By Joseph Raczynski
This is the first post in a three-post series about blockchain, an online public ledgering system, and how it will soon significantly impact many aspects of the legal industry. The intent of this first post is to show the marvels and the pitfalls of Bitcoin and its underlining blockchain technology. My personal account shared below is an experience with the virtual currency beginning five years ago until today; and the subsequent posts will embark on a legal discussion of the real magic behind Bitcoin, the blockchain system.
Part 1: Passage through Mt. Gox
I still remember the day of June 19, 2011, when I transferred $40 from a little-used, barely funded State Department Federal Credit Union account into Dwolla, a nascent electronic money exchange. Dwolla was an intermediary, allowing people to send money to others or into various accounts electronically. I used it once to transfer money from my State Department Credit Union account to a Mt. Gox account.
There was no question at the time that I thought every aspect of this was cybersecurity risky. Transferring money from an established credit union was the first chance I took. What were the implications connecting these two entities? Would that exchange compromise my credit union account? What was I doing transferring $40 into a mysterious Tokyo based company, which was previously a trading place for fantasy trading cards named “Magic: The Gathering Online eXchange” aka (Mt. Gox)? The owner of the exchange, Mark Karpelès, had picked up the burgeoning enterprise a few months prior. The original owner who had converted the business from fantasy cards to Bitcoin bowed out after not being able to manage the new exchange’s growth.
Rise and Fall of Bitcoin
This risky hoop-jumping money transfer I stomached in 2011 was to buy my first Bitcoin. I had heard about the new currency on an Internet message board focused on cybersecurity. As an undergrad studying economics, I believe that a decentralized, anonymous, secure currency was an amazing concept that absolutely made sense. But I was anxious for what might happen to my money, my account and my name in going through this process. After transferring the small sum into the Mt. Gox account I watched Bitcoin fluctuated from $11 to $22 per coin over a few months. When it hit $20 at one point I was able to buy two coins — thus turning the $40US into two Bitcoins.
So what is Bitcoin and why is there an appeal? When asked, my simplest response is that it is like holding and using cash on the Internet. Even better, it is universal, international, secure and anonymous peer-to-peer electronic cash. All currencies in the world can be exchanged for Bitcoin. The currency is not backed by anything (gold or silver), but neither is the US Dollar, circa 1971. The cryptocurrency (mathematically created denomination) allows people or companies to digitally exchange money quickly, securely, and without having to go through a bank or using a credit card — which traditionally charge a fee. Simply download an online digital “wallet” from the literally ton of apps to choose from, and you can transfer your Bitcoins into it. How do you transfer money into your wallet? Each wallet has a unique address (string of numbers and letters) which you use to receive money. If you wanted to transfer money to someone else, all you need is their address, the amount of Bitcoin desired to transfer and you can send money to them.
Another means of sending money is to scan a QR Code from someone’s app to transfer money from one wallet to another. You can even snap a picture of the QR Code with your phone and transfer the money. The currency can be transferred between neighbors, across the country and anywhere overseas with ease. The transaction fee can be free to as high as several pennies or dimes. As you can gather, users can completely circumnavigate the banking and credit card communities — which poses issues, but also has many benefits. It is a fascinating technology; and the underlying architecture and its platform, called the Blockchain, is even more intriguing.
Think of all the legal implications here. Currently, individuals and businesses can transfer unlimited sums of money from country to country without notification, identification or taxation. It is completely unregulated. More on the legal implications of this later.
The Mt. Gox Crash
Back to my passage through Mt. Gox. In 2011, the coins I held with Mt. Gox simply sat in my account. Monitoring the currency infrequently, I noticed that it increasingly fluctuated and became widely unpredictable with a thrust upward, rising from $20 to $266. In 2013, I was stunned to see the change. My $40 had turned into $532. As time went on the rapid changes to its valuation continued to gain momentum. By November 2013 (two years later), Bitcoin peeked at around $1,250 per coin. My $40 became $2,500 in “electronic paper” money. I was flabbergasted. At that stage, my imagination had the thing hitting $10,000 per coin, but that never came to pass. In fact, from that lofty point, the currency has fallen to a current $400 US per coin in March 2016.
Unfortunately, I never was able to cash out of that Bitcoin, because like most early investors, I had my money with Mt. Gox, which handled 70% of all Bitcoin transactions. Two weeks prior to the exchange closing, like many others, I tried pulling my money out, but the system would not allow it. It was equivalent to a bank run of the 1920s.
As was widely reported, someone just decided to make off with all of the Bitcoins that were held within Mt. Gox. It certainly seems obvious, but having worked with multiple banks over my life, you are semi-lulled into a sense of security around an institution and money. If a bank goes under, you rely on the FDIC insurance — not so with Mt Gox. Sure, if I had thought about it, it seemed feasible that something like this could happen. However, never would you assume that a single individual could shut down an exchange with $473 million in assets by tossing that sum onto a digital wallet and walking out the door. My $40 investment which jumped to $2,500 vaporized and now is in bankruptcy proceedings. Many other Bitcoin believes and cryptocurrency hopefuls literally lost millions of dollars from this exchange going insolvent. This experience underlined the possibilities of the currency, validated great underlining concerns, and clearly demonstrated that the legal world would benefit from understanding this technology.
In my next post I will touch on how these currencies will impact all of us in the near future and where the law with play a role.