Cryptocurrency Gives Rise to Legal Questions

by Freeborn & Peters LLP
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A cryptocurrency is a digital asset designed to work as a medium of exchange. Cryptocurrencies use techniques of cryptography – or code-breaking – to generate units of currency and then to secure transactions. Cryptocurrencies are created and managed entirely separate from the central banking system, raising questions about regulation, legality, and the potential for fraud and other abuses.

The first decentralized cryptocurrency – and still the most well-known today – is Bitcoin. Many others have sprung up as well, including Ethereum (known as the first viable alternative to BitCoin), XRP (a cryptocurrency aimed at enabling real-time global payments among traditional financial institutions such as banks and payment providers), and PotCoin (a cryptocurrency to service the legalized cannabis industry).

For most businesses, the difficulty with cryptocurrency is the inability to use it. Under most circumstances, you still have to convert it into an established currency to complete a transaction. For investors and those interested in creating their own cryptocurrencies, they’re interested in understanding whether cryptocurrency is treated as a security and compliance with the Securities Act. They’re also interested in knowing how to use it for traditional transactions such as using it as collateral for loans, and they want to understand how to perfect taking a security interest in the cryptocurrency so that it can be accessed in, for instance, a default.

As the popularity of cryptocurrency grows, legislation will be changing to cover specific legal questions, and litigation will sort out many ambiguities.  In some instances, related technologies also will be applied to solve problems such as Bitcoin’s use of blockchain technology to create a secure public ledger potentially authenticating transactions. In the meantime, companies that are looking to use cryptocurrency as a means of accepting or making payments, investors who are looking to invest in cryptocurrency as a digital asset, and entrepreneurs looking to make their own cryptocurrencies would be wise to work with forward-thinking attorneys who can partner with them to navigate this nebulous area of law.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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