The Regulation of Bitcoin and Other Digital Currencies

Bitcoin and other cryptocurrencies are based on blockchain technology.  These are revolutionary technologies that that can be utilized in many diverse fields such as finance and healthcare.

The use of Bitcoin and other cryptocurrencies is still in its early stages and is at present, like email in the 1990’s, or for those more technically astute, like modems when the technology transitioned from 28.8 kbps to 56.6 kbps right before the advent of  high speed cable and DSL.

Bitcoin and other cryptocurrencies are also known as digital currencies.

Now, there at least 1,000 digital currencies, with a total market cap of approximately $150 billion.

Bitcoin was the first and is the most well known digital currency and has the largest market capitalization which is currently $70 billion.  Numerous other digital currencies have arisen that have other functions.  Ethereum is a digital currency that can be used with smart contracts that can be self-executing.   A digital currency that has a much faster transaction time than Bitcoin is known as Litecoin.   Banks can send international payments across networks in real-time with Ripple.

Bitcoin was first used in 2009.  Bitcoin was created in order to provide more privacy, a lower transaction cost, and to offer protection from online thefts as occurred through providers such as PayPal.

The blockchain technology utilized by Bitcoin allows individuals and companies to establish a level of trust with unknown parties over the Internet.  Bitcoin allows for transfers of any type of digital information in a quick, secure, and verifiable fashion anywhere in the world.  Large corporations including IBM and NSADAQ, and even some governments around the world are in the process of utilizing blockchain technology.

Bitcoin is a digital currency that is created electronically.  It utilizes peer-to-peer technology to operate which means that there is no central authority such as a government or bank involved in the transactions.  Each transaction made with Bitcoin is recorded on an online ledger known as a blockchain that is very similar to a standard accounting ledger.  Anyone in the world can check to verify that the transaction took place.

The production process (mining) for Bitcoin involves people and businesses from all around the world operating computers that use special software designed to solve mathematical problems.

Bitcoins can be obtained in many different ways.  In addition to mining, Bitcoin can be obtained by exchanging a currency like the U.S. dollar for bitcoins on an online exchange such as Coinbase.

Bitcoins can also be obtained in exchange for goods or services.   Even some law firms are accepting payment in bitcoins.   Another method of obtaining Bitcoin is through a process known as “Bitcoin mining.”  This involves using special software to solve complex math problems in order to validate the authenticity of new network transactions.   Bitcoin miners are paid in Bitcoins.

While previous digital currencies suffered from the problem of double spending, where on could commit to one transaction, and if they were quick enough, able to commit to yet another transaction using the original amount spent, Bitcoin eliminates the possibility of the same Bitcoin being spent by more than user through the use of public-key cryptography in which both a public and private cryptographic key are generated.

Each user is assigned both a public and private key to conduct and authenticate all of their Bitcoin transactions.   Using Bitcoin does allow for a certain level of privacy.  However, it is not completely anonymous.  It is closer to being considered as pseudo-anonymous.

Tracking transactions involving large quantities of Bitcoins is possible by using sophisticated computer analysis on the blockchain.  Thus, it is possible for law enforcement using currently available technology to obtain information on individuals that are involved in Bitcoin transactions.

The use of Bitcoin is expanding rapidly.  For example, the online Bitcoin exchange known as Coinbase currently has over 8.8 million users and 29 million wallets.  At the present time, there are at least 46,000 merchants accepting Bitcoins via its payment network, including such well known companies as Dish Network, Expedia, and Overstock.com.

Bitcoin has increasingly become accepted around the world for its use in storing value, including derivatives, commodities, and securities products.

Consumers with low incomes have had difficulties accessing traditional banking opportunities not only in California and the United States, but also in other parts of the world, where the infrastructure simply does not exist otherwise.  Venezuela is a current case study.  Africa is expected to benefit most greatly from the technology underlying Bitcoin.

Bitcoin provides the billions of consumers around the world that do not have access to traditional banking opportunities a mobile platform to store and transact money.  Bitcoin can be transacted outside of normal banking business hours and does not require a visit to a brick-and-mortar branch.

Bitcoin is also an excellent method for transferring money internationally.  The transaction fees are lower than most currency exchange fees or Western Union.

Bitcoin offers more protection to merchants due to the fact that transactions cannot be reversed which eliminates the possibility for chargebacks or credit fraud, or data privacy leaks by hackers or scammers.  Bitcoin also protects consumers, who ultimately have a lower risk of credit phishing scammers and/or hackers from collecting, and ultimately exploiting, sensitive financial data.

A common misconception is that digital currencies are lightly regulated and transactions are allegedly essentially anonymous.  The truth is that digital currencies are highly regulated and it is possible for law enforcement to trace any particular Bitcoin transaction, much more so actually than paper currency.

Additionally, people and companies engaging in bitcoin-related business are heavily regulated by many regulatory authorities.  The United States Department of Treasury – Financial Crimes Enforcement Network known as FinCEN regulates bitcoin businesses that operate like Coinbase in the same way it regulates traditional money services businesses.  Coinbase complies with the same FinCEN reporting requirements as companies such as Western Union, by filing “Suspicious Activity Reports” meeting FinCEN-prescribed thresholds.

Numerous states such as Washington and New York, have regulations that cover Bitcoin-related businesses.

Many states are contemplating regulations even more stringent than those covering traditional financial services businesses.  On July 25, 2017, the SEC issued guidance covering what are known as Initial Coin Offerings, and the CFTC has stated that its regulations can apply to Bitcoin-related transactions.

Bitcoin is also anything but anonymous.  Bitcoin transactions can be tracked via the blockchain, which is a publicly viewable ledger. See Nicholas Godlove, Regulatory Overview of Digital Currency, 10 Okla. J. L. & Tech 71 (2014).

Because bitcoin transactions can be reverse-engineered via the blockchain, using bitcoin for money laundering or other illicit purposes “does not seem . . . particularly attractive.”

The European Union recently issued a report concluding that criminal use of digital currencies is “quite rare” due to transaction fees and a lack of sophistication when it comes to the technology tied to using them.

A recent case in the Northern District of California clearly demonstrates that Bitcoins are not anonymous or untraceable.  In that case two former federal agents were charged on March 25, 2015 with Bitcoin money laundering and wire fraud – in that case Bitcoin tracing analysis was used.

Some argue that the way money transmission is regulated may impede or stifle the growth of such new technology.  For example, payment companies in the United States are at present forced to have regulatory conversations with 53 states or territories rather than dealing with one federal body such as is done in the United Kingdom.

Any successful regulatory scheme will balance promoting the profound benefits of global banking via digital currency and protecting the public at large with sensible law making.

Contact attorney Nathan Mubasher for a free consultation and evaluation of your case.

SCHEDULE A FREE CONSULTATION TODAY WITH ATTORNEY NATHAN MUBASHER.

Call (800) 691-2721 and let’s talk about your options.

CONTACT INFORMATION FOR NATHAN MUBASHER:

Law Offices of Nathan Mubasher
2621 Green River Rd, Ste 105 PMB 403
Corona, CA 92882
tel 1-800-691-2721 | fax 1-310-356-3660
www.mubasherlaw.com

DISCLAIMER:

Thank you for reading. I hope I could have been educational as I endeavor to provide my knowledge as a free public service. Please note that all the materials and information on this blog are general analyses made available for the public’s general informational purposes only. These analyses are not in any way intended to serve as specific legal advice to be applied in your particular situation. Although I am an attorney, absent a signed retention and engagement letter, I am not your attorney. There are no exceptions to this rule. Moreover, you shall not rely on the information I am providing you, as it is only for your general knowledge and educational purposes, since this information would likely change based on any additional facts. Thus the transmission and receipt of information on this blog by anyone does not form or constitute an attorney-client relationship. My knowledge of laws is limited to California. Anyone receiving any information on this blog should not act upon the information provided without first obtaining the services of professional legal counsel licensed in their respective jurisdiction. Best of luck.

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What Attorneys Should Know About Bitcoin and More Importantly, Blockchain

Attorneys should increase their familiarity with Bitcoin and blockchain technology.

Assisting in securely transferring assets constitutes a substantial percentage of the work performed by many attorneys.  This form of asset management includes mortgage closings, sales of businesses, divorce cases and securities transactions.  Attorneys have a professional and ethical duty to oversee that such transactions occur successfully.  Because blockchain promises to provide such facility at volume, attorneys should become more knowledgeable about Bitcoin and the blockchain technology that makes it possible.

Some may argue that the odds are against Bitcoin gaining universal acceptance as an alternative currency.  Bitcoin was embroiled in controversy in its early years with the Silk Road, and more recently, Alphabay, both dark markets that ended up being disbanded.  However, it has become clearer over time that the technology is not to blame.  Criminals tend to be among the first adopters of any successful technology.  The internet is a great example.  However, when the drama and mystique are pushed aside, what is Bitcoin really?

Bitcoin is based on the blockchain technology that allows a transparent and efficient transfer of an asset between two parties in a decentralized and cryptographically secure ledger.  Blockchain is best thought of as a very innovative ledger that is distributed in a very secure manner that allows it to be “trustless.”

The blockchain technology records ownership of a particular asset such as a Bitcoin, and this information is transmitted across the entire ledger from the registered owner of the asset to the collection of parties in a network using an anonymous key.  If there is any change in ownership of an asset by any member of the anonymous network it is recorded and broadcast across the entire network yet again, including the anonymous authorization key that is used to verify the legitimacy of the transfer.  The risk of fraud and simple bookkeeping errors are drastically reduced because the entire record of the transactions is recorded by numerous parties across the network.  Blockchain technology thus can be used to record medical records, educational records and business records in a decentralized way that blows wide open the accessibility, malleability and applicability of such information.  This is especially true since because the information is no longer centralized, there is no single point of failure, that once struck, could bring the whole system down.  One power outage, or hack, has disabled many a large hospital or company in the past.

Blockchain technology is thus a very relevant technology for attorneys due to the fact that, if it does become widely adopted, not only for its use with digital currencies like Bitcoin, but for its use with digital assets or digital asset protocols, it will reduce the need for many transactions that are currently very complex, and that take a lot of time, such as escrow accounts and title checks.

The fact is that many Fortune 500 companies are currently investigating as to how they will be able to utilize the blockchain technology in their operations. These companies include many large banks and utility companies.  Banks for example are investigating how to do away with currency exchange fees that are incurred by exchanging one currency into a digital asset by utilizing a system called Ripple that automatically converts the house currency with the target currency in a matter of seconds saving banks potentially hundreds of millions of dollars a year.

Other cryptocurrencies such as Ethereum have already been developed and are currently being fine tuned to utilize them in corporate finance and other industries using “smart contracts.”

These newer cryptocurrencies are not intended for widespread use by consumers.  Instead they were developed and were intended to be used by businesses to utilize to ensure that the recording of the ownership of an asset, or any transfers of ownership can proceed faster and at a lower cost.  Some have called blockchain the future, as it is conceivable that as everything is moved on to blockchain, that such blockchains will act as the backbone for the Internet of Everything (IoE) as well as applications for artificial intelligence.

Attorneys that work in specialized areas of the law including securities law and litigation finance are likely to be among the first to become aware of blockchain technology in their practices.  In fact, blockchain technology has just recently begun to be utilized to speed the process for clearing securities.  Another potential use for blockchain technology would be in litigation finance where the companies could use it to create smart contracts that would allow them to become more efficient.

As we head toward the end of 2017, attorneys who haven’t already, should become more familiar with both Bitcoin and blockchain technology so that they will understand what a potential client is referring to.  Clients have already begun contacting attorneys asking for more information on using a smart contract based on blockchain technology.  Because blockchain is now moving from the innovation phase into the early adoption phase, those attorneys who understand blockchain now will be in the best position to be able to provide the clients much more complete legal services.  As more services move on to the blockchain, including court and county records, knowledge acquisition on blockchain will likely become mandatory to maintain competence as a legal professional in various practice areas.

See you on the blockchain!

Contact attorney Nathan Mubasher for a free consultation and evaluation of your case.

SCHEDULE A FREE CONSULTATION TODAY WITH ATTORNEY NATHAN MUBASHER.

Call (800) 691-2721 and let’s talk about your options.

CONTACT INFORMATION FOR NATHAN MUBASHER:

Law Offices of Nathan Mubasher
2621 Green River Rd, Ste 105 PMB 403
Corona, CA 92882
tel 1-800-691-2721 | fax 1-310-356-3660
www.mubasherlaw.com

DISCLAIMER:

Thank you for reading. I hope I could have been educational as I endeavor to provide my knowledge as a free public service. Please note that all the materials and information on this blog are general analyses made available for the public’s general informational purposes only. These analyses are not in any way intended to serve as specific legal advice to be applied in your particular situation. Although I am an attorney, absent a signed retention and engagement letter, I am not your attorney. There are no exceptions to this rule. Moreover, you shall not rely on the information I am providing you, as it is only for your general knowledge and educational purposes, since this information would likely change based on any additional facts. Thus the transmission and receipt of information on this blog by anyone does not form or constitute an attorney-client relationship. My knowledge of laws is limited to California. Anyone receiving any information on this blog should not act upon the information provided without first obtaining the services of professional legal counsel licensed in their respective jurisdiction. Best of luck.