The Madness Surrounding Bitcoin, et. al.

Jason Taken

Senior Editor

Loyola University, Chicago School of Law 2019

Earlier this year, Bitcoin, and cryptocurrencies writ large, occupied many financial headlines as onlookers began to divert their attention to the “unexplained” rise, and subsequent fall in the price of one the more popular (and maiden) cryptocurrencies: Bitcoin. Naturally, because many of the onlookers didn’t realize what Bitcoin was (or is), the media took lead on the story. Earlier this month, Bitcoin began to make its appearance in headlines, once again.

What is Bitcoin?

In the wake of the financial collapse of 2008, an individual that went by the name of Satoshi Nakamoto released a white paper describing a new way to do money: a peer-to-peer electronic currency. With the growing lack of trust in centralized systems, in the wake of the 2008 collapse, computer scientists from the depths of society were looking for a way to de-centralize the very lifeblood of the country’s economy.

Nakamoto (a pseudonym to this day, although there is some speculation as to his, or her, true identity) led the cryptocurrency revolution by creating Bitcoin.

Bitcoin is a peer-to-peer electronic currency that removes the need for a third party to agree, approve, disapprove, or hold each and every transaction. This is made possible by employing the Blockchain. Blockchain is essentially a distributed ledger in which every transaction is recorded, and approved, by the users on the network. There’s no need for a third party (i.e., a bank) to approve the transaction. The users on the network (i.e., the community) approve the transaction with some high-level mathematics that make the system near impossible to reverse engineer.

The key ingredient to Bitcoin’s success, and what makes it so attractive, is the use of de-centralization. Finance isn’t the only arena that’s found success in using Blockchain; areas of property and personal identification, and other areas traditionally requiring a third-party to approve or recognize a transaction, are exploring this revolutionary idea.

Why de-centralized?

De-centralization is a relatively new concept in which an approval of a transaction, whether it be a monetary transaction, enforcing a contract, enforcing a settlement, approving a trade, or selling a house, no longer requires a third party (a bank, a broker, a judge) to participate and complete in the transaction. The transaction is thus, approved and granted, by ALL members of the Blockchain. It would be as if each person, where a person is one node on the network, approved of every bank withdrawal, every deposit, and every transfer. This is what makes the Blockchain concept so unique in that the “power” is not concentrated in a third party, but rather, the power is distributed amongst the network. The power is distributed such that a majority rule is required to approve a transaction. Malicious transactions are not approved, and a majority rule is required to approve a valid transaction. Thus, the power remains with the network, and no one actor can invalidate a transaction.

The obvious problems that arise where a 3rd party is needed (or trusted—the banks) are eliminated as concerns. Trust is no longer concentrated in one entity. As you eliminate the necessity for a bank, or a judge, to step in and guide or approve a particular transaction, it would not be difficult to imagine a small panic from government regulators as they scramble to gain insight, determine what regulation is needed, and then act.

Regulation and Compliance

At the outset of the creation of this new form of money, regulators were confused as to whether Bitcoin could (or should) be classified as a currency. Classifying it as a currency would have some regulatory implications from the outset. That’s because in the United States, the only legal tender is the dollar. Additionally, only the Mint and the Federal Reserve are allowed to produce coins and currency. In the United States, people have been convicted for creating their own currency. So the question turned, for the purposes of Title 31 and other regulations, on whether Bitcoin, in those contexts, was illegal.

Despite the regulatory confusion and self-branding as a currency, Bitcoin is treated more like a “speculative vehicle” or a security. One of the reasons is because, in fact, U.S. dollars are often traded in exchange for Bitcoin, and vice versa. On the other hand, Bitcoin has also been used as “money” to purchase things, without the exchange of U.S. dollars.

The regulators are beginning to gain insight. Nearly 10 years after the birth of cryptocurrency, regulators are starting to gain a foothold into what this technology is, cracking down on misbehavers, and implementing protection for people who need it.

One thing that worries regulators is hysteria around the bubbles that these new currencies experience. People have lost money in trading cryptocurrencies like Bitcoin. The hysteria and attention generated around a bubble, like the Bitcoin bubble in late 2017 and early 2018, have regulators worried that people are blindly investing in these vehicles resulting in them becoming massively rich or losing everything. A contributing factor to the rapid change in wealth of some Americans was that the media did a great job of documenting Bitcoin’s rapid rise from the hundreds to over $20,000 USD per coin, only to then document its fall to around $4000 USD before they decided to focus on something else. This emotional hysteria cost people millions while also making people millionaires overnight. Many have argued that the government was too late to step in and get a handle on this new form of money, and others would rather have no government involvement at all. Nevertheless, acting without insight, whether it be by the people or the government, has always shown harmful in some ways.

What’s next?

Even the founders, creators, and initial users of Bitcoin still don’t quite know what it is. Since their creation, Bitcoin and other cryptocurrencies have been used to transfer wealth, create wealth, and destroy wealth all with distributed trust in mind.

It’s been shown that the need for a centralized body of trust is no longer required. This, of course, puts worry into the minds of those who depend on that model, who believe in that model, and whose very livelihood is sustained by that model. De-centralization is a very likely outcome in the future. De-centralization places power and authority back to the community and back to the people where some argue it belongs.