INTRODUCTION TO BITCOIN - Lawson Law Center...public meeting to discuss bitcoin and digital...

INTRODUCTION TO BITCOIN A/K/A WHAT THE HECK IS BITCOIN, AND WHY SHOULD I GIVE A RIP?

Presented by: Terry Lawson Lawson Law Center LLC www.llckc.com 816-802-6677 [email protected]

Note: If you would like a copy of this presentation, please go to: http://llckc.com/forlawyers/ to download the PDF.

http://llckc.com/forlawyers/

What is Bitcoin?

Simplest Answer: Bitcoin is a peer-to-peer electronic payment system using open source software.

Created in 2009 by a cryptographic software developer, Pseudonym of Satoshi Nakamoto.

As open source software, the code of the bitcoin payment system can be checked by anyone for vulnerabilities.

Fun Fact: the “satoshi” is now the smallest recognized unit of bitcoin, representing one billionth of a bitcoin.

2 LAWSON LAW CENTER LLC - LLCKC.COM – 816-802-6677 – [email protected]

The digital currency created and used in the bitcoin system is alternatively referred to as: 1. a virtual currency, 2. electronic money, or 3. most commonly, a cryptocurrency because

cryptography is used to control its creation and transfer.

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Bitcoin is a type of cryptocurrency

LAWSON LAW CENTER LLC - LLCKC.COM – 816-802-6677 – [email protected]

Crypt-O-Currency?

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Don’t Be Afraid! This is not “scary money,” this is “mathematically locked” money.

NO

YES

Cryptocurrency is Math Unlike regular currency, in that there is nothing tangible to exchange. Users are exchanging particular long string numbers (called hashes) created using an open source cryptographic algorithm, that are unique to the transfer or creation of any bitcoin Example of an actual bitcoin hash: 00000000839a8e6886ab5951d76f411475428afc90947ee320161bbf18eb6048 The above hash represents the first “block” of bitcoins mined in the “blockchain” (i.e. 50 bitcoins mined on January 9, 2009).


Tip: Don’t believe it? Go to blockexplorer.com to find all the hashes of all the bitcoin block chain to date.

Cryptocurrency is Math - cont.

Bitcoin is the oldest, largest, and most developed crypotocurrency around. BUT There are over 70 cryptocurrencies in active trading, and perhaps 1,000 that are created, but not actively being traded. Examples: Litecoin, Peercoin, Mastercoin, Dogecoin, Namecoin, Darkcoin, Ripple, and on and on…..


Bitcoin : crytocurrency :: Google : search Boeing : planes Campbell’s : soup

• The Bitcoin system is not controlled by any single entity

• No Central Bank

• US Treasury calls bitcoin a “decentralized currency”

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Who Controls Cryptocurrency?


The only true “control” of bitcoin is the public ledger of bitcoin and the bitcoin miners who confirm the public ledger. The public ledger is the only true confirmation of the legitimacy of any particular bitcoin or exchange of bitcoins. This lack of a central authority makes bitcoin and other cryptocurrency different from fiat currency

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Who Controls Cryptocurrency? cont.


Is Bitcoin really Currency, or is it Property?

The IRS has recently defined bitcoin as property, NOT currency. See IRS Notice 2014-21. http://www.irs.gov/pub/irs-drop/n-14-21.pdf This may pose large problems with tracking capital gains and losses.


Without a central authority to issue new currency or regulate it, bitcoin has NOT been accepted as true “currency” by any government.

Bitcoin as Property Does bitcoin have a UCC Problem? Law Prof. Lynn LoPucki of UCLA, a well-known authority on all things UCC, believes that Article 9 is the biggest problem with bitcoin. WHY? UCC 9-332 does not allow a security interest in actual currency. Transferees of money take freely without a security interest attaching to the currency. Subject to Security Interests? if bitcoin is NOT currency as defined in UCC, but property, then bitcoins may be subject to security interests in property when transferred.


Is Bitcoin a commodity? Maybe.

The US Commodity Futures Trading Commission (CFTC) will hold a public meeting to discuss bitcoin and digital currencies on October 9, 2014 in Washington, DC. Panel will focus on bitcoin and the CFTC’s involvement in creating a derivatives market for bitcoin.


IMPLICATION: Once a bitcoin market is created and regulated by the CFTC, bitcoin will have a big “stamp of approval” as a legitimate item to be speculated / invested, traded, bought, sold.

Momentum is Gathering . . . LIKE IT OR NOT: People are buying cryptocurrencies; Venture Capital Money is being invested; Markets are being created; Governments are reacting;


YOU MIGHT NOT like, trust, believe in, want, or need any cryptocurrency, but – The SNOWBALL EFFECT doesn’t care what you like, trust, believe in, want or need.

Lead, Follow, or Get Out of the Way!


There’s a lesson to be learned from this, but I am a little to freaked out to figure out what it might be!

Part 2: The Nuts and Bolts of Bitcoin

A basic understanding of how this stuff works will keep you from being in the dark in one of the biggest changes in markets since the birth of e-commerce. There is no need to be an expert, or to use bitcoin yourself, to have the level of understanding needed to be conversant about this technology.


Nuts and Bolts of Bitcoin Best Article On the Detailed Workings of Bitcoin: “How the Bitcoin protocol actually works” http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/ Does a great job of laying out the math and why Bitcoin works the way it does.


Best Video on how Bitcoin works: Kahn Academy Video Series https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it 9 part series, Narrated by cryptography expert (Zulfikar Ramzan PhD Comp Sci, MIT)

Nuts and Bolts of Bitcoin – What’s in YOUR Wallet?

The Wallet: Bitcoin requires a “wallet” to hold your bitcoins. Think of the wallet like a specific email address. Example address: 1FfmbHfnpaZjKFvyi1okTjJJusN455paPH Who has the Biggest Wallet Today? US Govt. – FBI Seizure of Silk Road Assets yielded wallets currently worth $84M USD after selling of $17M this summer


Nuts and Bolts of Bitcoin – The Basics of a Transaction

Step 1: You, the payee, give your Bitcoin wallet address to whoever wants to give you bitcoins. Step 2: The payor generates a transaction which is recorded as an entry (hash) on the public ledger. The transaction has payor’s wallet address, the payee’s address, the amount of bitcoin to be moved and a time stamp.


Nuts and Bolts of Bitcoin – The Basics of a Transaction cont.

Step 3: Bitcoin Miners worldwide use their computers to mathematically check that the transaction should be honored. These miners insure the payor really has the bitcoins to give the payee and prevents “double spending” the same bitcoins. Once confirmed, the transaction is added to the “blockchain” the public ledger of all prior transactions. As a reward for doing all of the math to make this confirmation, the miner gets – surprise! More bitcoins!


Nuts and Bolts of Bitcoin – The Transaction Step 4: Once the transaction has been confirmed by enough miners, both parties will receive confirmation of the transaction. Typically takes 10 mins. to an hour. (compare this to 2-3 days for credit cards) Step 5: Upon confirmation the bitcoin(s) that were transferred from the payor’s wallet permanently reside in the payee’s wallet.


Once this transaction is done it CANNOT be undone. NO chargebacks are possible.

Nuts and Bolts of Bitcoin – The Transaction This transaction, along with EVERY other transaction EVER MADE, becomes a part of the public ledger, a/k/a the blockchain. This is the master record of all transactions going back to the first ORIGINAL creation of the first 50 bitcoins on January 3, 2009 – the so-called “Genesis Block”


Examples in the Real World

For Example: I bought bitcoin on Coinbase. https://www.coinbase.com/ Downloaded Coinbase Android app on my phone. (using my online wallet at Coinbase, not local) And I have the Hive app allowing a bitcoin wallet directly on my phone https://www.hivewallet.com/


Belief: All that sounds complicated! I don’t have time for all that math! Reality: It’s seamless, behind the scenes, and easy for the end user.

https://www.hivewallet.com/



Examples in the Real World Pt. 2

Would you like a DEMONSTRATION?


OK, so that’s how Bitcoin works – Why should I give a rip?


Part 3: Why should you give a rip?

There are already MANY companies accepting bitcoin,

including some locally.

• Over 30,000 locations worldwide accept bitcoin, with more added every day. Go to coinmap.org to find some of them

• PayPal has begun accepting BTC payment • Other online retailers, including Overstock.com, Newegg.com, and

Tiger Direct.com have begun accepting BTC payments

• Even some local companies take bitcoin . . .


Answer 1: You can already buy LOTS of things with bitcoin

Buy things with bitcoin, cont.

That’s me, using bitcoin to buy some delicious and nutritious “Slap Yo Momma” Wings from Wings Café on Englewood Road. Purchased with bitcoin through Menufy.com


Major Kansas City connections to the Bitcoin universe: BF Labs Inc. aka Butterfly Labs, - major supplier of bitcoin mining computers located in Leawood, KS

• BF Labs involved in two large lawsuits including one class action, for failure to timely deliver computers.

• Local law firms are representing BF Labs and the plaintiffs in both actions.

• Cases are pending in D. Kansas federal court. • FTC requested federal court shutdown and appointed a receiver in

September, 2014

Why should you give a rip? Answer 2: KC area is “bitcoin active”


KC area is “bitcoin active” cont.

Cloud Hashing – major bitcoin mining operation, started in Kansas City, KS in June 2013. Early 2014, moved major operations to Iceland to take advantage of cheap power and cold conditions.


KC area is “bitcoin active” cont.

Netsolus, a company based in downtown KC, is the world’s largest bitcoin mining host. Is expanding to 20 megawatts of hosting space (enough power for 20,000 homes)


Why should you give a rip? Answer 3: Because it just might be your ethical duty The Model Rules of Ethics may implicitly require at

least some cursory knowledge of bitcoin. Client-Lawyer Relationship

Model Rule 1.1 Competence A lawyer shall provide competent representation to a client. Competent

representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Comment 8 - Maintaining Competence To maintain the requisite

knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.


Duty of Competence, Cont. How effective can you be as a counselor and an advocate,

without some basic understanding of bitcoin? Consider the following settings: 1. Divorce: Your client insists his techie wife is “hiding assets” and

“making money on the side” in some kind of “internet thingie.”

2. Business Law: A entrepreneur wants to transact business quickly with fewer exchange fee costs than credit cards – will bitcoin work for them?

3. Debtor / Creditor: If a judgment debtor converts his money to bitcoin, may it then be garnished? How would you schedule it in a bankruptcy?


Part 4: Legal ethics of bitcoin Hypothetical 1

Ethical Rule that Applies: MO Rule 4-1.15 Safekeeping Property (a) A lawyer shall hold property of clients or third persons that is in a lawyer's

possession in connection with a representation separate from the lawyer's own property. Client or third party funds shall be kept in a separate account designated as a "Client Trust Account" or words of similar import maintained in the state where the lawyer's office is situated or elsewhere if the client or third person consents.

(1) Every client trust account shall be either an IOLTA account, non-IOLTA trust account, or exempt trust account. No earnings from an IOLTA account, a non-IOLTA trust account, or exempt trust account shall be made available to any lawyer or law firm, nor shall any lawyer or law firm have a right or claim to such earnings. Other property shall be identified as such and appropriately safeguarded.

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What if a client comes to you with a pile of bitcoins in a wallet. Can you hold it for them?


Adequate safeguards should be taken to protect the bitcoins. See Comment 1 to Rule 4-1.15: [1] A lawyer should hold property of others with the care required of a

professional fiduciary. Securities should be kept in a safe deposit box, except when some other form of safekeeping is warranted by special circumstances. All property that is the property of clients or third persons, including prospective clients, must be kept separate from the lawyer's business and personal property and, if monies, in one or more trust accounts. Separate trust accounts may be warranted when administering estate monies or acting in similar fiduciary capacities. A lawyer should maintain on a current basis books and records in accordance with generally accepted accounting practice and comply with any recordkeeping rules established by law or court order.

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Legal ethics of bitcoin Hypothetical 1


Adequate safeguards must be taken to protect any client property, including bitcoins.

But in the bitcoin context what is adequate protection?

Online exchange / wallets: Biggest is Coinbase Easy to access, but hard to regulate. Uncertainty makes them vulnerable.

Mt. Gox Exchange imploded, taking hundreds of millions worth of bitcoin with it. Is it safe? Probably not safe enough to be considered reasonable

level of security for client property in the long term.

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Offline exchange / wallets: Allow bitcoins to be stored offline, on local computer. Can also encrypt the keys to bitcoin

to make them harder to obtain, even if the computer or drive were stolen.

Examples: Armory, Electrum, Hive Is it safe? Probably safe enough to be considered reasonable level of

security for client property in the long term. Especially if extra encryption is used.

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Offline PAPER wallets: Allows bitcoin wallet to be stored offline, on paper. Can then be stored as any valuable

would be stored, in a safe at home or a safe deposit box.

Is it safe? If it is good enough to store a client’s securities in a safe deposit box, this is surely safe enough for bitcoin wallets.

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Going Back to the Rule: Ethical Rule that Applies: MO Rule 4-1.15 Safekeeping Property (a) A lawyer shall hold property of clients or third persons that is in a lawyer's

possession in connection with a representation separate from the lawyer's own property. Client or third party funds shall be kept in a separate account designated as a "Client Trust Account" or words of similar import maintained in the state where the lawyer's office is situated or elsewhere if the client or third person consents.

(1) Every client trust account shall be either an IOLTA account, non-IOLTA trust account, or exempt trust account. No earnings from an IOLTA account, a non-IOLTA trust account, or exempt trust account shall be made available to any lawyer or law firm, nor shall any lawyer or law firm have a right or claim to such earnings. Other property shall be identified as such and appropriately safeguarded.

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Client wants you to take bitcoins into your trust account as a deposit against future work. Can you?



A: There is NO rule-based way to store “other property” in

Client Trust Account. Trust Accounts hold only “funds.” If bitcoin are only property and not “funds” then there is no way to hold them in a Client Trust Account.

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Client wants you to take bitcoins into your trust account as a deposit against future work. Can you?



As Bitcoin is a new phenomenon, there are NO RULES

written to specifically address it. You must review the rules and decisions currently in place to determine where acceptance of bitcoins might fit.

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What if a client wants to give you bitcoin to convert to cash for deposit in trust. Can you ethically take payment this way?



Can Lawyer Accept Property as Payment? MO Sup. Court Advisory Committee Formal ethical opinion rendered March 29, 1977: QUESTION: Can an attorney ethically accept, for forming a

Missouri for profit corporation, the payment of his fee by issuance to him of preferred voting stock and/or common non-voting stock?

ANSWER: Assuming the attorney did not personally participate

in the decision of the incorporators to engage his legal services, it is the opinion of the Advisory Committee that acceptance of stock as payment for legal services in forming said corporation is not improper.


Can Lawyer Accept Property as Payment? Cont.

Takeaway: If a lawyer can accept stock (property) as payment from a client…. Shouldn’t we also be able to accept bitcoin (property) as payment from the client?


Answer: YES. A lawyer can accept payment in bitcoins (or gold bars, chickens, homemade pies, or beanie babies)

IF both client and attorney: 1. Make clear the VALUE of the property being exchanged and 2. The SCOPE of work the property will cover as payment. In order to obtain such clarity, it is necessary to contract with the client.

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Informal Advisory Opinion (03/27/14) by Loretta Schouten MoBar Legal Ethics Counsel: Question presented: Can bitcoin be accepted as payment? Can

bitcoin be accepted as an advanced deposit, to be kept in trust? Answer: Bitcoin can be accepted as a payment method, if certain steps

are taken to assure clarity between client and attorney regarding risks, value, etc. Bitcoin may NOT be accepted directly as an advance deposit in trust, but can be converted to cash and then deposited.

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Answer Cont.: Rule 4-1.8(a) may apply, in that a separate agreement

might be necessary to effectively set for the risks associated, and the exchange rate, and the method of exchange and who bears the risk of loss/gain at the time of exchange to funds.

See also 4-1.15(a)(1) Final sentence: Other property [of a client] shall

be identified as such and appropriately safeguarded.

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RULE 4-1.8: CONFLICT OF INTEREST: PROHIBITED TRANSACTIONS (a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and

reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing, signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.

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Conclusions

Bitcoins are REAL. Purchase nearly anything with them, if you look hard enough.

Can be stored them in a safe, in a computer, or online in the cloud.

Credit cards only work in relatively few places. But bitcoin “works” anywhere you can transmit the data; i.e. transactions can be anywhere in any amount.

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Robocoin CEO and co-founder Jordan Kelley uses the Robocoin Bitcoin ATM, during a demonstration of the ATM in the Rayburn House Office Building on Capitol Hill, April 8, 2014 in Washington. Drew Angerer—Getty Images


Bitcoins are GROWING – Part 1

Fitch reports Feb. 2014 transactions of $68M per day, up 10X from last year. (PayPal $492M, Western Union $225M) Bitcoin Market Cap: 2012: $40M; 2013: $754M; Today: $5.4 B; What will it be worth tomorrow? In five years?


Bitcoins are GROWING – Part 2 Remember the Winkelvoss Twins? They have created a bitcoin ETF, awaiting SEC approval right now. And what will the index be called? The WINKDEX, of course. Just like many other assets (precious metals, real estate, business sectors, etc.) a trading index will likely legitimize bitcoin and increase investment in the system.



And speaking of the Winklevoss Twins: Their market cap estimate for Bitcoin, based on its value as a payment system, is $400 billion or greater. Other analysts seem to agree, stating that 10 - 100X present value is a realistic estimate.



If Bitcoin market cap exceeds $400 billion, it would be larger than the market caps of

Visa, Mastercard, Discover, Moneygram, and Western Union --

COMBINED!!!


Parting Thoughts . . .

Like it or not, you likely WILL end up dealing with bitcoin (or some other cryptocurrency) at some point in your career.

Cryptocurrency may be treated as a commodity,

currency, investment, or something in between. Individuals, businesses and governments will be using

and trading in this new form of payment / property.


Parting Thoughts . . . Cont.

And who will be advising everyone on the legalities of using cryptocurrency?

ATTORNEYS – But only those who understand at least the basics


THE END

1. Please give feedback so I know how to improve this presentation

2. Any questions?


Presented by: Terry Lawson Lawson Law Center LLC www.llckc.com 816-802-6677 / [email protected]

Reminder: If you would like a copy of this presentation, please go to: http://llckc.com/forlawyers/ to download the PDF.

http://llckc.com/forlawyers/

INTRODUCTION TO BITCOIN - Lawson Law Center...public meeting to discuss bitcoin and digital...

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