What is Bitcoin? What are the legal ramifications?

Over the course of 2013, few other emerging technologies experienced as meteoric of a rise in stature as Bitcoin. It is typical for such a rapid ascendency to bring about a litany of questions. However, the digital currency has proven a bit more difficult to explain than the latest social media craze. What’s Twitter? It’s kind of like Facebook but only statuses! Totally accurate? Of course not. But this is way closer to the pin then you could ever get trying to explain Bitcoin in one sentence. Its comparative complexity does not make it any less worthy of having massive legal ramifications, in fact, quite the opposite. Here is a brief overview of what exactly Bitcoin is, why it is suddenly so relevant, and how it has caused a major legal stir already.

What is Bitcoin?

Bitcoin is a de-centralized digital currency. It has no reserve and no single institution controls it. They are stored purely online. You cannot print them, mint them, or create them in any physical manifestation. In fact, they do not even come in the form of a tangible computer file as one might imagine existing on a hard drive. Instead, a Bitcoin is essentially a record of previous transactions.

If I tell you I gave Bob 3 dollars, Bob then gave Mike the same 3 dollars, and Mike gave them to Alice, we know that those 3 dollars exist without ever having to see the 3 dollars. All someone would have to do is look at the transaction record and know that those same 3 dollars exists as valid currency. This transaction record is public for Bitcoin on a massive general ledger called the “Block Chain”, and instead of using names, Bitcoin associates each person with an address online.

This makes the currency essentially anonymous, as even if I gave Mike (or in this case, the Bitcoin address associated with Mike) 3 dollars, that does not tell me how much money Mike has total. For this I would have to try and find each and every instance of his address amongst a vast sea of others on the massive transaction record list that is the Block Chain. Even if I tried to do this, Mike could protect himself by switching or using multiple addresses. Further anonymity is provided by a user’s encrypted Bitcoin wallet, which only they have the keys too and can be stored offline as an extra measure of security.

Why is it Important?

Bitcoin is the primary player in a growing category of “cryptocurrency”, which promotes itself on being a secure and anonymous way to conduct commerce. Many see inherit value in a currency that considers itself beyond the clutches and control of governments and large banking institutions. As Wired notes, these were particularly important ideals when Bitcoin founder Satoshi Nakamoto published a research paper on his new design in 2008. “The Federal Reserve was introducing ‘quantitative easing,’ essentially printing money in order to stimulate the economy.” Comparatively, Bitcoin offered a currency outside the reach of politicians and large central banks.

While this may sound inherently “black-market” (and we will get to that), supporters argue the currency provides greater security as well as an opportunity to lower payment processing fees. For example, the New York Times notes that, “Retailers typically pay 2 to 3 percent of the value of a customer sale when a credit card is used.” On the other hand, Bitcoin fees range from nothing to under 2 percent. With the ever-increasing efficiency of marketing companies and tracking software, few, if any, other payment methods offer such a secure and discrete service as Bitcoin.

What are the Legal Ramifications?

As touched on above, the currency has a rather robust history with the seedier side of the internet. For a time, it was largely associated with the massive online black market site the Silk Road. As the Guardian notes, “A paper from 2012 estimated that almost one Bitcoin in 20 was spent on the site…” Due to the currency’s anonymity, a buyer could take some comparatively simple precautions that would allow them to purchase drugs and other illegal or high regulated goods with minimal concerns about the transaction being traced. The two were so closely associated that the FBI’s seizure of the Silk Road site in October 2013 caused the Bitcoin market to crash, dropping from $124 USD to $75 USD. Not that it ended up mattering too much, the currency is trading at just over $800 as of early January, 2014, a big win for those who believe in its legitimacy.

Even though the currency has survived and thrived with its’ diminished role in online black markets, many legal questions still persist. Imagine being caught up in litigation where a company’s Bitcoin transaction record becomes integral evidence. Will attorneys go to the complex Block Chain and try to find the needle in the haystack that is the company’s Bitcoin address? The company may keep a separate copy of their transaction records, but an individual employee may not be as diligent, which would prove troublesome in the event that their transactions prove an important aspect in discovery. In the far majority of cases, a potential custodian’s transactions history will be logged in their Bitcoin wallet. However, there has been recent debate about whether or not turning over one’s encryption keys is considered self-incrimination. This debate has been applied to hard drives, laptops, and other digital media, would a Bitcoin wallet fall under this umbrella?

The important thing to realize is that cryptocurrency, specifically Bitcoin, does not seem to be going away any time soon. Litigators must realize that the currency’s drive towards acceptance by mainstream vendors could leave them vulnerable to some very difficult circumstances if they do not take the time to at least familiarize themselves with the technology.