LEGAL GUIDE
Written by attorney John Paul Fernandes | May 8, 2019

Understanding Bitcoin and Virtual Currency

Bitcoin is the most well-known form of digital currency (also referred to as digital money or virtual currency). It was created by Satoshi Nakamoto, a pseudonymous person whose true identity remains elusive, via software that was released under an open source license. Satoshi Nakamoto also released

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Lending Considerations As the bitcoin ecosystem matures, a number of new uses are being found for bitcoin. Each has its own risks and advantages, and requires careful consideration. One prominent example is the use of bitcoin as collateral for a loan. A major risk of accepting bitcoin as collateral is that, without appropriate safeguards, bitcoin can be transferred or liquidated by the borrower pretty quickly in the event of default. Another practical consideration is how to enforce a lien, given that the private key for the user’s wallet is necessary. These issues can be addressed, however, by using a feature of the bitcoin protocol that enables escrows. Specifically, the feature can enable an “M of N transaction.” This requires a total of M parties to consent to execute a transaction out of a total of N parties. In the case of a simple loan, three parties may exist—the lender, the borrower, and the escrow entity (thus, N=3). A transaction can be programmed using the bitcoin protocol such that the borrower transfers bitcoin to the escrow account with conditions for release, including a requirement that M(2) of N(3) parties must consent. If the borrower and lender agree that there has been a default, they can both “sign” the transaction with their private key and the bitcoin can be released to the lender (in the event of default) or to the borrower (in the event of satisfaction of the underlying loan). If there is a dispute, then the escrow agent can act, together with the party that the agent deems to be correct regarding the dispute, and provide the necessary second signature. Theoretically, this enables the bitcoin protocol to facilitate the enforcement of a lien and potentially avoids the need for filing liens. Overview – Bitcoin Regulation Bitcoin is not legal tender, but it is not necessarily illegal in most countries. Governments around the world are grappling with whether and how to regulate it. The primary regulatory concerns are: (1) consumer protection, (2) anti-money laundering; and (3) tax evasion. These issues implicate federal, state, and international law.

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