CBA Record January 2018

If the year 1849 is remembered for the Gold Rush, the year 2017 might be remembered for the Cryptocurrency Rush. Many know someone who has invested in the cryptocurrency boom, with strange-sounding products like“Bitcoin,”“Litecoin,”“Ethereum,”and“Monero.” In 2017, the world’s most popular cryptocurrency, Bitcoin, increased by approximately 2000% and has fluctuated up and down from there. As of December 18, 2017, the cryptocurrency market cap (including all knownmajor cryptocurrencies) had reached approximately $600 billion, with Bitcoin accounting for roughly half of the total cryptocurrencymarket capitaliza- tion and with one Bitcoin valued at just under $20,000. The market, however, is extremely chaotic: by December 22, 2017, Bitcoin had fallen 40% and the total cryptocurrency mar- ket cap had fallen 20%. Market capitalization can be tracked on the popular website, Coin Market Cap, available at https://coinmarketcap.com.

S KEPTICS CONTEND THAT CRYPTOCURRENCY IS a fad or a bubble about to burst into nothing. Others contend that cryptocurrency is here to stay as a permanent alternative to government currency. Indeed, many sophisticated entities, such as government regulators, banks, and large exchanges such as the Chicago Mercantile Exchange (“CME”) and Chicago Board Options Exchange (“CBOE”) have taken actions suggesting that cryptocurrency could become a permanent fixture in global commerce. Investors, entrepreneurs, and established businesses now have a wide range of options to capitalize on cryptocurrency. Some transactions are regulated, others are not. Some investments are legitimate, others are not. The business and regulatory landscape is volatile, not unlike cryptocurrency prices. New products and regulatory pronouncements emerge on a virtually daily basis . The goal of this article is to serve as a primer on the marketplace, the regulatory landscape, and issues that attorneys and their clients may have to deal with in the coming years. Overview of Cryptocurrencies Cryptocurrencies are a non-government backed form of electronic money. Bitcoin is the most popular cryptocurrency. Despite its name, it produces no actual “coin.” Instead, the currency relies on blockchain technology to verify transactions made over the Internet. The users are in a network tied together through the Internet and open-source software. Their computers verify transac- tions through “blockchain” and post to a permanent distributed ledger that is available to all users in the network. Transactions are processed through a combination of a “public key” and a “private key.” All users know the unique public keys of the other users. Each user has her own private key that is used to unlock funds for transactions transmitted by other users. For example, Bitcoin digital wallets keep a private number (key) that is used to sign transactions. The SEC defines blockchain as a “type of distributed ledger, or peer-to-peer database spread across a network, that records all transactions in the network in theoretically unchangeable, digitally recorded data packages called blocks.” See SEC v. Recoin (Com- plaint) at 7, n. 2. The blocks are linked together based on time and referenced to previous blocks on the chain, using cryptographic

technology to record the transactions. Cryptocurrencies, such as Bitcoin and Ethereum, rely on this technology to track and verify their transactions. Users who allow their computer facilities to help the network verify and record transactions are called “miners.” These miners are compensated via the cryptocurrency used in the network. A great deal of computing power—and electricity— is needed to facilitate mining (verification and recordation). Some entrepreneurial college students mining from their dorm rooms have been “busted” for overheating their dorm rooms and burden- ing their universities’ electricity. Cryptocurrencies have legitimate e-commerce uses. Some retailers have begun accepting the currency. The fact that cryp- tocurrency transactions such as Bitcoin cannot be canceled once completed helps prevent a common problem of double using of funds in online commerce—this is known as “chargeback fraud.” They also provide the ability to store currency and wealth for those that live in places that do not have stable banking systems. The use of cryptocurrency also gives purchasers some comfort that their transactions are more secure, because confidential financial information is not stored and purchasers retain their funds until the moment of the transaction. The Origins of Cryptocurrency The most popular cryptocurrency, Bitcoin, was created in 2008 by a mysterious person or group of people that used the name “Satoshi Nakamoto,” which is believed to be a pseudonym. He (or they) created Bitcoin with the belief that the world needed an electronic payment system in which individuals and entities (including those who are strangers to each other) could trade based on cryptographic proof, rather than trust in the counterparty. This proof would enable willing parties to transact directly with each other (“peer-to-peer”) without the need to involve a trusted third party like a bank. The Spot Market for Cryptocurrency Investors of all types have ready access to the cryptocurrency “spot market,” which refers to the underlying market for a good or commodity, in this case cryptocurrencies. The “spot market” is different from the “futures” or “forward” markets, which deal with contracts for the future delivery of a good or commodity. In

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