On October 31, 2008, someone posted a PDF to an encryption newsgroup. The post came from an account named Satoshi Nakamoto.
The PDF contained a text called “Bitcoin: A Peer-to-Peer Electronic Cash System” and described what we know today as Bitcoin—the biggest cryptocurrency in the word by market capitalization (about USD$110 billion as of today).
Here are ten things that lawyers should know about Bitcoin.
1. There are no physical Bitcoin coins or banknotes.
Bitcoin is modelled after physical coins and banknotes but it is purely digital. But! Most people still use a physical medium for accessing their bitcoin although some, in theory, are able to keep billions in bitcoin entirely within their brains.
Let’s unpack this.
Bitcoin represents money as digital messages referring to different amounts—just like banknotes. You don’t keep your bitcoin in an account. You own bitcoin by owning one or more messages stored by the Bitcoin blockchain. Every message is digitally signed. The signature consists of a public part and a secret part. You own a message (that is the bitcoin amount it represents), if you know the secret part matching the public part of the signature. In that case, you have the power to change the signature to that of a new owner so the public part changes to that matching the new owner’s signature’s secret part (in cryptography, those are called public and private keys). To accept a payment you publish your public key.
Just like in law, owning bitcoin means having the exclusive power to transfer it to a new owner which is equivalent to having exclusive use of bitcoin. Isn’t the only way to use money to spend it? Except in Bitcoin “exclusive” goes way above conventional law and crosses the boundary into the law of nature. Mathematics (cryptography) and physics (mining/networking) make your ownership of bitcoin exclusive, not laws of people.
Now why would most people still use a physical medium for accessing their bitcoin if it’s purely digital? You need a private key to control your bitcoin holdings. It is a long string of characters, probably longer than any password you used. You have two options: memorize it (and break all your bitcoin into many small amounts with a different private key for each so you can dispose of private keys once you touch any computer or network with it) or keep it on a medium such as flash or hard drive under control of software known as a wallet. There are dedicated computers just to store private keys known as hardware wallets. A non-digital medium is also possible: write your private keys on paper, etch them on metal, and so on. But once your private key is out of your head it is vulnerable to loss or seizure. Losing a private key is equivalent to burning cash and stirring the ashes.