The Oklahoma Bar Journal January 2023

T ransactional L aw

Virtual Currencies Explainer

By Miles Pringle

I F YOU WATCHED THE 2022 SUPER BOWL, you may be excused for concluding that the virtual currency revolution was here, and you were missing out. In fact, it was reported in February 2022 by Bloomberg News, “$112.9 million has been spent on national crypto- related ads since the start of 2020.” For perspective, the number of Americans with expo sure to crypto assets is estimated to be 12%, 1 while approximately 58% own stock. 2 Since the Super Bowl, digital assets have experienced a “crypto winter” in which many notable digital assets were more than 70% off their highs 3 – and that was before the epic collapse of FTX and its sister company, Alameda Research. Here, we will discuss some of the concepts behind virtual currencies so you can have a better understanding of what is occurring.

non-fungible tokens, or “NFTs,” are unique, one-of-a-kind digital tokens that are managed on a blockchain (unlike other virtual currencies that are fungible, i.e. , one token is fundamentally the same as any other token of the same issuance). 9 Theoretically, instead of a car title being recorded on paper, it could be in the form of a digital token. Bitcoin is the original cryp tocurrency, and it was created by Satoshi Nakamoto, a pseud onym for an unknown person or group, in 2008-2009. 10 Bitcoin was intended as a response to the 2008 financial crisis to circumvent the role of banks in the financial system. According to Satoshi Nakamoto, reliance on financial institutions as trusted third par ties to process electronic payments “suffers from the inherent weak nesses of the trust-based model. Completely nonreversible transac tions are not really possible since financial institutions cannot avoid mediating disputes.” 11 Whether or not Satoshi’s premise is true is

dollar value of any crypto currency can fluctuate quite dramatically, e.g. , bitcoin, ethereum and cardano. Currency (CBDC): A fiat currency issued in the form of a digital token by a central bank. 7

The best way to think about a virtual currency is as a virtual token. The U.S. Commodity Futures Trading Commission defines virtual currencies as “a digital representation of value that functions as a medium of exchange, a unit of account, and/ or a store of value.” 4 There are three main types of virtual currencies: 1) Stablecoin: A virtual cur rency that is secured by another form of value – typically the U.S. dollar. 5 For example, USD coin, a prod uct of the FINTECH Circle, trades at a 1-to-1 rate with the U.S. dollar. Circle holds reserves, so it can always exchange with anyone who wants to exchange their USD coin. Theoretically, the value of a stablecoin should be “stable.” 2) Cryptocurrency: A privately issued virtual currency 6 that is not tied to any other form of value. As a result, the

3) Central Bank Digital

Virtual currencies often utilize “blockchain” technology. “At its core, a blockchain is just a database that is maintained by a network of users and secured through cryptography.” 8 The information being maintained can be a ledger of virtual tokens, but it does not have to be. Also, the users main taining the network do not need to be controlled by a single entity – the basis of the term “DeFi” or decentralized finance. A ledger is only one type of information that can be main tained. Blockchain technology may have practical uses beyond virtual currency, such as virtual real estate or medical records. For example,

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