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Cryptocurrencies are open-source, peer-to-peer digital currencies. Two of their most distinctive features include the use of public key cryptography to secure transactions and create additional currency units, as well as the decentralized nature of their digital payment systems. The underlying technical system which all cryptocurrencies are modelled after is that of the original cryptocurrency, Bitcoin. Bitcoin was created by “Satoshi Nakamoto” a person or group credited with writing the first paper on the digital currency in 2008. Certain key elements differentiate cryptocurrencies from traditional electronic currency systems such as electronic banking and PayPal, most notably their decentralized control mechanisms. That is, traditional methods involve a single entity recording, verifying, and ensuring transactions. With many cryptocurrencies, including Bitcoin, past transactions are recorded on a public ledger and verification of transactions is outsourced to users.
Bitcoin and other cryptocurrencies provide users many benefits, including ease of digital transactions, lower transaction costs, and enhanced privacy. However, these benefits come with concerns regarding consumer protection and fraud deterrence. Three pressure points persist: the irretrievability problem (the inability to call back a bitcoin once it has been transferred), bitcoin mining malware, and exchange services. Also problematic is the lack of uniformity from state-to-state regarding cryptocurrencies’ (predominately Bitcoin’s) categorization as either currency or property. Defining cryptocurrencies as currency facilitates its use as a method of exchange, while categorizing it as property may be easier for tax collection purposes.
Bitcoin’s encrypted nature problematizes the digital currency as abandoned property. Traditionally, abandoned property reverts to the state after a statutorily set period of time. In instances of cash, gold, etc. this is fairly easy – ownership of the valuable goods transfers to the state after the statutory period. Generally, banks and financial institutions are required by state laws to retain a customer’s property for a period of time, usually five years, before the property will escheat to the state. However, Bitcoin creates circumstances in which the value of the abandoned property is permanently lost rather than transferred to the state. Finally, a fear concerning Bitcoin and other digital currencies is the potential for use in criminal activity. The pseudonymous nature of the transactions, the ease with which funds can be transferred across geographical distances, and the inherent risk in the currency have fueled hesitation and fear. This paper defines cryptocurrencies, Bitcoin, and explains the processes and vulnerabilities facing Bitcoin user, as well as the currency’s potential as a tool for criminal activity. Additionally, each section concludes with policy suggestions to help inform legislators and general audiences on the nature and Bitcoin, as well as provide insights into the digital currency’s’ general usage.
Note: This paper was prepared for general education purposes by students in the University of Washington School of Law's Technology Law and Public Policy Clinic, under the guidance of Professor William Covington
University of Washington Technology Law and Public Policy Clinic
Banking and Finance Law
Brian Conley, Jeffrey Echert, Andrew Fuller, Heather Lewis & Charlotte Lunday,
Crytocurrencies: An Introduction for Policy Makers,
Available at: https://digitalcommons.law.uw.edu/techclinic/13