Bitcoin, Ether, Cryptocurrency & Such

By Bill Ramsey & Phillip Hampton

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 BitcoinEther, 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.” Some 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 cave man days, we traded goods. Then, as we evolved and became more “civilized” we used precious goods, such as salt, silver or gold, 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. Remember “Silver Certificates” or when Nixon took us off the gold standard for our currency in the 1970s? Since that time, our money is purely “fiat money”—or currency without any intrinsic value established as money by government regulation or law. And now, we rarely use cash or coins—we use credit cards, PayPal or Venmo, or Apple Pay—as most spending transactions are now digital. When we pony up for one of our gadgets, we just 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. And to make them work, you need to have a trusted record keeper to keep track of the transactions to prevent double-spending and to verify balances, etc. An inventor who used the fake name, Satoshi Nakamoto, figured it out.

The solution is the use of “Blockchain” technology that you may have heard about. With Blockchain, there is no centralized ledger. Instead, Blockchain technology uses a network of peers. Every peer has a record of the complete history of all transactions and thus of 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.

If a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone and is no longer forgeable—it can’t be reversed. Transactions such as credit card transactions use a single record keeper, and those transactions can be reversed. Not so with Blockchain or Bitcoin transactions. Once confirmed, they are set in stone.

So, you ask, how do transactions get confirmed? The only way they can be confirmed are by so-called “miners.” This is their job in a cryptocurrency-network. They take transactions, stamp them as legit, and spread them in the network. After a transaction is confirmed by a miner, every node must add it to its database. It has become part of the blockchain. For this job, the miners get rewarded with a token of the cryptocurrency, for example, with Bitcoins.

How do miners “mine?” 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. After finding a solution, a miner can build a block and add it to the blockchain. Mining requires a specific amount of computing power. Once “mined” and there is a consensus in the network, no one on the network can break or change the transaction. These cryptocurrency transactions are irreversible, are not identified with any individual (pseudonymous), and are secure. The transactions are very fast and no one has to give permission for them (other than verification by miners).

The blockchain technology that ensures the veracity and security of cryptocurrency transactions is also getting the notice of the legal technology world. Many envision blockchain being utilized by lawyers 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 potentially is a big step forward in ensuring secure and legal transactions.

There are several different “species” of cryptocurrencies… Bitcoin, Ethereum (Ethers), Ripple (not the wine)LitecoinMoneroDashAugur, and more. 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. On March 25, 2014, the United States Internal Revenue Service (IRS) ruled that Bitcoin will be treated as property for tax purposes as opposed to currency. In fact, for tax purposes, they are treated much like precious metals, such as gold. This ruling had the side benefit of confirming the legality of cryptocurrency in the United States.

Well, that was your primer on cryptocurrency. Now, we must fire up our computers and “mine” some Bitcoin so we can buy more gadgets.

—Bill & Phil

ADDRESS

Neal and Harwell, PLC
1201 Demonbreun Street, Suite 1000
Nashville, TN 37203

CONTACT

Phone: (615) 244-1713
Fax: (615) 726-0573
Email: info@nealharwell.com