Bits and Blocks: Navigating the Legal Landscape of the Blockchain Economy
GALE L. POOLEY AND LARISSA LEE, J.
“We can only see a short distance ahead, but we can see plenty there that needs to be done.”
– Alan Turing
A news website recently reported that a New York man was arrested after making millions of dollars selling purported Bitcoins, which were actually just Chuck E. Cheese coins with a capital “B” written in permanent marker. huzlers.com, Bitcoin Scam: Man Arrested After Making over $1 Million Selling Chuck E. Cheese Tokens as “Bitcoins,” https://www.huzlers. com/bitcoin-scam-man-arrested-after-making-over-1-million-selling-chuck-e-cheese-tokens-as-bitcoins/ (Dec. 18, 2017). Unfortunately, most people did not scroll to the bottom of the page, which states: “Huzlers.com is the most infamous fauxtire & satire entertainment website in the world,” id., and thousands proceeded to share the story of this “hero” on various social media sites. Josh Hafner, Chuck E. Cheese Tokens Sold as Bitcoins? That’s Not a Real Story, USA Today, https://www.usatoday.com/ story/news/nation-now/2017/12/21/chuck-e-cheese-tokens-sold-bitcoins-thats-not-real-story/973173001/ (last updated Dec. 21, 2017 1:59 p.m.).
As an economist and an attorney with an interest in cryptocurrencies and blockchain technology, we believe this fake news article – and the widespread sharing of this fake story – helps to demonstrate society’s general lack of understanding about Bitcoin and, more broadly, the technology that underlies it. Bitcoin is not an actual physical coin (despite the stock images you may see online), and its store of value cannot be transferred as easily as handing a coin to someone on the street. Attorneys may encounter various situations in which a basic understanding of Bitcoin and the blockchain is helpful or even necessary to represent their clients effectively.
This article is intended to be a primer for attorneys who are (mostly) unfamiliar with this Brave New Innovation of technology and security. First, we provide an overview of Bitcoin and other cryptocurrencies. Second, we discuss the blockchain: a type of distributed ledger technology that makes all of this possible. Third, we tackle why it is (or should be) important for you, as an attorney, to have a basic understanding of this technology.
What Is It?
Bitcoin first emerged as a concept in a whitepaper, published in October 2008 by the infamously pseudonymous Satoshi Nakamoto. Nakamoto envisioned a “purely peer-to-peer version of electronic cash” that would allow one party to send an online payment to another party directly, without the help of a financial institution or other intermediary. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (Oct. 2008), http://bitcoin.org/bitcoin.pdf. Rather than having to rely on trust to secure these transactions, Nakamoto created a system that relied on proof. That is, cryptographic proof that is so strong that it would eliminate common issues in traditional third party approved transactions, such as high transaction costs, reversal of payments, and double spending. Id.
Nakatmoto referred to Bitcoin as “electronic cash,” but in the last decade there has been serious debate as to what exactly a Bitcoin is. Since 2014, the IRS has classified Bitcoin and other cryptocurrencies as property, rather than currency – the same classification used for stocks and bonds. IRS News Release, IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply, (March 25, 2014), https://www.irs.gov/ newsroom/irs-virtual-currency-guidance. Although a Bitcoin on its own is probably not a security, depending on how it is pooled and how it is managed, it could become one. This elusive enigma known as Bitcoin is probably best described as a “cryptocurrency,” i.e., digital cash.
A Bitcoin by Any Other Name…
Bitcoin may be the first, but it is not the only cryptocurrency (or “crypto,” as the cool kids like to say). In fact, as of March 29, 2018, there are 1,594 cryptocurrencies. crypto-currency market capitalizations, http://coinmarketcap.com (last visited March 29, 2018). The top five by market capitalization are Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin. These five currently hold 74.55% of the total market capitalization. Id. Like Bitcoin, these cryptocurrencies have experienced wide volatility, especially in the past few months as regulators attempt to keep up or even begin regulation. Currently, the market capitalization for all cryptocurrencies is $277 billion, down 66% from an all-time high of over $817 billion in January of this year. Id. at https://coinmarketcap.com/charts/. A single Bitcoin currently sells for $7,465.77, but on December 16, 2017, Bitcoin hit an all-time high of $19,192.11. https://charts.bitcoin.com/ chart/price. There are between 150,000 and 500,000 Bitcoin trades every day, and thousands more trades of other cryptocurrencies. https://charts.bitcoin.com/chart/daily-transactions; https://coinmetrics.io/charts/#left=txCount.
Legal Environment of Bitcoin
The legal status of Bitcoin and other cryptocurrencies varies widely – Japan recently recognized Bitcoin and a few...