I think the main problem is if someone causes harm while using your service you will be held responsible. If you goto wal mart and someone pours water on the floor and you slip and fall you would sue wal mart. Lol.
There is a risk. If someone commits credit card fraud via your proxy, or spams, you being responsible for the IP can be held accountable.
I dont think this is true. If this were true, if I committed credit card fraud then my ISP would be responsible because it's their IP ?? Service providers are protected against this type of thing, and if you're running a proxy, you're a service provider. Not to say your IP might not be blocked or your domain end up on a spam filter or other various nasty side-effects, but legally speaking, I think you're safe.
Assuming that you are not an ISP, you are bound by the TOS of the datacenter where the server resides. When they receive an abuse report that your server's IP was used to commit credit card fraud or disseminate spam, they'll forward it to you & hold you responsible.
You dont need to be an ISP to be considered a service provider... Though, you're right, your host or data center may hold you responsible and terminate your account. That would fall under "other nasty side effects". But the OP was asking about legal problems.
so, should I cancel my proxy ,as it can cause hassle? I mean its not earning anything, as I just have my own links on it.
It's your call... If you are on a dedicated server you can use TOR or something similar as a proxy for all traffic on the particular IP on which the proxy site is hosted on, & the proxy will be behind a proxy itself Relatively safer
I'd either sell it or throw up Adsense on the main page and put ads on the proxied pages with a network that allows proxied ads. I agree with Chem, proxies are a really hot selling thing right now, with a decent domain, design and some traffic, you could probably get some nice offers for it. I still don't agree with the legal implications though.