Cryptocurrency Legal Risks: A Guide for CA Investors & Businesses

Cryptocurrency continues to be a major force in finance and technology. As a result, many individuals invest in digital assets like Bitcoin, while more businesses explore using this technology. However, the “wild west” era of crypto is rapidly coming to an end. In 2025, both the federal government and California are increase their regulatory oversight. Consequently, understanding the complex web of rules and the significant Cryptocurrency Legal Risks is no longer optional—it’s essential for survival.

Navigating this landscape can be challenging. For instance, different government agencies treat digital assets differently, creating a confusing patchwork of rules. In addition, a major new state law adds another critical layer of compliance for California investors and businesses. This article, therefore, breaks down the key regulations and legal risks you need to know about.

The Core Problem: Defining Crypto Creates Legal Risks

A central challenge in U.S. crypto regulation is that different agencies claim jurisdiction. Unfortunately, they don’t all agree on what crypto is. This disagreement creates uncertainty and is a primary source of Cryptocurrency Legal Risks.

• The SEC Sees Securities: The U.S. Securities and Exchange Commission (SEC) has taken an aggressive stance. For example, it argues that many cryptocurrencies are “investment contracts” and therefore securities. According to the SEC, if a crypto asset is a security, it must follow strict federal laws. Selling an unregistered security is illegal and has led to major lawsuits.
• The CFTC Sees Commodities: In contrast, the Commodity Futures Trading Commission (CFTC) classifies major cryptocurrencies like Bitcoin as commodities, similar to gold or oil. As a result, the CFTC regulates the futures and derivatives markets for these assets.
• The IRS Sees Property: Meanwhile, for tax purposes, the Internal Revenue Service (IRS) treats cryptocurrency as property. This means when you sell or trade crypto, you must report it and pay capital gains taxes on any profits.

This lack of a single definition means businesses must be aware of rules from multiple federal agencies.

Key Federal Regulations and Compliance Risks

Beyond the major agencies, other federal rules also apply. For instance, the Financial Crimes Enforcement Network (FinCEN) works to prevent money laundering. FinCEN requires crypto exchanges and other money service businesses to comply with the Bank Secrecy Act. This involves:

• Registering with FinCEN.
• Implementing Anti-Money Laundering (AML) programs.
• Following “Know Your Customer” (KYC) rules to verify user identities.
• Reporting suspicious activities.

Therefore, businesses that handle crypto transactions must take these compliance obligations very seriously to avoid severe penalties.

California’s New Law and Its Impact on Cryptocurrency Legal Risks

California has now stepped in with one of the nation’s most comprehensive state-level crypto regulations. The Digital Financial Assets Law (DFAL) creates a major new licensing framework. The California Department of Financial Protection and Innovation (DFPI) oversees this law, which is in full effect as of mid-2025.

What does this law do? Specifically, according to the California DFPI, it requires most businesses engaged in digital asset activities in California to get a state license. This includes crypto exchanges, wallet providers, and ATM operators. To get a license, a company must meet strict requirements related to consumer protection, risk disclosures, and financial stability. Ultimately, this law significantly increases the compliance burden for crypto companies operating in the Golden State.

Top Cryptocurrency Legal Risks for Your Business or Investments

Navigating this multi-layered regulatory environment creates specific risks for both companies and individuals.

For Businesses

• Securities Violations: Issuing a new token without following SEC rules can lead to enforcement actions and massive fines. This is one of the biggest Cryptocurrency Legal Risks.
• AML/KYC Compliance Failures: Furthermore, not having a robust program to report suspicious transactions can result in severe federal penalties.
• Contract Issues: If you accept crypto as payment, its volatility can create contract disputes. Therefore, your agreements must be very clear about how you handle risk.
• Cybersecurity Threats: In addition, holding crypto makes you a target for hackers. A breach can lead to devastating losses and lawsuits.

For Investors

• Scams and Fraud: The crypto space is still filled with fraudulent schemes. For example, “pump and dump” scams and fake investment platforms are common.
• Market Volatility: Moreover, crypto prices are notoriously volatile. You can lose your entire investment very quickly.
• Tax Liability: Many investors are unaware of their tax obligations. The IRS is increasing its enforcement, so failing to report crypto gains can lead to back taxes and penalties.
• Holding Unregistered Securities: Finally, if you invest in a token that the SEC later declares is an unregistered security, its value could plummet as exchanges delist it.

How KAASS LAW Can Help Navigate Cryptocurrency Legal Risks

The legal framework for cryptocurrency is complex and constantly changing. For businesses looking to innovate using digital assets, navigating these rules is a major challenge.

At KAASS LAW, we help California companies understand their obligations in this evolving space. Our Business Law practice provides guidance on regulatory compliance, risk management, and contract law. For instance, we can help you understand the legal implications of incorporating cryptocurrency into your operations, review agreements with crypto service providers, and develop compliance strategies that align with current state and federal expectations. The legal landscape surrounding Cryptocurrency Legal Risks is a key focus for businesses today. If your company is grappling with these issues, please Contact Us for a confidential consultation.

Conclusion

The era of unregulated cryptocurrency is over. In 2025, a complex patchwork of federal and state laws will govern the industry. From the SEC’s enforcement actions to California’s new Digital Financial Assets Law, the rules are becoming stricter. Consequently, for both investors and businesses, understanding and addressing Cryptocurrency Legal Risks is a necessity. Staying informed, prioritizing compliance, and seeking knowledgeable legal counsel are, therefore, the best ways to navigate this innovative yet challenging financial frontier.