Forks in blockchains, which are situations when a blockchain network diverges into two different blockchains based on changes in the protocols of the chain, create the potential for large legal challenges in the blockchain ecosystem. There are two major types of forks: soft forks, which are backward compatible and allow the old-versus the new version to run in parallel, and hard forks, which create two completely different blockchains.

 The most notable example being Bitcoin Cash emerging from Bitcoin. The legal issues that relate to forks are regulatory compliance, issues of intellectual property, tax obligations, and impacts to existing contracts. From a tax perspective, a hard fork creates a new cryptocurrency, and regulators may categorize this new cryptocurrency under relevant financial regulations, including securities regulations. Issues of intellectual property could arise if forked projects use patented technology without permission. 

There are tax ramifications, since in some jurisdictions the IRS would consider “new” cryptocurrencies resulting from a fork as taxable income. Existing contracts, including smart contracts and terms of service agreements, may need to be revised to account for new assets generated by forks. Forks can also increase security risks related to the new blockchain, creating challenges in determining responsibility for a financial loss. Previous blockchain forks, including the Bitcoin Cash and Ethereum Classic splits, provide evidence of potential legal and practical challenges resulting from forks.

 As blockchain technology continues to evolve, it is important to stay up to date with regulations and consider the legal implications of forks in blockchain-based projects.