The market quote for Bitcoin on October 15, 2015 at 5:00 pm EST was $255.64 US according to CoinDesk.com on the site’s Price & Data page. At that same moment, I was very fortunate to have been attending a presentation entitled the Bitcoin Seminar that was just starting at the law firm of Kaye Scholer in midtown Manhattan. Coincidentally, the firm’s address is numerically just 5.64, well, whatevers¹ away at 250 West 55th Street.
Many thanks to Kaye Scholer and the members of the expert panel for putting together this outstanding presentation. My appreciation and admiration as well for the informative content and smart formatting in the accompanying booklet they provided to the audience.
Based upon the depth and dimensions of all that was learned from the speakers, everyone attending gained a great deal of knowledge and insight on the Bitcoin phenomenon. The speakers clearly and concisely surveyed its essential technologies, operations, markets, regulations and trends.
This was the first of a two-part program the firm is hosting. The second half, covering the blockchain, is scheduled on Thursday, November 5, 2015.
The panelists included:
- Kathleen H. Moriarty, Esq., partner at Kaye Scholer
- Evan L. Greebel, Esq., partner at Kaye Scholer
- Cameron Winklevoss, Co-Founder & President of Gemini
- Tyler Winklevoss, Co-Founder & CEO of Gemini
- Peter Van Valkenburgh, Research Director at Coin Center
- Keith McGowan, Partner at BDO
The following are my notes from this 90-minute session:
1. What is a “Virtual Currency” and the Infrastructure Supporting It?
- Bitcoin is neither legal tender nor tied to a particular nation.
- Bitcoin is the first means available to move value online without third-party trusted intermediaries.
- Bitcoin involves a series of decentralized protocols, consisting entirely of software, for the transfer of value between parties.
- Only 21 million Bitcoins will ever be created but they are highly divisible into much smaller units unit called “satoshis” (named after the mysterious and still anonymous creator of Bitcoin who goes by the pseudonym Satoshi Nakamoto).
- The network structure for these transfers is peer-to-peer, as well as transparent and secure.
- Bitcoin is a genuine form of “cryptocurrency”, also termed “digital currency”²
- The networks use strong encryption to secure the value and information being transferred.
- The parties engaged in a Bitcoin transaction often intend for their virtual currency to be converted into actual fiat currency.
2. Benefits of Bitcoin
- Payments can be sent anywhere including internationally.
- Transactions are borderless and can operate on a 24/7 basis.
- Just like email, the network operates all the time.
3. Bitcoin Mining and Bitcoin Miners
- This is the process by which, and the people by whom, bitcoins are extracted and placed into circulation online.
- “Miners” are those who use vast amounts of computing power to solve complex mathematical equations that, once resolved, produce new Bitcoins.
- The miners’ motivations include:
- the introduction of new Bitcoins
- their roles as transaction validators and maintainers of the blockchain
- All newly mined bitcoins need to be validated.
- Minors are rewarded for their efforts with the bitcoins they extract and any additional fees that were volunteered along with pending transactions.
- Miners must obey the network’s protocols during the course of their work.
- Security is the central concern of all participants in Bitcoin operations.
- Notwithstanding recent bad publicity concerning incidents and indictments for fraud (such as Mt. Gox), the vast majority of bitcoin transactions do not involve illegal activity.
- The Bitcoin protocols prevent Bitcoins from being spent twice.
- Measures are in place to avoid cryptography keys from being stolen or misused.
- There is a common misconception that Bitcoin activity is anonymous. This is indeed not the case, as all transactions are recorded on the blockchain thus enabling anyone to look up the data.
- Bitcoin operations and markets are becoming more mature and, in turn, relatively more resistant to potential threats.
5. Using Bitcoins
- Bitcoin is secured by individual crypto-keys which are required for “signing” in a transaction or exchange.
- This system is distributed and individual keys are kept in different locations.
- Once a transaction is “signed” it then goes online into the blockchain ledger³.
- The crypto keys are highly secure to avoid tampering or interception by unintended parties.
- Bitcoin can be structured so that either:
- multiple keys are required to be turned at the same time on both sides of the transaction, or
- only a single key is required to execute a transaction.
- By definition, there are no traditional intermediaries (such as banks).
6. Asset Custody and Valuation
- Financial regulators see Bitcoin as being a money transmission.
- Currently, the law says nothing about multi-keys (above).
- Work is being done on drafting new model legislation in an attempt to define “custody” of Bitcoin as an asset.
- Bitcoin services in the future will be programmatic and will not require the trusted third parties. For example, in a real estate transaction, if the parties agree to terms then the keys are signed. If not, an arbitrator can be used to turn the keys for the parties and complete the transaction. Thus, this method can be a means to perform settlements in the real world.
- Auditing this process involves public keys with custodial ownership. In determining valuation, the question is whether “fair value” has been reached and agreed upon.
- From an asset allocation perspective, it is instructive to compare Bitcoin to gold insofar as there is no fixed amount of gold in the world, but Bitcoin will always be limited to 21 million Bitcoins (see 1. above).
7. US Regulatory Environment
- Because of the Bitcoin market’s rapid growth in the past few years, US federal and state regulators have become interested and involved.
- Bitcoin itself is not regulated. Rather, the key lies at the “chokepoints” in the system where Bitcoin is turned into fiat currency.
- US states regulate the money transfer business. Thus, compliance is also regulated by state laws. For example, New York State’s Department of Financial Services issues a license for certain service companies in the Bitcoin market operating within the state called a BitLicense. California is currently considering similar legislation.
- Federal money laundering laws must always be obeyed in Bitcoin transactions.
- The panelists agreed that it is important for Bitcoin legislation is to protect innovation in this marketplace.
- The Internal Revenue Service has determined Bitcoin to be a tangible personal asset. As a result, Bitcoin is an investment subject to capital gains. As well, it will be taxed if used to pay for goods and services
8. Future Prospects and Predictions
- Current compelling use cases for Bitcoin include high volume of cross-border transactions and areas of the world without stable governments.
- Bitcoin’s success is not now a matter of if, but rather, when. It could eventually take the emergence of some form of Bitcoin 2.0 to ultimately succeed.
- Currency is now online and is leading to innovations such as:
- Programmable money and other new formats of digital currency.
- Rights management for music services where royalties are sent directly to the artists. (See Footnote 3 below.)
9. Ten Key Takeaway Points:
- Bitcoin is a virtual currency but it is not anonymous.
- The key legal consideration is that it involves a stateless but trusted exchange of value.
- Bitcoin “miners” are creating the value and increasing in their computing sophistication to locate and solve equations to extract Bitcoins.
- Security is the foremost concern of everyone involved with Bitcoin.
- Because Bitcoin exchanges of value occur and settle quickly and transparently (on the blockchain ledger), there are major implications for online commerce and the securities markets.
- Government regulators are now significantly involved and there are important distinctions between what the states and federal government can regulate.
- The IRS has made a determination about the nature of Bitcoin as an asset, and its taxable status in paying for goods and services.
- The crypto-keys and “multi-signing” process are essential to making Bitcoin work securely, with neither borders nor third-party intermediaries.
- Real estate transactions seem to be well-suited for the blochchain (for example, recording mortgages).
- Comparing Bitcoin to gold (as a commodity), can be instructive in understanding the nature of Bitcoin.
1. Is there a conversion formula, equivalency or terminology for the transposition of address numerals into Bitcoin? If one soon emerges, it will add a whole new meaning to the notion of “street value”.
2. See also this May 8, 2015 Subway Fold post entitled Book Review of “The Age of Cryptocurrency”.
3. For two examples of other non-Bitcoin adaptations of blockchain technology (among numerous other currently taking place), see the August 21, 2015 Subway Fold post entitled Two Startups’ Note-Worthy Efforts to Adapt Blockchain Technology for the Music Industry and the September 10, 2015 Subway Fold post entitled Vermont’s Legislature is Considering Support for Blockchain Technology and Smart Contracts.