An Intro to Bitcoin

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a section of our paper which will ultimately serve as a preliminary introduction to the digital currency Bitcoin. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comments section below, and please bear with us on the citations, the seemingly never ending block quotes, the poor grammar, etc. etc.

Explanation of Bitcoin

Thus far, this paper has included broad discussion of alternative currencies in terms of the benefits of systems untethered from sovereign dictates and commodities. We have, as part of this broad discussion, mentioned the idea of digital currencies without addressing many specific examples. From this point on, we intend to pivot from the general and the abstract and focus our attentions on a very specific digital currency, Bitcoin. We do this because it is the largest, most highly developed of the digital currencies, with its own exchanges and history. We also believe certain aspects, discussed below and addressed later in this paper, of the currency render it the most interesting fodder for legal discussion. Finally, its size and scope make it the most likely digital currency to face legal attention in the near future, potentially rendering discussion of Bitcoin all the more timely.

In addition to the generally understood benefits of online currencies, the following specific advantages of Bitcoin have been advertised [1]:

1.       Person to person, no transactional intermediary

2.       Account can’t be frozen

3.       Universality

4.       No prerequisites or arbitrary limits

In addition to the benefits above, the creation and structure of Bitcoin have also been cited as points in the system’s favor[2]. Bitcoins can be created by anyone with a computer running an application called a Bitcoin miner. Coins are owned by doing ‘work’, the difficulty of which self-adjusts to result in a predictable flow of coins into circulation. Coins which are earned, or ‘mined’ are held in a digital wallet. When a holder desires to transfer coins, typically for a transaction to purchase a good, a digital signature[3] is added to the coin. As the transaction occurs, this signature is verified by a miner and is permanently, anonymously stored on the network[4]. 

The software for the system is open-source, allowing anyone to review it. Exchanges exist where coins can be traded for dollars, euros and other currencies. Because of the lack of transaction costs, the absence of chargebacks or fees, Bitcoins have been advertised as a great tool for small businesses to utilize to drive business by attracting current users.  

While several benefits have been described, Bitcoin is not without its detractors. It has been utilized to fund hacktivist groups[5], has been identified as a facilitator in the purchase and sale of illegal substances[6], was used to fund Wikileaks and its founder Julian Assange’s legal fund[7][8] and has had its usefulness as a tool downplayed for everything from inflation[9] and legal concerns[10] to the fact that it isn’t backed by anything by the faith of its users.[11]

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[1] http://www.weusecoins.com/,  last accessed 9.30.12. See the video presentation at the www.weusecoins.com for additional insights.

[2] Id.

[3] Those who would take a deeper look at the technical aspects of Bitcoin should certainly avail themselves of the wonderful white paper written by pseudonymous founder Satoshi Nakamoto (and cited ad nauseum in this paper). However, for the purposes of a legal audience, the description herein, including the idea that there is indeed a physical aspect to Bitcoin, should be sufficient.

[4] Probably need to insert a discussion of the exchanges somewhere in here…

[5] Discuss Anonymous

[6] Staff (12 June 2011). "Silk Road: Not Your Father's Amazon.com". NPR. http://www.npr.org/2011/06/12/137138008/silk-road-not-your-fathers-amazon-com.

[7] Cite to relevant resource

[8] While some of this paper’s readers may view the previous few examples as benefits, they should consider that they wouldn’t be viewed as favorably by a legislature or government agency trying to find reason why Bitcoin should be allowed…

[9] Lengthy footnote here on the market run-up a few years ago.

[10] Discussed at length infra (cite page)

[11] Which may or may not be as strong as the ‘full faith and credit’ of the United States, but we digress…

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.