Us lawyers love our definitions and precise language. One fun aspect of practicing law is the use of language to achieve our clients’ goals. It is helpful to know the specific definition of a word to properly articulate the argument we are trying to make, or the piece of information we are trying to find through discovery.
The problem with cryptocurrencies is that the area is so new, these definitions are still fleshing themselves out mostly through colloquial use and associated jargon. We don’t yet have legal definitions of a great many concepts that have evolved from this new technology. Words like “virtual currencies,” “mining,” “proof of work,” “wallets,” and “blockchain” are perfect examples. The goal of this and the next few posts is to explain these terms such that the reader will be able to identify the concept more than the specific term.
Cryptocurrency. Within the space, most everyone – users, investors, companies, exchanges, media, etc. – uses the term “cryptocurrency,” or “crypto” for short. However, to confuse things the IRS has been using the term “virtual currency” in its filings. For example, the IRS filed a John Does summons in 2016 where it sought information from Coinbase, Inc. (a US-based dollar/cryptocurrency exchange) for virtual currencies which it defined as:
“Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some situations, virtual currency operates like “traditional currency,” i.e., the coin and paper money of a country that is designated as legal tender. However, it does not have legal tender status in any jurisdiction. A virtual currency is considered “convertible” if it has an equivalent value in traditional currency or acts as a substitute for traditional currency. Convertible virtual currency can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other traditional or virtual currencies.” See Memorandum in Support of Ex Parte Petition For Leave to Serve John Doe Summons. https://www.justice.gov/opa/press-release/file/914256/download (citations omitted).
While this definition helps to conceptualize crypto in its currency form, this is an already outdated definition and understanding of cryptocurrencies as they are now in 2019. I believe the better term going forward will be “cryptocurrency” or “cryptoasset.” There are far more uses than just a medium of exchange of value and many, if not all, projects and businesses are developing for those other use cases. So much so that the projects being developed are creating a new form of asset class, much like stocks, bonds, etc. Thus, “virtual currency” is far too limiting a term and a practitioner seeking information using that term may miss some key discovery.
So for our purposes, I believe the definition of cryptocurrency or cryptoasset is better understood to be: a digital commodity that is created from and based upon a distributed ledger system, enforced and secured by cryptography. These commodities can act as currencies as a medium of exchange, or as an asset representing a ‘share’ of a company, project, or other underlying value. A “distributed ledger system” will be explained in the next post regarding “blockchain” definitions.
Now that I’ve muddied the water, what is crypto in a more practical sense? At this point you’re most likely to see it is an asset that is being held for investment purposes. If your client says they or the opposing party has a ‘wallet’ with cryptocurrency, you can start thinking whether they have an asset that would fit the definitions described above. If so, then that leads to a whole new realm of discoverable information, which may result in additional assets available for your case.
This blog post will be Part 1 of an ongoing series discussing cryptocurrency and cryptoassets as they relate to South Carolina law and Lowcountry Legal Solutions’ practice areas. If you have questions or wish to know more after reading, please don’t hesitate to contact us…
Cryptocurrencies have been a healthy passion (obsession) of mine for about five years now. In that time, I have been keeping up-to-date on law related news in the space and particularly any news coming out of South Carolina. Outside of federal tax guidance (IRS Notice 2014-21) there has been very little in the way of any official word from federal agencies, and even less from the South Carolina General Assembly or Courts. This slow-walking is perhaps a good thing as the space has organically developed a rapidly growing sub-culture all across the internet – YouTube, for example, has a myriad of regular content channels devoted to every aspect of the ‘crypto space’.
In fact, I am greatly downplaying just how big and rapidly the cryptosphere has grown. Bitcoin (the original cryptocurrency) went live 10 years ago this past January. Since that time, bitcoin went from being the digital plaything of dedicated internet surfers and online Magic: The Gathering players to hitting over $19,000 per coin on the exchanges in December, 2017 – a $325 billion market capitalization. Despite its well-known price volatility, bitcoin has been the number one performing asset (in terms of percent growth) since it was created 10 years ago. Further, more than 2,000 new cryptocurrencies and cryptoassets have been spawned or spun off from bitcoin.
With such incredible exponential growth, the possible angles of discussion are equally numerous. This blog series will therefore focus primarily on two things: (1) the basics of cryptocurrency concepts for the purpose of educating the legal professionals in South Carolina; and (2) the intersection between cryptocurrency and South Carolina law, and specifically those areas which Lowcountry Legal Solutions practices. For our purposes, the majority of these discussions will revolve around bitcoin and the other big cryptoassets (more on these later) as those are the most likely to be encountered in practice.
Why is this important to our profession? While there is a narrative that bitcoin is dead or will die soon, these claims have been greatly exaggerated and consistently proven wrong. See e.g. https://99bitcoins.com/bitcoin-obituaries. Even though past performance is no indication of future growth, I can confidently say as an observer of the space, the growth will continue. Further, as ownership and investment in the space grows, the client who has these assets in their portfolio will come around more and more. As an attorney, or other professional, understanding how ownership and conveyance works is a must. Stay tuned, stay relevant.