• Cryptocurrency: A New (and Quickly Developing) Method of Finance
  • April 25, 2018 | Author: Michael D. Waters
  • Law Firm: Jones Walker LLP - Birmingham Office
  • The legal and financial communities are increasingly confronted with issues related to cryptocurrency. What is it, what value does it have, and how is it regulated, if at all? One form of cryptocurrency, bitcoin, began 2017 valued at $1,000 and rose to a high of $19,000 last year.

    Bitcoin is a digital, worldwide payment system. Much of the description of bitcoin used here is derived from a helpful book by Andreas M. Antonopoulos, Mastering Bitcoin, Programming the Open Blockchain, O’Reilly 2017 (hereinafter Antonopoulos). To some extent, the term “bitcoin” is misleading because there are no “coins” in the bitcoin system, not even digital coins. The bitcoin technology permits a sender to transfer value to the recipient, and the principal method by which bitcoins are transferred is the internet. The software for bitcoin can be used on computers, laptops, smartphones, etc. Bitcoin has been described as “a truly disruptive technology with the potential to fundamentally change the way our financial systems operate” (Ryan and Donahue, “Securities on Blockchain,” The Business Lawyer 85 (2017–2018) (hereinafter Ryan and Donahue)).

    Bitcoins are transferred on a “peer to peer” system. Thus, there is no “central bank” or central control over the transmittal of bitcoin. Yet the bitcoin process is ostensibly secure. The primary element that provides security in the transfer of bitcoin is a system of built-in algorithms that regulate the transfer. A process called “mining” competes to find solutions to a mathematical problem, which permits the transfer of bitcoin. Anyone participating in the bitcoin network can be a miner. A miner who successfully solves the mathematical problem collects new bitcoin and transaction fees.

    A user wishing to pay for something with bitcoin will utilize a “wallet,” an application that interacts with the bitcoin protocol. The bitcoin user has an address, which is public and may be re-created by the wallet for each transaction. At the same time, the wallet generates at random a private key that will match the public address for the transaction. These keys allow the user to prove ownership of bitcoin in the bitcoin network.