Streams of unintelligible numbers, letters, and symbols feed into a dark-hole, deep within the recesses of the internet. From the other side emerges a reciprocated flow, steeped now with hidden value. Their exchange is secretive, elusive and, with little regulation or assurance to-boot, on the fringes of the law. cryptocurrency may be the way of the future, but what is it? What does exchange entail? And what, above all, does it mean for our legal system?
Difficulty in explaining cryptocurrency arises naturally from its nonexistent physical form and its, at best, vague explanations in the news, in articles, and in podcasts. In the simplest explanation, cryptocurrency is code imbued with meaning and value. Stateless and living on the edges of legality, currency is mined on “server farms” where hundreds, sometimes thousands, of computers solve encrypted calculations to produce cryptocurrency units, such as Bitcoin. After Bitcoin is mined, it can be exchanged for flat currency, often in huge sums. Exchange data is stored through blockchain, a web of time-stamped selling and buying records linked and secured using cryptography. Exchanged through this market, Bitcoin and similar currencies are highly valued, but, until very recently, were fairly unknown to those outside of the system. Over the last few months, there has been an upsurge in popular interest in these currencies, partly due to their lucrative nature, but partly also due to increased interest in management of these currencies by governments worldwide. Although blockchain contains the record of all purchases and sales of cryptocurrency, governments are still working to bring regulation up to speed and resolve questions of tax payment and collection, among other things.
There is little about cryptocurrency that doesn’t seem, at least at first, incredibly suspect. Original suspicion is undoubtedly intensified by the difficulty of answering even simple questions of identity, function, and usage. Images show popular types of cryptocurrency, such as Bitcoin, in familiar form—coins resembling common denominations are held in comparison to the unsuspecting copper-coin embellished with the letter “B.” This representation, however, is for those of us on the outside. It is to facilitate the formation of a mental image for a technology existent only in the digital sphere. As one cryptocurrency expert summed it up: “cryptocurrency is everything and nothing…it is 99% bullshit.” Surely then, our supplementary mental image is needed.
If, as the expert claims, these currencies are everything and nothing at once, why do they even matter? For one thing, the value of these currencies is staggering. At the time of writing this post, a single Bitcoin has a valuation upwards of ten-thousand USD. In addition to this, with a simple Google search, articles abound about rogue mining operations, crypto-criminality, and astounding profiteering. To be fully informed now involves financial literacy at the real and the slightly-less real level.
One of the most salient topics in the cryptocurrency discussion of late is the use and regulation of ICOs (Initial Coin Offerings). ICOs are a fundraising method that utilizes crowdsourcing in order to fund a new cryptocurrency venture. Similar to the well-known IPO (Initial Public Offering), ICOs raise funds by offering early-investors a percentage of a new cryptocurrency in exchange for other forms of this currency, most commonly Bitcoin. Of particular concern with these exchanges is the lack of regulation and potential for fraudulent sales. Unlike with IPOs, fundraising ventures in the US are not regulated by the Securities and Exchange Commission (SEC), meaning that any funds lost may never be recovered. The SEC recently released a statement on cryptocurrencies and ICOs, wherein SEC Chairman Jay Clayton addressed concerns surrounding ICOs, such as limited investor protection and trade without proper licensing. Concluding his statement with urges to investors and market professionals alike to, “ask good questions, demand clear answers and apply good common sense,” the statement leaves the issue of ICOs in the US largely in suspension. While the SEC warns against the potential pitfalls of ICO investment, as of now this form of funding is not bound by normal exchange regulation, but hinges on recommendations of education and alertness to potential fraud.
There should lie interest in the fate of these currencies as it relates to legal systems around the world. At the moment more popular in Asian nations than in Western ones, cryptocurrencies are being debated at a legislative level in order to introduce some regulation to the “wild-west” of exchange. China and South Korea both are taking stands in an effort to curb unchecked cryptocurrency use, and the United States is seemingly following suit if statements by the Securities and Exchange Commission are any indication. The impact of cryptocurrency is something to watch when looking at the future of law and the legal profession within the USA, as regulations are bound to be handed down, creating many-a-job for the nation’s finest: the tax attorney.