Key Risk of Investment in Cryptocurrency: Is It Illegal?

The Global Market and Investment Risks of Cryptocurrency 

Like other commodities, crypto assets are exposed to risks arising from market movement. There are two types of risks associated with cryptocurrency trading, i.e., systematic risks and unsystematic risks. The systematic risk is present in all cryptocurrencies because it is inherent in the crypto markets. Unsystematic risk, which is particular to a single crypto asset, could involve a change in the company's fundamentals.

The Investment Risk of Cryptocurrency in Nepal

Nepal faces a high risk of capital flight through investments in cryptocurrencies although the country has barred Nepalis from investing abroad, the Nepal Rastra Bank has said. ... “There is the risk of capital flights through illegal Hundi for cross-border network marketing [of cryptocurrencies]

Nepal’s Act on Restricting Investment Abroad, 1964 prohibits Nepalis from investing in foreign countries. There is also the risk of tax dodging, money laundering, and financial instability, such investment can negatively impact monetary policy and pose challenges to consumer protection, the central bank said in a notice on Tuesday.

In a country like Nepal where there is limited capital and people are banned from investing abroad, it is a huge challenge to stop capital flights in the form of investment in cryptocurrencies, and there is the risk of capital flights through illegal Hundi for cross-border network marketing [of cryptocurrencies] 

As of the first five months of the current fiscal year 2021-22, remittance inflow dipped by 7.3 per cent to $3.26 billion on a year-on-year basis, while foreign exchange reserves dropped 14.7 per cent to $10.03 billion in mid-December 2021 from $11.75 billion in mid-July 2021, according to the central bank’s statistics. With transactions taking place outside the government’s system, the risk of tax dodging is also high.

On January 25, the Department of Revenue Investigation registered a case at the Kathmandu District Court against four people on the charge of foreign exchange misappropriation amounting to Rs376.41 million through illegal investment in virtual currencies. Besides the risks to the economy, there is a bigger danger for individuals investing in cryptocurrencies, according to the central bank.

It argues that investing in cryptocurrencies means a violation of the Foreign Exchange (Regulation) Act-1962 of Nepal, which does not recognise cryptocurrencies as foreign exchange and bars their use for payment, exchange and as monetary instruments. Even Nepali nationals living abroad will face punishment for violating the Foreign Exchange Regulation Act if they facilitate capital flight from Nepal

On the other hand, there is no legal remedy for investors if any dispute arises in connection with cryptocurrency transactions. While investing through others, there is the risk of non-recovery of such funds in cases of fraud.

The systematic risk is present in all cryptocurrencies because it is inherent in the crypto markets. Unsystematic risk, which is particular to a single crypto asset, could involve a change in the company's fundamentals. There is some uncertainty regarding the tax status of cryptocurrency investments and returns.

Nepal Rastra Bank Regarding Criptocurrencies

The Nepal Rastra Bank (NRB) has urged one and all to remain cautious on the issue of cryptocurrency and networking transactions since it is an illegal act. Issuing a public message Tuesday against the backdrop of increasing incidents of networking marketing and cryptocurrency, the central bank has said such activities in Nepal not only leave the country's economy vulnerable but also risk investors losing their money. The central bank has also urged one and all to remain cautious about these activities stating that the nature of cryptocurrency and networking marketing is not subject to regulation. 

The NRB has mentioned that there is a high risk for investment in money laundering and terrorist activities from the transaction of cryptocurrency and networking marketing. The use of cryptocurrency could lead to illegal activities, especially forgery and tax evasion and networking marketing is also an illegal economic activity that leads to a negative impact on revenue collection of the country, the central bank stated.  Similarly, the central bank said the use of cryptocurrency could impact the regulation of capital flight; and its efforts to stop capital flight.  Stating that the capital flight could be made through illegal means or Hundi, the NRB said that increased use of cryptocurrency could pose an adverse impact on fiscal stability. 

Cryptocurrency and Foreign Bank Account Regulations

Cryptocurrency trading frequently involves holding cryptocurrency in a foreign account. As of January 2022, federal law does not view a foreign cryptocurrency account as a type of "reportable account." That is, cryptocurrency account holders are not required to file disclosures of their foreign accounts to the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S.

Treasury Department. Commonly called an FBAR, for Foreign Bank Account Report, this is FinCEN Form 114, and it must be filed by holders of substantial overseas accounts. Cryptocurrency wallets are not included in that requirement but that could change at any time. FinCEN intends to propose amending the filing requirements regarding foreign bank accounts to include cryptocurrency holdings. 

Key risks to investing in cryptocurrencies, including Bitcoin.

First: the value of the cryptocurrency has fallen at the same rate as it has risen. However, most investors do not know the reason for the decline in its value. Then they sell in a hurry and lose their hard-earned money. In the last two months alone, the value of Bitcoin has dropped from Rs 65,000 to about Rs 30,000.

Second: Trading of such currencies is illegal in our country Nepal. The government has not given any recognition to cryptocurrency. The government has already taken action against such traders and gangs engaged in cryptocurrency mining in Nepal. Not only that, the government had also monitored some fintech companies for being involved in bitcoin trading. Therefore, the investment made in it seems to be legally risky.

Third: the government has always been aware of the possibility of money laundering using cryptocurrency. As this could endanger the security of the country, the state treats its traders as criminals. That is why the relationship with cryptocurrency seems to be unfavourable.

Fourth: The value of the cryptocurrency has been greatly affected by even the smallest international events. A few days ago, Alan Musk, the owner of the world's richest Tesla company, tweeted about Bitcoin, which caused its price to fall sharply. In such a case, small investors have to bear huge losses.

Fifth: Concerns about cyber security have been growing globally in recent days. In this case, the business of cryptocurrency is naturally at risk. Because such currencies are transacted through a code or password. If someone forgets that code or password, that currency is lost forever.

Sixth: Most people invest in cryptocurrencies through apps like Wazir X, Uno Coin, Coin DC X, Pocket Pay, Coin Switch Cover. However, these apps do not have the strong conditions required for this type of investment. So the alarm goes off.

Seventh: The biggest risk seen in cryptocurrency is that there are no rules about it yet. There is no country, government or institution to control or regulate it. So its value sometimes skyrockets and sometimes falls faster than that. Therefore, investing in cryptocurrencies is no less risky than travelling on a wrecked ship.

Eighth: The risk of cryptocurrency fraud is just as high. Between October 2020 and May 2021, 7,000 people were involved in cryptocurrency fraud, according to figures released by the US Federal Trade Commission.