Blockchain and the Law, Part 2: Cryptocurrency, Smart Contracts, and Alabama Law

Cryptocurrency and smart contracts are two of the most talked about products of blockchain technology, and both raise real legal questions for people and small businesses in Selma, Dallas County, and across west Alabama. The short answer is that these tools are not lawless. Federal tax rules already treat cryptocurrency as property, Alabama licenses many businesses that transmit virtual currency, and Alabama has long given legal effect to electronic records and signatures. This is Part 2 of the four part series Blockchain and the Law, with Security, from the Law Offices of Elliott Owen Lipinsky. If you have questions about how these rules apply to your situation, call the firm at (334) 230-7986. This article is general legal information and not legal advice for any specific case.

What is cryptocurrency?

Cryptocurrency is a form of digital value recorded on a blockchain, which is a shared and tamper resistant digital ledger maintained across many computers rather than by a single bank or government. Bitcoin is the most widely known example, but there are thousands of others. Ownership is proven by cryptographic keys rather than by a bank account statement. Most cryptocurrency is not issued or backed by the United States government and is not legal tender the way dollars are. That distinction matters because the legal rules that apply to cryptocurrency often come from tax law, securities law, and money transmission law rather than from the rules that govern ordinary cash.

How does federal tax law treat cryptocurrency?

For federal tax purposes, the Internal Revenue Service treats cryptocurrency as property. In Notice 2014-21 the IRS stated that virtual currency is treated as property and that general tax principles applicable to property transactions apply to transactions using virtual currency. The practical result is that buying, selling, exchanging, or spending cryptocurrency can create a taxable gain or loss, much like selling stock. When you dispose of cryptocurrency, you generally measure gain or loss by comparing your basis, meaning what you paid in United States dollars, against the fair market value you received, and cryptocurrency received as payment for services can be ordinary income at its fair market value on the date received. The IRS has continued to publish guidance building on Notice 2014-21. Because tax consequences depend heavily on your records and the specific transaction, working with a qualified tax professional is often worthwhile. This article keeps the federal discussion general and does not address any single federal court district.

What is a smart contract, and is it enforceable in Alabama?

A smart contract is not a lawyer drafted paper contract. The National Institute of Standards and Technology describes a smart contract as a collection of code and data, sometimes described as functions and state, deployed using cryptographically signed transactions on a blockchain network and executed on the network so that the outcome is recorded on the blockchain. In plain language, it is a program stored on a blockchain that runs automatically when certain conditions are met, such as releasing a digital payment once a defined event occurs. Here the honest answer requires caution. The fact that Alabama gives legal effect to electronic records and signatures does not automatically mean every smart contract is a valid, enforceable legal contract. Whether blockchain code creates a binding agreement still depends on the familiar elements of contract law, including offer, acceptance, consideration, capacity, and a lawful purpose, along with what the parties actually agreed to. Self executing code can carry out a transaction, but a court asked to enforce or unwind it will look at the underlying agreement and the facts. Alabama has not enacted a statute that broadly declares every smart contract enforceable simply because it runs on a blockchain, so these questions are best answered case by case, and no one should assume the code alone settles their legal rights.

Does Alabama law give legal effect to electronic records and signatures?

Yes, and this is one of the most settled points in this area. Alabama has adopted the Uniform Electronic Transactions Act, found in Title 8, Chapter 1A of the Code of Alabama. Under Section 8-1A-7, a record or signature may not be denied legal effect or enforceability solely because it is in electronic form, and a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation. The same section provides that if a law requires a record to be in writing, an electronic record satisfies that law, and if a law requires a signature, an electronic signature satisfies it. In general, agreements formed and signed electronically stand on equal footing with paper agreements in Alabama, subject to ordinary contract law and the Act's own limits.

Does a cryptocurrency business need a license in Alabama?

Many virtual currency businesses do need to be licensed in Alabama. The Alabama Monetary Transmission Act, found in Title 8, Chapter 7A of the Code of Alabama, is administered by the Alabama Securities Commission. Under the Act's definitions in Section 8-7A-2, monetary value means a medium of exchange, including virtual or fiat currencies, whether or not redeemable in money, and monetary transmission includes receiving money or monetary value for transmission. Because the definition of monetary value expressly includes virtual currencies, a business that receives virtual currency for transmission on behalf of others can fall within the licensing requirements the Commission administers. An individual buying or holding cryptocurrency for personal use is in a different position from a company that moves virtual currency for customers. A business unsure of its status should seek guidance before operating, because operating without a required license can carry serious consequences.

Has Alabama taken enforcement action involving cryptocurrency?

Yes. The Alabama Securities Commission has been active in this space, both by warning investors about crypto related scams and by pursuing enforcement matters. In June 2023 the Commission joined a multi state action against the exchange Coinbase, issuing a show cause order that questioned whether Coinbase's staking rewards program was offered to Alabama residents without proper registration under securities law. In April 2025 the Commission announced it was setting aside that litigation, with its director explaining that the agency wanted to allow time for federal policy makers to develop clearer national rules and to conserve resources, while making clear the matter could be revisited. The takeaway is that Alabama regulators treat certain cryptocurrency products as subject to existing securities laws, and the landscape continues to shift.

Frequently asked questions

Is cryptocurrency legal to own in Alabama?

Owning cryptocurrency for personal use is not prohibited, but ownership carries legal duties, including reporting and paying federal tax on gains, and it does not make cryptocurrency legal tender. Businesses that move virtual currency for others may face licensing requirements.

Do I owe taxes when I sell or spend cryptocurrency?

Often yes. Because the IRS treats cryptocurrency as property under Notice 2014-21, selling, exchanging, or spending it can produce a taxable gain or loss, and receiving it as payment can be income. Keeping careful records of what you paid and received is important, and a qualified tax professional can help.

Is a smart contract the same as a legal contract?

No. A smart contract is computer code that runs automatically on a blockchain. It may carry out a transaction, but whether it creates a binding legal agreement still depends on ordinary contract law and the facts. Do not assume code alone protects your legal rights.

Does my Alabama business need a money transmission license to handle crypto?

It might. The Alabama Monetary Transmission Act, administered by the Alabama Securities Commission, defines monetary value to include virtual currencies, so a business that receives virtual currency for transmission can fall within its licensing rules. Because the answer depends on your specific activities, seek guidance first.

Cryptocurrency and smart contracts sit at the intersection of tax law, securities law, money transmission law, and ordinary contract law, and the rules keep evolving. This article is Part 2 of the four part series Blockchain and the Law, with Security, from the Law Offices of Elliott Owen Lipinsky in Selma, Alabama, serving Selma, Dallas County, and west Alabama. Watch for the remaining parts of the series, and if you have questions about how these issues affect you, your family, or your business, call the firm at (334) 230-7986. This article is general information, not legal advice, and reading it does not create an attorney client relationship.

Frequently Asked Questions

Q: Is cryptocurrency legal to own in Alabama?

A: Owning cryptocurrency for personal use is not prohibited, but ownership carries legal duties, including reporting and paying federal tax on gains, and it does not make cryptocurrency legal tender. Businesses that move virtual currency for others may face licensing requirements.

Q: Do I owe taxes when I sell or spend cryptocurrency?

A: Often yes. Because the IRS treats cryptocurrency as property under Notice 2014-21, selling, exchanging, or spending it can produce a taxable gain or loss, and receiving it as payment can be income. Keeping careful records of what you paid and received is important, and a qualified tax professional can help.

Q: Is a smart contract the same as a legal contract?

A: No. A smart contract is computer code that runs automatically on a blockchain. It may carry out a transaction, but whether it creates a binding legal agreement still depends on ordinary contract law and the facts. Do not assume code alone protects your legal rights.

Q: Does my Alabama business need a money transmission license to handle crypto?

A: It might. The Alabama Monetary Transmission Act, administered by the Alabama Securities Commission, defines monetary value to include virtual currencies, so a business that receives virtual currency for transmission can fall within its licensing rules. Because the answer depends on your specific activities, seek guidance first.