Many entertainment industry artists and creators believed that the rise of digital content distribution would result in more direct and accurate financial accountings. But the complexities only increased. Still, content creators hopes were raised recently when DotBlockchain Music announced its partnership — for an open source, cryptocurrency method of tracking income — with the independent music distributor CD Baby, digital rights firm FUGA and Canadian performance rights organization SOCAN. Hollywood producers also see digital cryptocurrency as a fundraising avenue with significant potential to get projects off the ground.
With that in mind, this article familiarizes lawyers with cryptocurrency and, particularly, the enabling blockchain technology, methodologies and systems. It also introduces blockchain’s current and future uses, and points to resources to learn more about this profoundly disruptive and promising collection of technological advancements.
Bitcoin and other cryptocurrency transactions depend upon the transactional trust enabled by blockchain, a distributed system using open source digital protocols with cryptographic security, and the operation of a distributed shared ledger within which chains of blocks of data from individual transactions are analyzed or “mined” for validity. Uses of the term “blockchain” range to include and reach beyond its technical reference to these chains of data blocks. Collectively, blockchain is the technology that enables peer-to-peer (P2P) payment to occur between individuals or companies without the involvement of a bank or other trusted intermediary. The use of blockchain and blockchain-leveraging systems is fueling these P2P financial exchanges and is beginning to enable so-called “smart contracts” and a host of other transactions, innovations and industries well beyond the financial sector.
Bitcoin is a leading type of digital or virtual currency that is exchanged by means of a decentralized online network. See, U.S. Securities & Exchange Commission (SEC), “Self-Regulatory Organizations: NYSE Arca Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading Shares of the Bitcoin Investment Trust under NYSE Arca Equities Rule 8.201,” Release No. 34-79955 (http://bit.ly/2ml7zlk); File No. SR-NYSEArca-2017-06, 82 Fed. Reg. 10,086, 10,087 (Feb. 3. 2017).
Virtual currency itself is not a new concept, but has been a medium of economic exchange within online video games and virtual worlds for years. Over time, virtual currencies used within the economies of the virtual games or worlds began to be exchanged for U.S. dollars and other real-world, or “fiat,” currencies. (A fiat currency is the legal tender that a central authority designates and issues as the medium of economic exchange for goods and services.) People accept and employ fiat currency because regulatory systems support its durability and stability and because they trust the governing central authority.
The evolution of cryptocurrency leapt completely beyond the confines of virtual games and worlds with the 2009 advent of Bitcoin, which became the world’s first successful cryptocurrency and has a current market cap of $16.3 billion.
Bitcoin and other cryptocurrencies now participate in exchanges with fiat currencies and are used widely as a medium of economic exchange from goods and services. Cryptocurrencies play a particularly important role in developing economies that lack well-established and well-distributed banking systems.
By early 2015, the number of Bitcoin-accepting merchants worldwide surpassed 100,000. Bitcoin’s merchant adoption rate has ascended logarithmically. For example, according to CryptoCoins News, in Japan alone the number of Bitcoin-accepting merchants is expected to quintuple to 20,000 this year in the beginning run-up to the 2020 Summer Olympic Games.
Recall that cryptocurrency exchanges occur through an online network. The decentralized network operates without a bank or other trusted centralized payment authority in processing cryptocurrency exchanges. This means that exchanges operate across national borders with ease and without the need for currency conversions and sizable associated fees. Consequently, cryptocurrency transactions may be more quickly and cost-efficiently completed than fiat currency transactions. For example, some cryptocurrency payment processors charge merchants a 1% settlement charge for handling Bitcoin transactions, comparing that with the up to 3% rates charged by credit card companies.
As with fiat currencies and centralized banking systems, cryptocurrencies would have no value without a system for validating those transactions so that they may be processed and the funds transferred between buyers and sellers. Blockchain is the technological and mathematical means by which such systems are configured and participants operate within those systems and by which transactional trust is achieved.
A blockchain network is made up of numerous P2P, i.e., non-hierarchical, computing resources called “nodes.” The work of the nodes is to execute open source digital protocols that employ cryptographic security and certain other computational methods. The purpose of these protocols is to validate cryptocurrency transactions presented to the nodes. The node operators are called “miners” because, once they carry out the protocols and validate a transaction, assuming that another miner has not bested them in first achieving that validation, the miners earn or “mine” cryptocurrency for that work.
“Blockchain” may serve to collectively label the protocols used by nodes to analyze and seek to validate blocks of data about individual transactions in sequence, that is, in a chain. Some use “blockchain” to refer more generally and collectively to the network, systems or platforms within, upon and around which nodes are organized and miners execute the given security and computational protocols.
Bitcoin and cryptocurrency transactions are the first, but only one set of applications for blockchain technology and systems. The SEC recently published a useful and accessible overview of the Bitcoin network and blockchain, Bitcoin transactions, and the Bitcoin industry and market in the Federal Register. See, U.S. Securities & Exchange Commission, supra note 1, at 10,087-90. Paul Brody of Ernst & Young also publishes a terrific slide presentation with an embedded YouTube video. See, “BitCoin Basics: Doing Ordinary Things in Amazing Ways” (Dec. 2015). The seminal blockchain white paper is “ Bitcoin: A Peer-to-Peer Electronic Cash System” (2008), pseudonymously published by Satoshi Nakamoto, the person or persons who invented Bitcoin.
The tremendous demand from consumers and businesses for cryptocurrency-enabled transactions also drives heavy development and business investments by many of the world’s largest companies and financial institutions around blockchain and related technologies. Those blockchain investments include the financial technology, or shortly-named “ fintech,” industry that is rapidly harnessing and leveraging machine-to-machine communication systems collectively known as the Internet of Things.
Given the absence of a “trusted” central authority, cryptocurrency transactions might otherwise never have occurred. Enter science, technology, engineering and mathematics (STEM) and those mighty STEM wielders to save the day and, certainly, to spur significant future innovations. STEM professionals imbue cryptocurrency transactions and other blockchain applications with trust, that fundamental rocket fuel to the future.
***** Emile Loza de Siles is chief technology counsel of Technology & Cybersecurity Law Group PLLC, which she founded in 2003. She is a member of the Board of Editors of Cybersecurity Law & Strategy, an LJN Newsletters sibling newsletter of Entertainment Law & Finance. Her practice emphasizes technology and cybersecurity transactions, due diligence, compliance, litigation and corporate counsel services. She can be reached at eloza@TechnologyLawGroup.com.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.