk involved in trading/storing cryptocurrency in a particular country with green being the least risky, to red being the most. Risk, as it is used in this system, represents the number of variables (known or unknown) that would prevent you from a full legal recovery against a business for wrongdoing.
In The Green, the Safest Zone
For most traders the Green Zone is not only the safest, but probably the easiest. The important thing to remember is quality, accessibility, enforceability and proximity of the law. If your home country has a robust legal system that values property rights, enforces private contracts, and exhibits the above qualities then you are probably the safest when you use domestic exchanges.
For example: for a U.S. trader an exchange based in the United States is probably the safest:
• The United States has a strong legal system and a healthy respect for the rule of law.
• U.S. constitution protects individual property rights, and U.S. courts will enforce signed contracts between consenting parties.
• The government is stable and is responsible to the citizens it governs (it is unlikely that the Government will just seize your investment).
• The courts value justice and fairness and adhere to a strict civil procedure. There are centuries of case law that these courts adhere to, and legal precedent means consistency in results.
• U.S. courts are accessible to the average citizen with multiple levels of specialized courts.
• The U.S. has a robust and respected legal community that promotes advocacy and pro-bono groups that regularly take cases for indigent clients.
• The U.S. has the capacity to enforce judgments. Courts in one state are required by the U.S. Constitution to enforce the judgments of courts in other states. The U.S. also has a police force that is (when compared to a lot of other countries) ethical and honest.
• The trader is physically close to attorneys who practice in the U.S. which keeps the time and costs required for a verdict lower.
• The exchange is domestic, and any judgment against it can be enforced by the courts and police in the U.S.
Proceed Cautiously in the Yellow Zone
Countries in the Yellow Zone are foreign countries that exhibit the same attributes described above, but still present more risk to a trader.
A country with similar qualities is likely to have an interest in protecting your property rights and enforcing your contracts despite your foreigner status. Their courts are interested in promoting justice and their country is interested in getting reciprocal rights for their citizens who sue abroad. Exchanges who operate out of these countries have an interest in satisfying and respecting foreign courts and laws because it provides a better business environment internationally and keeps foreign governments from causing them trouble. These countries are also more likely to be signatories to treaties like the Hague Conference on Private International Law which allows some traders to sue foreign businesses in their home countries and have the judgment enforced by the courts in the foreign country.
As a foreigner trading internationally there are a lot of unknowns. For example, is the country your trading in a common or civil law country? Countries like Germany and South Korea are civil, while the United States and United Kingdom are common. Then you have countries like Japan and Norway which sometimes use a hybrid system. What are the laws in that country? International traders were miffed that the profits from their Mt. Gox investments could end up in the hands of the people who caused the problem in the first place. Bankruptcy laws differ country to country, and in the United States that probably wouldn’t have happened. Different laws could have a detrimental effect on your case, and if your trades touch multiple countries you could have multiple layers of laws involved.
Then you have the problem of finding adequate representation. It will be more expensive to hire an attorney who knows French business law in the United States and similarly it will be more expensive to find an attorney in France who regularly does business with Americans. Sometimes the cost of litigation outweighs the reward of a friendly verdict and distance can add to those costs.
The Danger (Red) Zone
Countries in the Red Zone are countries that lack strong rule of law, have corrupt governments, have banned cryptocurrency, or present significant legal barriers to your recovery.
No real explanation is needed for the first three. If you choose to trade or store cryptocurrency in a country with a weak legal system, a corrupt/failing government, and/or with a country that has banned cryptocurrency you are just asking for trouble.
The fourth reason is a little more complicated. Some countries put up significant legal hurdles against foreigners seeking recovery against their businesses. Countries like China refuse to sign the necessary legal treaties for foreign judgments to be enforced in China. Meaning if you want to sue an exchange located China, you must do it in a Chinese court to get any results. Other countries like Russia still have significant issues with judicial corruption. In the worst countries sometimes a large bribe is required to grease the wheels of justice.
The smart trader would probably limit their exposure to exchanges in these types of places, because the cost of recovering your investment may be too high to justify the expense, or there just may not be any option of recovery at all.
Trading is Risky Business
Cryptocurrency trading is a risky endeavor. From a legal perspective it is important to limit your exposure to potential problems. When you trade internationally you often wade into unknown waters and so it should only be done cautiously with some reflection on the risk involved.
What do you think, should traders be more cautious about where they trade, or is the concern overblown? Have you ever been burned by a foreign exchange, or have you ever had one go above and beyond to protect your investment? Comment below and let us know.
This article is not meant to be legal or financial advice at all. The totality of International Law and Cryptocurrency Law is not a topic that could be fully discussed in just one article. The purpose of this article is to get cryptocurrency enthusiasts thinking more critically about the places and companies they trade or store their coins with. If you have an issue or a question you should consult an attorney. Each issue or question is particular to the person and the location of the issue/question and an attorney will be able to review your issue/question and review the applicable law.