Legality of Crypto Margin trading

[Chrisgold]

Jurisdiction

US Federal Law

There are multiple sites that claim that circumventing restrictions with margin trading by using VPN's or unlicensed platforms in the US are "against the law" for the trader, is this true?

"When American citizens and residents register with a crypto-margin brokers, they get a notice that this service is not allowed in their country. Technically, a US citizen can circumvent around this by using a VPN. However, doing so is a clear violation of the law and hence, it is not advisable to do so. If the platform discovers that a traders is a US resident, it could freeze your account and your funds. Additionally, there might a legal action against the trader."

another site however contradicts this and says,

"Margin trading is strictly controlled. It isn't illegal per se, but exchanges need to register and get permission from the CFTC. However, it is one many cypto exchanges are unavailable in the U.S. Both Kraken and Coinbase Pro disabled their margin trading products earlier this year."

So what is it? Is there an actual federal law that would prohibit such actions on the part of the trader or would an exchange just freeze accounts on part of their duty to uphold their end of the law?

There are some decentralized exchanges which wouldn't be able to freeze funds due to those contracts and funds being on that persons crypto wallets, and while they prohibit US customers, some don't even seem to bother with IP restrictions on their site.

Some sites make it sound like CFD's (Contract for differences) are illegal in general? I dont know if thats true and if legal margin trading like what Kraken employs, which seems to be one of the few licensed US margin traders, circumvents those restrictions in some way.

What would happen in the case of an IRS inquiry into the details of someone who reported income that was using margin in this way? Would it be illegal for an individual? Could they be prosecuted?

The idea that the government would prosecute traders for circumventing a law meant to protect them from undue risk would seem on par to giving the death penalty to someone who attempted suicide.

So what is the law? Could traders get in actual legal trouble for violating these terms of services or do exchanges just have a responsibility to uphold regulations on their platform and therefore the risk is only to ones assets or getting banned from the platform.

I don't personally care to hear about how crypto trading, or margin trading for that matter is a scam like many have stated on other crypto topics on this forum just looking for real facts on how the federal law operates in this regard.

 

[Zigner]

Why, specifically, are you concerned?

 

[justblue]

No. No, it is nothing like that at all. Your analogy is absolutely foolish.

The idea that the government would prosecute traders for circumventing a law meant to protect them from undue risk would seem on par to giving the death penalty to someone who attempted suicide.

 

[army judge]

If you reside in the Dominion of Canada, why on earth would you have any concerns about US laws????

 

[Tax Counsel]

There are multiple sites that claim that circumventing restrictions with margin trading by using VPN's or unlicensed platforms in the US are "against the law" for the trader, is this true?

What federal law provides is that generally publicly traded crypto currency is treated the same as other publicly traded securities (e.g. stocks, bonds, etc). That means that the crypto brokers are subject to the same kind of registration and reporting requirements as stock brokers, public corporations, and so forth. For the most part, those laws simply require that broker's be licensed to sell the securities they deal in and require those persons/firms offering securities to meet the federal securities laws, which largely contain requirements for those offering securities in large amounts to register those securities. Those registration requirements are expensive, which what the big crypto trading firms don't like. And that's why some of them won't deal with American investors. But crypto trading firms are not subjected to substantially different requirements than any other investment trading exchange or brokerage house.

And of course it is the case that if you are breaking the law, using a VPN won't change that you are committing a crime and thus can be prosecuted for it. VPNs mask your identity making it harder for authorities to catch you, but web sites caution that using VPNs is not a guarantee you won't get caught.

What would happen in the case of an IRS inquiry into the details of someone who reported income that was using margin in this way? Would it be illegal for an individual? Could they be prosecuted?

Your profits from crypto trading are, of course, taxable income. If you fail to report and/or pay the tax you may be subject to prosecution for tax evasion or other tax offense. Federal law prohibits the IRS from routinely giving out tax information to other federal and state agencies (other than state tax agencies, who are bound to the same privacy requirements as the IRS). A federal agency that already suspects you of criminal activity may, however, make a specific request for tax information that may help provide evidence of the offense.

Could traders get in actual legal trouble for violating these terms of services or do exchanges just have a responsibility to uphold regulations on their platform and therefore the risk is only to ones assets or getting banned from the platform.

Violating a private company's terms of service is not a crime. It may be a breach of contract for which you may be sued or may be subject to a penalty clause in the contract.