Bitcoin and cryptocurrencies have become the biggest financial products for 2018, generating ample headlines and turning average people into millionaires – at least for brief moments until their investments in these volatile currencies comes tumbling down.
Cryptocurrencies are not a new concept, although most of the early attempts to create a virtual currency crashed and burned, like the long-defunct Flooz and DigiCash that were hallmarks of the 1990’s tech boom.
However, Bitcoin offered something different – it billed itself as the first digital currency with a decentralized network that was not dependent on a central bank. First conceived of as open-source software in 2009, Bitcoin was the leader in a virtual currency revolution that drove prices to almost $20,000 for a single coin and that prompted a frenzy that sent the prices of other cryptocurrencies skyrocketing.
While Bitcoin and the blockchain technology that made it possible is indeed having a profound impact and these cryptocurrencies may yet change the world, future gains are uncertain, substantial losses have already occurred, regulatory issues have arisen, and investors have also managed to lose millions. Investing in cryptocurrencies and understanding the legal issues surrounding them can be a very complicated prospect and you need a Bitcoin attorney who understands the technology and the law that will impact the future of blockchain.
Zamansky LLC is the firm you are looking for. Our legal team is made up of renowned securities and investment fraud attorneys who have handled class action cases, securities arbitrations, and many financial claims arising out of complex legal issues. We understand the cryptocurrency revolution, we have been keeping abreast of legal developments, and we can provide the assistance and support you need to protect yourself when you become involved in the cryptocurrency market. To find out more about how our firm can help you, give us a call today.
How Do Cryptocurrencies Work?
Cryptocurrencies, including Bitcoin and its competitors, are digital or virtual currencies. The currencies get their value because of their scarcity, just as any monetary system obtains value. If you could print unlimited dollars or produce unlimited Bitcoins, they would have no worth.
While the supply of most currencies is controlled by central banks, like the Federal Reserve in the United States, cryptocurrencies do not rely on a central bank. Instead, encryption techniques regulate the production or generation of new units of the currency, which has helped to give these currencies their name. Encryption techniques also verify when funds are transferred when transactions take place involving cryptocurrencies.
For payment networks to be viable, there must not only be a limited supply of the currency, but there must also be a way to track the currency and make sure no one spends the same money twice. With cryptocurrencies, there’s no centralized entity that monitors transactions to prevent double spending. Instead, there is a decentralized network that everyone can access which keeps a list of transactions.
Ensuring that there is a consensus among all of the different entities in the network is essential for cryptocurrencies to have value, because it must be clear when transactions took place. The shared database of information about transactions must not only be accessible and uniform among all entities in the network, but it must also be unchangeable so no entity in the network can modify it.
Cryptocurrencies have achieved this through the use of blockchain technology. Blockchain is an unchangeable, immutable, irreversible record of historical transactions that took place. Transactions can only be added to the blockchain if confirmed by all of the entities in the decentralized network.
Once a transaction is confirmed, it’s combined with others in a block of data that becomes part of the unchangeable record. These blocks with data about different transactions are all joined together in permanent, unalterable ways. The entire network can see the transactions made up of the blocks of information, all of which has been confirmed.
The basic tenants of this blockchain technology form the basis not just for Bitcoin but for other cryptocurrencies as well, such as ethereum. While the specific process of building the unchangeable public ledger can vary from currency to currency, the key to all cryptocurrencies is the blockchain, or shared global transaction ledger which transactions can be added to only after confirmation.
What Are the Different Types of Cryptocurrencies?
Bitcoin is the most well known of the cryptocurrencies because it was the first modern cryptocurrency to be developed and because it was the first to make use of blockchain as a technology. However, it is far from the only cryptocurrency. Others include:
- Ethereum classic
Cryptocurrencies that are not Bitcoin are sometimes called altcurrencies. While there are many altcurrencies that have become quite valuable, it’s important to recognize that many cryptocurrencies have been created to attempt to cash in on the frenzy to buy virtual currencies – and not all of these currencies are legitimate. One currency, Dogecoin, for example, was introduced as a joke currency based off of an Internet meme created around a Shiba Inu dog. The parody cryptocurrency had a market value of more than $1 billion as of January 2018.
Before investing in cryptocurrencies, researching the history of the currency and the technology behind it is vital. A cryptocurrency law firm can provide you with assistance in conducting your due diligence and in taking action if you are taken in by a scam currency.
How Do You Invest in Cryptocurrencies?
Investing in any cryptocurrency, even Bitcoin and other cryptocurrencies that are legitimate and established, can be a high-risk investment due to the volatility of the cryptocurrency market. Making an investment is also not as simple as calling up your broker or visiting a responsible brokerage account where you have funds invested.
If you want to buy cryptocurrencies, you’ll need to use a specialized coin exchange. There are several well-known trading platforms for cryptocurrencies, but even many respected and widely-known coin trading platforms have experienced serious problems including hacks and flash crashes. While there is an inherent risk in buying and selling currencies from any trading platforms, some are better than others and you should carefully research to find the right one
When you purchase cryptocurrencies, you’ll typically need a digital wallet in which to store the public and private keys necessary to prove your ownership and to complete transactions. Bitcoins have an added layer of security through public key cryptography, or asymmetric cryptography as it is also called. While anyone can encrypt data using the public key, only the owner of the paired private key can decrypt the data. If you lose access to your public or private key, such as by forgetting the password to your digital wallet, you won’t be able to access your bitcoins.
Virtual wallets not only allow you to store the cryptography you need to access your coins, but they also facilitate the transfer of coins by allowing you to send and receive them. There are different virtual wallets for different kinds of cryptocurrency and the wallets work differently. You can use mobile or computer applications that serve as virtual wallets, you can have a web wallet, you can have a wallet on your mobile device, or you can even create a paper wallet.
Wallets can be susceptible to hacking, so it is imperative you take precautions to select the right virtual wallet and to keep your data secure. There is typically no easy method of password recovery when you forget your digital wallet passcode and there are services that charge thousands of dollars to use specialized programs to try to help you recover virtual currencies stored on wallets rendered inaccessible due to forgotten passwords.
What are the Rules and Regulations Governing Cryptocurrencies?
Because the cryptocurrency marketplace is a relatively new one, it is not as well-regulated as many other types of financial products. Still, there are laws surrounding cryptocurrencies that investors need to be aware of.
In 2013, the Financial Crimes Enforcement Network (FinCEN), released guidance indicating Bitcoin exchanges should be treated as Money Services Businesses (MSBs), which triggered registration requirements. As MSBs, trading exchanges are subject to rules set forth under the Bank Secrecy Act, including Know Your Customer rules which require identity verification when accounts are opened in order to reduce the use of Bitcoin in money laundering and other illegal operations.
The IRS has also determined that Bitcoin and other virtual currencies are treated as property. Investors must report these cryptocurrencies on their tax returns, and the IRS has successfully pursued legal action to compel a major coin exchange, Coinbase Inc., to turn over information on some transactions and on some account holders. The information the IRS obtains could potentially be utilized to identify potential tax evaders who failed to comply with the rules regarding declaring their virtual currencies.
What Are the Risks?
The risks of investing in cryptocurrencies are ample and varied. There is, of course, the obvious risk of suffering substantial financial loss if a cryptocurrency declines dramatically in value or even loses its value altogether. Bitcoin has experienced wild fluctuations in price, dropping as much as 50 percent of its value over a single month period. Other cryptocurrencies have also experienced volatility.
As the regulatory framework evolves, further substantial financial reductions in cryptocurrency value could occur if governments impose tough regulations or even ban trading altogether. For example, when the South Korean commissioner considered a crypto trading ban, this sent the price of Bitcoin plummeting.
It is not only a decline in the value of the cryptocurrency you’re invested in that should give you cause for concern. There have been numerous instances where respected trading platforms have been hacked and substantial losses have occurred.
In 2016, for example, a loophole in the Decentralized Autonomous Organization (DAO) that served as Ethereum’s ecosystem, resulted in the DAO being hacked. Because of the hack, more than 1/3 of the DAO’s funds were taken. This was the equivalent of $50 million. This precipitated a dramatic decline in the price of ether and was undermining trust in the entire cryptocurrency concept. The DAO that was stolen, however, was still sitting in the child DAO and was inaccessible for 28 days. A decision was made to refund the money taken by the hack using a hard fork.
A fork occurs to update software. If the fork is a soft fork – as most often happens with the blockchain – – it is backward compatible so all transactions that came before are still accessible. Hard forks, on the other hand, are not backward compatible. New software will be needed and access to previous data won’t be possible. The hard fork in this case was created to refund the stolen funds; however, some in the ethereum community who were opposed to the hard fork renamed the old fork Ethereum Classic and continued to maintain the old blockchain that didn’t give the hacked individuals back their funds. Today, there are two separate virtual currencies, ethereum classic utilizing the old blockchain without the hard fork, and ethereum which includes the fork
However, not all individuals who have lost cryptocurrencies through hacking have been able to recover their funds. Investors assume the substantial risk of loss when investing in cryptocurrencies because of this threat of hacking. Further, virtual wallets are not insured by the FDIC as bank deposits are, so if the digital wallet company goes out of business or a security breach occurs, you have little recourse.
What Legal Issues Can Arise in Connection With Cryptocurrencies?
Because regulations are still developing, the legal issues cryptocurrency investors could encounter are still not yet fully apparent. For U.S. based investors, the Bank Secrecy Act and IRS tax rules are the primary legal requirements that investors and coin sellers must be aware of.
Businesses and individuals who change Bitcoins into U.S. dollars should register with the Department of Treasury and ensure compliance with the reporting requirements found within the Bank Secrecy Act. All investors should ensure they follow guidelines for reporting transactions to the IRS.
Getting Help from a Bitcoin Attorney at Zamansky LLC
Zamansky LLC can provide comprehensive assistance with all of the legal issues that arise in relation to Bitcoin. Our firm can offer guidance on securities regulations, the Bank Secrecy Act, tax laws, and other evolving regulations that are applicable to Bitcoin and cryptocurrencies. We can also provide assistance if problems arise in connection with Bitcoin or cryptocurrency transactions. To find out more about the assistance we can offer, give us a call today.