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Bitcoin and other cryptocurrency transactions depend upon the transactional trust enabled by blockchain, a distributed system using open source digital protocols with cryptographic security, and the operation of a distributed shared ledger within which chains of blocks of data from individual transactions are analyzed, or “mined,” for validity. Uses of the term “blockchain” range to include and reach beyond its technical reference to these chains of data blocks. Collectively, blockchain is the technology that enables peer-to-peer (P2P) payment to occur between individuals or companies without the involvement of a bank or other trusted intermediary. The use of blockchain and blockchain-leveraging systems is fueling these P2P financial exchanges and is beginning to enable so-called “smart contracts” and a host of other transactions, innovations, and industries well beyond the financial sector.

This article familiarizes lawyers with cryptocurrency and, particularly, the enabling blockchain technology, methodologies and systems. It also introduces lawyers to blockchain’s current and future uses and points to other resources to learn more about this profoundly disruptive and promising collection of technological advancements.

A Bit About Bitcoin (and Other Cryptocurrencies)

Bitcoin is a leading type of digital or virtual currency that is exchanged by means of a decentralized online network. See, U.S. Securities & Exchange Commission, “ Self-Regulatory Organizations: NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading Shares of the Bitcoin Investment Trust under NYSE Arca Equities Rule 8.201,” Release No. 34-79955; File No. SR-NYSEArca-2017-06, 82 Fed. Reg. 10,086, 10,087 (Feb. 3. 2017).

Virtual currency itself is not a new concept, but has been a medium of economic exchange within online video games and virtual worlds for years. See, e.g., Jennifer S. Bisk, “Case Summary of Bragg v. Linden Research, Inc., Eastern District of Pennsylvania: Denying a Motion to Dismiss for Lack of Personal Jurisdiction and a Motion to Compel Arbitration,” in American Bar Association, Section of Intellectual Property Law, Division VII – Information Technology, Final Report 89 (Aug. 5, 2008) (subsection presented by Comm. 758 – Special Comm. on Computer Gaming) [hereinafter, “ABA Computer Gaming”] (discussing legal challenges around Linden’s 2003 confiscation of virtual property purchased within Second Life); Second Life, Marketplace, (providing virtual items for sale in exchange for Linden Dollars, $L).

Over time, virtual currencies used within the economies of the virtual games or worlds began to be exchanged for United States dollars and other real-world, or fiat, currencies. See, e.g., Greg Lastowka, “ Virtual Worlds: The New Laws of Online Worlds,” 120-21 (2010); Jon M. Garon, “Second Life’s Prohibition of Unlicensed Banking and Securities Transactions,” in ABA Computer Gaming, supra, at 70-71. A fiat currency is the legal tender that a central authority designates and issues as the medium of economic exchange for goods and services. People accept and employ fiat currency because regulatory systems support its durability and stability and because they trust the governing central authority. See, Sarah Rotman, World Bank, Consultative Group to Assist the Poor, “ Bitcoin Versus Electronic Money,” 1, CGAP Brief No. 88164 (Jan. 2014).

The evolution of cryptocurrency leapt completely beyond the confines of virtual games and worlds with the 2009 advent of Bitcoin (Ticker: BTC; Symbol: Ƀ). Bitcoin became the world’s first successful cryptocurrency and now a current market cap of US$16.3 billion with one Bitcoin now selling for more than US$1000 (as of Feb. 24, 2017).

Examples of other types of cryptocurrencies include Litecoin (LTC), Ripple (XRP), and the recently-launched ZeroVert (ZER), and include and have included many others. See, e.g., BitCoin Forum, “ List of All Cryptocoins,” (updated Jan. 1, 2013).

Bitcoin and other cryptocurrencies now participate in exchanges with fiat currencies and are used widely as a medium of economic exchange from goods and services ranging from beer to funeral services to houses. See, CoinsBank, “ The Leading Platform for Professional Cryptocurrency Traders”; see, e.g., CNET, “ 25 Things You Didn’t Know You Could Buy with Bitcoins”; Lester Coleman, “ Man Buys California Home with Bitcoin, Makes $1M Profit,” Cryptocoins News (Jan. 30, 2017). Cryptocurrencies play a particularly important role in developing economies that lack well-established and -distributed banking systems. See, e.g., Cade Metz, “ Why Bitcoin Will Thrive First in the Developing World,” Wired (Feb. 2, 2016).

By early 2015, the number of Bitcoin-accepting merchants worldwide surpassed 100,000. Arthur Cuthbertson, “ Bitcoin Now Accepted by 100,000 Merchants Worldwide,” International Business Times (Feb. 4, 2015). Bitcoin’s merchant adoption rate has ascended logarithmically. For example, in Japan alone, the number of Bitcoin-accepting merchants is expected to quintuple to 20,000 this year in the beginning run-up to the 2020 Summer Olympic Games. Samburaj Das, “ Japan Could See 20,000 Bitcoin Accepting Merchants in 2017,” CryptoCoins News (Jan. 31, 2017).

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