Yes, we know — cryptocurrency is not a gadget. We do love our gadgets, but we love money, too, because it can buy us more gadgets. So writing about Bitcoin, Ether and other cryptocurrency seems a natural fit for our monthly gadget. And, since this topic is so nerdy, it really appeals to us.

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Test Drive

Bitcoin, Ether, Cryptocurrency and Such

Yes, we know — cryptocurrency is not a gadget. We do love our gadgets, but we love money, too, because it can buy us more gadgets. So writing about Bitcoin, Ether and other cryptocurrency seems a natural fit for our monthly gadget. And, since this topic is so nerdy, it really appeals to us.

Some say cryptocurrency is the future of money. Others say all cryptocurrencies are Ponzi schemes. Everyone agrees it is a very trendy topic. Banks, accounting firms, governments and securities firms are all researching the topic, and many do not understand the basic concepts behind it.

We believe that Bitcoin and other cryptocurrencies are a logical step in the evolution of money. In caveman days, we traded goods. Then, as we evolved and became more “civilized,” we used precious goods, such as salt, tea, shells or even whiskey as “money.” Next, we created coins out of precious metals and later backed paper money with the equivalent amount of precious metal, such as gold or silver. Since Nixon took us off the gold standard in the 1970s, our money has been purely “fiat money,” or currency without any intrinsic value established as money by government regulation or law.

Now, we rarely use cash or coins, instead using credit cards, PayPal, Venmo or Apple Pay. Most spending transactions are now digital. When we pony up for one of our gadgets, we rarely pay cash — we plop down our credit cards. We pay with “digital cash.”

With credit cards, Venmo, PayPal, etc., you need a payment network with accounts, balances and transactions. For them to work, you need a trusted recordkeeper to verify balances and keep track of transactions to prevent double-spending, among other tasks. An inventor pseudonymously known as Satoshi Nakamoto figured such a system out for digital currency.

The solution is the use of blockchain technology. With blockchain, there is no centralized ledger; the technology uses a network of peers. Every peer has a record of the complete history of all transactions and thus the balance of every account. Theoretically, the peers do not trust one another, so there can be no cheating. The transaction is known almost immediately by the whole network. But the transaction needs to be confirmed.

As long as a transaction is unconfirmed, it is pending and can be forged. Credit-card transactions use a single recordkeeper, and those transactions can be reversed. Not so with blockchain or Bitcoin transactions — once confirmed, they are set in stone and no longer forgeable.

The blockchain technology that ensures the veracity and security of cryptocurrency transactions is getting the notice of the legal technology world.

So, you ask, how do transactions get confirmed? So-called “miners,” whose job in a cryptocurrency network is to confirm transactions. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain. For this job, miners are rewarded with a token of the cryptocurrency, such as Bitcoins.

How do miners “mine”? Using a large amount of computing power, they compete to solve a cryptologic puzzle for the transaction. After they solve the puzzle, they add it to the blockchain and it is set in stone. Once the transaction is “mined” and there is a consensus in the network, no one on the network can break or change the transaction.

So these cryptocurrency transactions are irreversible, not identified with any individual (pseudonymous), and secure. The transactions are very fast, and no one has to give permission for them (other than verification by miners).

HOW DOES THIS APPLY TO THE LEGAL INDUSTRY?

The blockchain technology that ensures the veracity and security of cryptocurrency transactions is also getting the notice of the legal technology world. Many envision lawyers using blockchain for smart contracts, as well as other law firm administrative processes. In fact, we believe that in the near future, we will see blockchain being implemented in a number of industries across the global economy. Is this technology the magic bullet for all the cybersecurity ills that plague us today? Probably not, but we do believe it is potentially a big step forward in ensuring secure and legal transactions.

There are several different species of cryptocurrencies out there, including Bitcoin, Ethereum (Ethers), Ripple (not the wine), Litecoin, Monero, Dash and Augur. There are markets that trade in all of them, and they all have value on the open market. Cryptocurrencies are not legal everywhere, but they are legal in the United States. In 2014, the Internal Revenue Service ruled that Bitcoin will be treated as property as opposed to currency for tax purposes — much like precious metals such as gold. This ruling had the side benefit of confirming the legality of cryptocurrency in the United States.

That was your primer on cryptocurrency. Now, we have to fire up our computers and mine some Bitcoin so we can buy more gadgets.

ABOUT THE AUTHORS

William Ramsey, Partner at Neal & Harwell, and LogicForce Consulting President Phil Hampton are best known for The Bill and Phil Show.

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