Building Our Blockchain Future (Part 2) – Future Legal Payments Through Cryptocurrency

By Joseph Raczynski

This is the second 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. In the first post, I demonstrated the potential and the pitfalls of Bitcoin and its underlining blockchain technology. The intent of this post is to describe what full global adoption of a cryptocurrency would entail.

Part 2: Future Legal Payments Through Cryptocurrency

First, I have little doubt that in a decade or less we will have a world currency akin to Bitcoin. The implications on both the legal world and government legislation will be significant. Right now there are dozens of cryptocurrencies out there: Dogecoin, Litecoin, Peercoin, and there are many more are on the horizon. Each has unique aspects but all have at their focus: security, ease of electronic money exchange, and the avoidance of a centralized banking system. Certainly the most popular cryptocurrency to date is Bitcoin which started the concept in 2009 after its creation by an anonymous inventor known as Satoshi Nakamoto, a Japanese equivalent to “Jim Smith”.

Bitcoin is incredibly intriguing because it is a natural product of the Internet, a decentralized forum of exchange and connectedness. Currently, for two people to exchange money we typically have to route money through various exchanges which all take fees merely for passing the money along. The success of cryptocurrencies demonstrates that those traditional fees are outdated and excessive for current transactions. While traveling in Thailand recently I took $100 out of an ATM. With the fees — i.e., Thai ATM fee, foreign transaction fee, and a cut of the exchange rate my bank charged — I spent $23 to get that $100. The fee for a similar transaction from dollars to Bitcoin would have been in the neighborhood of 20 cents. The fees of yesterday by the banks made sense decades ago, but now given today’s advanced and speedy technology those extraordinary fees bear little relation to the actual cost of transferring money.

 

Where do I see a cryptocurrency taking off?

  • Micro payments — Premium content on the Web will be changing. If you want to avoid the dominate Internet model of advertising, think about cryptocurrency micropayments. That is, with Bitcoin you can pay people in tiny fractions of a cent. You could then create an account with The New York Times that every time you wished to read a story you would click a link and automatically you would pay ½ a penny. That may not seem like much, but if everyone embraced this model, content providers would actually be paid rather than having to serve you ads to pay for the content. This model is similar to music providers offering unlimited music for a monthly fee, but with that fee broken down into per-play royalties.
  • Developing Countries — Instead of a widely vacillating currency in a country, people could rely on this world currency to be sturdier, because it is not solely dependent on how a single country’s economy is performing, but rather on the stability of the whole world’s economy. Local government action would not be a factor. In addition, money would not have to be printed, but people could exchange money from person-to-person on their phones. This is already being done in African countries as people send money via text messages. Having a cryptocurrency would be much more secure and reliable than the text exchange of money which is currently happening.
  • Small Fees — As I mentioned previously, with a cryptocurrency, Visa, American Express, Master Card, Discover Card and all of the other credit cards could be potentially threatened. In fact, most of their business potentially could go away, especially with those people that use debit cards or pay their bills monthly. Banks could also be threatened. Some ask, why would I house my money in a bank which has a set of rules and a multitude of fees and regulations? In addition, a lack of convenience with banks means walking or driving to receive money. All of that could be avoided with a digital wallet where the individual is the person in complete charge of the money.

The market for growth in this arena will increase substantially in the years ahead. That said, there is little question that several challenges to cryptocurrencies persist. One, a lost electronic wallet is gone forever. If you have not created a backup or saved it digitally in a safe place, you could lose all of your assets. Two, insurance does not exist. Cryptocurrency is not FDIC insured as are bank deposits. Again, it is the responsibility of the individual to own this and make sure they have diversified their assets in safe locations.

In my next post, I will review the countless — and there are legion — legal hurtles ahead. The legal industry will play a significant role in further defining cryptocurrencies and how its underlining technology, the blockchain, will be used.

Building Our Blockchain Future (Part 1) – Passage through Mt. Gox

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.

blockchain

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.

On the Edge of Law Firm Technology

By Joseph Raczynski

Over the previous three years at ILTA, one of the most popular sessions has been “What’s That? New and Cool Technologies”.  This year was no different.  A capacity crowd of legal technologists listened to the witty foursome of Jeffrey Brandt of PinHawk LLC, Mark Manoukian of Kegler, Brown, Hill & Ritter, Beau Mersereau of Fish & Richardson P.C., and Ben Weinberger with Phoenix Business Solutions.  The cast injected levity into their dialog about predictions of where technology is headed.

They focused on several areas: Windows 8, Wearable Technology, Enterprise Content Management (ECM), Digital Currencies, and The Internet of Things (IoT).

Windows 8:

The panel mentioned that Windows 8 is lightning fast.  The difference between Windows 8 and 8.1 is that in the latter, a start button was added which is key for most users.  Previously people had to hunt out where to begin and it was less intuitive.  The other key takeaway, many firms have not implemented Windows 8 for a singular reason, many vendors do not support IE11 which comes standard on the OS.

Wearable Technology:

The group cited many examples of how wearable technology will start creeping into law firms.  Ben Weinberger stated that “The NFC ring could be used to unlock doors, mobile phones, transfer information and link people.”  This could be a nonintrusive way to acclimate users to this sort of technology.  It is easy and subtle.  Others weighed in with current examples.  Disney World uses Magic Bands worn by park goers.  They are easily able to tap down for food, gift shop purchases, and unlocking their hotel room door.  The goal with wearable said Jeffrey Brandt, is that the form will be small and help establish convergence.

Enterprise Content Management (ECM):

In a statement that seemed to shock the audience, several panelists stated that they thought law firms were on the cutting edge of ECM.  Where firms are typically more conservative to adopt new technology, this is an area firms have a precise focus on organizing data into scalable structural components.

Digital Currencies:

The panel was definitely split on this topic.  Some saw the true value of having an unregulated currency while others bluntly said this was a disaster without government control.  Bitcoin dominated the discussion as the crypto-currency of choice, but Mark Manoukian mentioned a new coin called Ripples which has the endorsement of MIT.  Ultimately the panel suggested that some sort of regulation would be important for true adoption.

Internet of Things (IoT):

The Internet of Things is very popular these days.  It is essentially applying an IP address to almost everything, e.g. each light at your home, doors, and appliances.  The panel saw a great deal of opportunity here and mentioned law firm books as a great way to incorporate this type of technology.  They spoke about placing RFID chips in books to keep track of inventories.

The fast paced discussion covered a wonderful array of topics that may have a major impact on the law firm of the future.  The wearable technology discussion specifically referring to the NFC ring, seemed to strike a chord with most as something very plausible in the near future.  Lastly, it does appear that ECM will continue to evolve within the firm to become more seamless and search dynamic.