Article

• Publication year: 2014
• Pages: 40
• Citation: Vol. 27 No. 4 Pg. 40

Article Vol. 27, No. 4 Pg. 40 Utah Bar Journal August, 2014

July, 2014

What Every Lawyer Should Know About Bitcoins

Brad Jacobsen and Fred Peña

For those who think Bitcoins and other virtual currencies are a passing fad, remember that many people thought the same thing about the Internet. Given the globalization of economies and the ease of transferring value via “virtual currencies,” we believe that Bitcoins (as well as other virtual currencies) are only going to become more ingrained in our everyday lives.

So what do you need to know now? Below are a few FAQs that we have put together to help you understand some of the basics of Bitcoins and other virtual currencies.

Q: What is a Bitcoin?

A: Bitcoins (like physical commodities) are intrinsically valued based on supply and demand. They are valued at the price someone will pay in order for someone else to sell. Supply, laws, regulations, public perception, utility and a host of other variables contribute to the valuation of virtual currencies.

A Bitcoin is a virtual asset that does not exist in the physical world, consisting of an entry on a public ledger known as a "Blockchain," and is owned by the possessor of a secret number, or "private key." The private key has a mathematical relationship with the public number in the ledger entry. The public ledger contains a chronological record of all of the prior ownership changes of the Bitcoin. This is similar to the Stanley Cup that has indicated on the Cup the team, players, and coaches that won the championship. Like the Cup, you can see in the Bitcoin (the ledger entry) itself the identity of the most recent owner. The Bitcoin is transferred to the next owner when the next owner gives a public key and the previous owner uses his private key to publish a record into the public ledger announcing the ownership has changed to the new public key.

Sending Bitcoins from one user to another is done using Bitcoin software. Each prospective Bitcoin user uses the software to create a Bitcoin wallet, which is simply a file containing randomly generated numbers that are treated as the public-private key pairs for future Bitcoin transactions. The public key is much like an e-mail address; it is an endpoint for a transaction. Much like an e-mail address is given out to a sender in anticipation of receiving a message, a Bitcoin address is given out in anticipation of receiving a payment. Bitcoins sent to a Bitcoin address are owned by the person who has knowledge of the private key associated with the address.

The "Bitcoin Network" is a system that creates and tracks the transfer of ownership of each Bitcoin and acts as a distributed ledger combined with a...