By: Joey Rugari
Image Source: https://pixabay.com/illustrations/business-word-cloud-bitcoin-3325386/
In 2009, Bitcoin was first introduced to the world.[1] It began a never before seen form of currency, called cryptocurrency.[2] This new system of currency did not require a centralized institution, or intermediaries to handle transactions.[3] Encrypted transactions kept buyers and sellers secret, but a decentralized public ledger meant that anyone who used the currency could see that the currency had been used – the Bitcoin network kept track of every transaction, so everyone in the network could see that whether the transaction was legitimate.[4] On top of all of this, Bitcoin introduced the concept of the blockchain, and peer-to-peer systems of transactions in general, to the world as an alternative to the traditional systems.[5] So why, then, are the traditional systems so much more enticing, even today?
Establishing a peer-to-peer system of laws or currency will inevitably have to face its greatest challenge in the simplest principle – innovation for innovation’s sake is pointless. Why would one seek to develop a governing framework that is confusing and complex when the traditional alternative is just as, if not more, capable of achieving those same goals?[6] It would seem that the place that such systems would be most valuable are those areas where the traditional systems are at their weakest.[7] Of particular interest are those areas of law and governance with endemic corruption or where agency costs are particularly high.[8] Like high-level corporate decision-making[9], or general currency transactions.[10]
Naturally, that’s where the principles behind blockchain currencies are being strained.[11] If the notion is that transparency of a distributed ledger will protect from predatory practices, then examples of the technology being used to contravene those principles would need to be definitively addressed. Which is why it is of particular note that North Korea has recently started flirting with the notion of cryptocurrency as a method of circumventing international trade sanctions, in the vein of the “petro coin” stunt of Venezuela.[12] While these sorts of claims seem ludicrous, the reasoning in which they are based[13] should be of concern to anyone watching the evolution of blockchain tech, in particular with regard to the current regulatory regimes surrounding currency and security transactions.
And they are. The IRS has taken notice of cryptocurrency as a problem area in modern transactions.[14] Cryptocurrency is an asset like any other and plays a role in the total value of a person’s finances.[15] The problem lies in the dual nature of cryptocurrency, containing aspects of both currency and of securities.[16] While it doesn’t make asset valuation impossible, it does create complications with determining that one actually has cryptocurrency on hand.[17] The peer-to-peer system makes it entirely possible to keep the value of the assets from being included in a complete financial valuation without specific audit due to the fact that, since cryptocurrency is not truly legal tender, it will generally not be readily regulable without there being some form of cryptocurrency sale in which legal tender is received.[18]
An answer to the question posed at the beginning is not likely to be available in a mere six hundred or so words. However, it’s not like this is all just some small issue that will eventually disappear into the void. The great experiment of blockchain technology is still in flux. Theoretical expansion of peer-to-peer systems extends into more and more areas where centralized institutions traditionally stand. Bitcoin lit the spark, and the flame has been burning low and slow ever since. But it’s clear that cryptocurrency is going nowhere, and that blockchain is likely to remain in some form or another as the experiments continue.[19] It’s simply a question of whether regulatory systems can properly integrate the technology into their frameworks as its reach grows. The matters above are but a smattering of the possibilities. It may even never truly take hold. Honestly, the whole thing’s pretty exciting.
[1] See Joshua Davis, The Crypto-Currency: Bitcoin and its Mysterious Inventor, New Yorker, Oct. 10, 2011, at 62.
[2] See Id.
[3] See Id. at 65.
[4] See Id.
[5] See Id.
[6] See Michael Abramowicz, Cryptocurrency-Based Law, 58 Ariz. L. Rev. 359, 371 (2016).
[7] See Id. at 365-66.
[8] See Id. at 365.
[9] See Id. at 361.
[10]See Neil Tiwari, The Commodification of Cryptocurrency, 117 Mich. L. Rev. 611, 618-619 (2018).
[11] See David Gilbert, North Korea is Building Its Own Bitcoin, Vice News (Sept. 18, 2019), https://www.vice.com/en_us/article/9ke3ae/north-korea-is-building-its-own-bitcoin.
[12] See Id.
[13] See Id.
[14] Michael Cohn, IRS Small Business Unit Pivots to Cryptocurrency Enforcement, Accounting Today (Sept. 19, 2019, 4:54 PM EDT), https://www.accountingtoday.com/news/irs-small-business-unit-pivots-to-cryptocurrency-enforcement.
[15] See Id.
[16] See Tiwari, supra note 10, at 614.
[17] See Id.
[18] See Id. at 623-24.
[19] See, e.g., Gilbert, supra note 11.