Among these warnings are the unclear cost of digital currencies, volatile exchange rates, the threat of hacking and scams and the lack of protection for lost or stolen funds. While financial supervisory authorities generally have not been required with blockchain, in lieu of such oversight, some companies have instituted exchange platforms and brokerage servers, among other things, effectively limiting the usage of blockchains to private service agreements.3Īdditionally, due to the potential for civil and criminal liability related to misuse of digital currency, state and federal agencies have issued warnings to consumers and investors about the risks of virtual currencies. While the irreversible nature of the transaction can lead to other issues (such as forking, discussed later in this article), such irreversibility also builds trust in the technology and the transaction, reducing the need for trust in the transacting parties themselves. It is referred to as a distributed ledger because it exists on thousands of computers running the same software, required for a transaction to occur, creating a network where each computer is considered a “node.” In order for a transaction to take place, the transacting parties must be authenticated with “cryptography.” When a transaction is entered in the blockchain ledger, there is a consensus mechanism which requires a majority of the nodes in the network to validate the transaction data’s authenticity, decreasing the likelihood of fraud.2 Once the transaction is recorded, it is irreversible. Some courts have ruled that digital currency (virtual currency or cryptocurrency), including bitcoins, is “funds” or “money,” thus bringing it within the ambit of federal criminal statutes and, more broadly, the Commerce Clause of the United States Constitution.1 “Blockchain” refers to the technology underlying cryptocurrencies.īlockchain is a distributed ledger, or a database that is shared and synchronized among a number of users. With the rise of the popular bitcoin, there have been increasing questions regarding the legal, tax and regulatory implications for virtual currencies.
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