SPLITCOIN: The Impact of the World’s Biggest Cryptocurrency Forking Into Two.

by Locke Lord LLP
Contact

Locke Lord LLP

On August 1, 2017, Bitcoin, the world’s most capitalized and popular digital currency, was split into two separate blockchains, “Bitcoin”[classic] and “Bitcoin Cash.” The controversial decision to “Hard Fork” Bitcoin’s code arose out of a recent debate as how to best increase the transaction speed of the digital currency network. As use of Bitcoin has greatly increased over the past several years, the clearing and settlement of transactions, which are handled by independent computer “miners” on the system, has decreased to the point where many question Bitcoin’s ability to persistently compete against the traditional payment and card systems – which has arguably been the most successful use of the technology. Moreover, Bitcoin is increasingly faced with competition from other emerging cryptocurrencies including Ether (which also forked recently into two separate codes) and Litecoin, which continue to gain ground in the market. To facilitate more efficient processing, Bitcoin users are currently able to pay a transaction fee to incentivize the miners to give their transactions a higher priority in the settlement hierarchy. However, it can take up to several hours for the entire blockchain to run, leaving some in the industry to wonder about the continuation of this slowing-down trend. Some would-be users even question whether Bitcoin’s existing structure will continue to support its underlying mission to promote seamless, low-cost financial transactions for all.

Unlike the Hard Fork that arose from security concerns during the capital raise of “The DAO” in July 2016 the Bitcoin split was the result of a difference in opinion, between the Bitcoin open-source code community and the network miners, as to how to best restructure the code to quicken the transactions. Bitcoin [classic] adopted a method called “SegWit2x”, which moved part of the transaction information out of the blockchain itself, where Bitcoin Cash created bigger blocks of data within the blockchain. The former is favored by the Bitcoin miners. Under both Bitcoin models, the speed of a given transaction is largely dependent upon the number of miners assisting with validating transactions. The more miners supporting a particular platform means faster processing. With the miners in greater support for Bitcoin [classic], there is immediate concern that Bitcoin Cash might not have sufficient processing support from their miners to efficiently run transactions in its separate currency. Bitcoin Cash also has additional concerns including that some Bitcoin exchanges have not yet adopted Bitcoin Cash, and many in the industry question the long-term success of both digital currencies in tandem. As a result, the valuation of both digital currencies have experienced immediate market volatility.

The split will likely incur additional scrutiny from regulatory agencies in the U.S. and abroad, as well as implicate securities regulations because the two new currencies could potentially be considered the issuance of new digital currencies. (See SEC: Digital Coin, Blockchain Capital Raises are Subject to Securities Laws). Further, there will likely be disputes arising from the inconsistent manner in which Bitcoin service providers have managed the split. The majority of exchanges and digital wallets, which function similar to a bank account, seem to have converted, or will convert, Bitcoin holdings by users to 50% Bitcoin [classic] and 50% Bitcoin Cash. However, not all financial service providers are taking this approach.

As future valuations of the two digital currencies diverge, there is the potential for user complaints and litigations to arise in response to the alternative methods of handling this Hard Fork by these Bitcoin service providers – especially if users allege some sort of fiduciary duty is owed them by their Bitcoin exchanges and wallets.

The digital currency space also anxiously awaits the reaction by the IRS with respect to the split, which resulted in a nominal doubling of digital currency held by many Bitcoin users. In 2014, the IRS issued a notice where it signaled that it would consider Bitcoin mining as general income and appreciation of the currency as a capital gain. If the IRS takes the position that the Bitcoin split was akin to a stock split, then little if any tax considerations need to be considered at this time. However, if the IRS decides that the new digital coins are a new issuance, then the implications of the 2014 Notice may be applied in a way that results in increased tax burdens on Bitcoin users.

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.

© Locke Lord LLP | Attorney Advertising

Written by:

Locke Lord LLP
Contact
more
less

Locke Lord LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.