How Do You Prove That Your Crypto Is Lawful?

Governments have come up with plenty of ways to put obstacles in the way of crypto enthusiasts and make cryptocurrencies harder to use.

• In some countries, any crypto transactions are outright banned.
• In others, critically important operations are allowed only through licensed intermediaries (custodial wallets).
• Elsewhere, crypto transactions are hit with excessive taxes.

Today, a court in Russia came up with a brand-new method - one we have not seen before.

Until today, Russia had a law under which legal protection for cryptocurrency owners was granted only if the crypto had been declared in advance to the tax authorities. In theory, this approach makes some sense. Technically, the owner of the funds at a given address is anyone who holds the private key. But what if several people have access to that key, and one of them spends the crypto without the others knowing? How should such situations be handled within a traditional concept of property rights? Declaration provides legal clarity: whoever is the first to inform the state that this cryptocurrency belongs to them is recognized as its owner.

In practice, this meant that if undeclared cryptocurrency was stolen or misappropriated, the victim was denied both criminal investigations and civil claims.

Today, however, the Russian Constitutional Court ruled that this provision of the law is unlawful and banned its application. But according to Russian legal experts and specialized media, the court added an important clarification in its decision. Courts are now required to protect rights to cryptocurrency, provided that the owner can prove the legality of both the acquisition of the cryptocurrency and its subsequent use.

And here is the key question: how exactly can one prove that?

I understand how to prove something is illegal. You find a violation of a specific legal norm. But this logic does not work when it comes to proving legality. The absence of a detected violation does not mean that no violation exists. Proving the absence is a logical absurdity.

Yet now this very absurdity is being adopted as an official legal standard - by an entire state.