Blockchain Research: Bitcoins, Cryptocurrency, and Distributed Ledgers, 0618 COBJ, Vol. 47, No. 6 Pg. 10
| Author | MARK POPIELARSKI, J. |
| Position | Vol. 47, 6 [Page 10] |
Bitcoins, Cryptocurrency, and Distributed Ledgers
MARK POPIELARSKI, J.
LEGAL RESEARCH CORNER
“Blockchain technology is complex, but the idea is simple. At its most basic, blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information but anything of value—money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes—can be moved and stored securely and privately. On the blockchain, trust is established, not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever code.” [1]
The rapid development and implementation of blockchain technology throughout the global economy has created many new opportunities for investing, purchasing goods and services, compensating employees, and streamlining business processes. However, like many technological developments that have occurred over the past several decades, the legal system has struggled to keep pace. This unsettled landscape has created unique challenges for attorneys tasked with advising clients on the many potential legal implications posed by the increased proliferation of virtual currencies and the repurposing of blockchain technology for other economic uses. This article explains this new technology, examines its legal and economic implications, and provides a roadmap for researching these issues.
A New Field of Research Emerges
Cryptocurrencies, also known as virtual currencies, represent the most well-known and common use of blockchain technology. Most people have heard of Bitcoin, but it’s just one of many existing virtual currencies, each of which possesses its own separate value and implementation. Because most virtual currencies are designed to keep their owners anonymous and are not tied to any government or its currency, monitoring and regulating cryptocurrencies has created numerous legal challenges. Virtual currencies have been used for the purchase and sale of illicit goods and services, money laundering, investment fraud, and tax evasion, and they have been subject to theft by questionable businesses and hackers.
The increased prevalence of these incidents has sparked many governments to enact or propose new legislation addressing different aspects of the virtual currency market and has prompted regulators to promulgate guidance and commence enforcement actions against individuals and businesses attempting to circumvent existing laws. At the same time, many governmental entities, businesses, and individuals are exploring ways to incorporate the underlying blockchain technology into new tools designed to streamline financial market transactions, secure new methods for satisfying contracts, manage government data, and even establish permanent identification systems for refugees and third-world countries. The rapidly evolving landscape in this area makes researching blockchain technology and advising clients about its potential implications a fascinating, dynamic, and challenging prospect for attorneys.
Overview of Blockchain Technology
Developed by an individual or entity calling itself “Satoshi Nakamoto,” blockchain technology and virtual currencies first gained prominence following the Great Recession of 2008. Crypto-currencies originally were intended to provide a decentralized, anonymous vehicle through which individuals or companies could transact business. As envisioned, the value of these virtual currencies would not be derived from the economic backing of any individual or block of countries (as is the case with fat currencies2 ) and would bypass traditional financial intermediaries such as banks. Instead, these cryptocurrencies would derive monetary value from the significant time and computer power required to create an individual unit of the currency and demand for the relatively scarce units.
Also known as distributed ledgers, the block-chains that serve as the basis for these virtual currencies are created by leveraging the power of one or more computers to process complex computer logic puzzles that can ultimately result in one unit of a particular currency being created (“mined”). Mining virtual currencies usually requires a significant investment in computer processing power and time, which helps ensure that the currency’s market does not become saturated. Once an entity “owns” a unit of the virtual currency, it may be exchanged or transferred to another party through the distributed ledger system.
A distributed ledger tracks the ownership and transfers of units of virtual currency. The transfers occur through a voluntary network of computers owned by many different parties. Each ledger possesses its own cryptographically protected copy of all transactions that have ever occurred for all units of that currency, and every copy of this ledger is updated to reflect changes in ownership. The high levels of encryption for the currencies and ledgers and the decentralized nature of record tracking have made cryptocurrencies particularly resistant to hacking attempts.
Since the inception of cryptocurrencies, many supporting technologies and services have emerged to support their ownership and transfer. Companies now offer virtual “e-wallets” designed to serve as an online storage account for the virtual currency holdings of individuals and entities, and cryptocurrency exchanges have emerged to facilitate the transfer of these currencies between parties.
Recognizing blockchain’s potential utility for creating and maintaining cryptographically secured data and the potential ability to leverage the technology’s decentralized characteristics to expedite common transactions, many governments and businesses are exploring new ways to use blockchains to prevent data breaches, create permanent records, and streamline common backend functions.
An Unsettled Legal Landscape
Legal growing pains often accompany the widespread adoption of cutting-edge technologies. The sudden explosion of cryptocurrencies, individuals and businesses that own them, and services supporting these virtual currencies has resulted in a proliferation of potential legal issues that attorneys, their clients, and governments are struggling to address. Currently, these legal considerations...
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