You may have read of Bitcoin or Ethereum in emails or on social media. You may have seen the actions of Tesla purchasing a significant amount or strange online images of a dog on a coin or “Dogecoin.”
Some readers in St Vincent and the Grenadines (SVG) may already be involved in the world of cryptocurrency. This article is to develop further understanding of the topic and to educate those who might be new to it. This is not financial advice.
What is Bitcoin?
Bitcoin is a cryptocurrency and to date there are hundreds of cryptocurrencies.
Bitcoin is the original cryptocurrency and it is considered the largest cryptocurrency in the cryptocurrency world.
What is Cryptocurrency ?
To my mind, a cryptocurrency is based on a few concepts. It is: (a) A digital currency; (b) based on a virtual ledger; (c) decentralised and (d) secured by cryptography.
A currency is a medium of exchange which replaces the bartering system in the past. In the old days, I could take five dasheen plants and trade them for clothing.
A currency (in the form of coins) was collectively recognised as a system by which we could exchange things without having the physical products or services. This introduced “value” and “worth” of things. So I could sell my dasheen for 10 coins and then purchase eggplants and other items “worth” the 10 coins. The coins would be tied to the value of actual gold, silver or other metals which have different values but which were universally recognised.
We now have paper notes “worth something” not because of inherent value but because of universal agreement. If everyone in the world, tomorrow, decided that the Eastern Caribbean Dollar was worth absolutely nothing, then it would be worth nothing simply because we all agreed.
Currency at its core is an abstract or intangible way that we have all agreed to value certain things.
Bitcoin is a digital form of currency to pay for goods and services.
Initially, I thought Bitcoin was some sort of trivial moment from Runescape or other online games but over the last decade it has become acutely popular. So popular that it may be the currency of the future.
Covid-19 has certainly shown that this may be a preferable method of payment as it is not affected by geography and requires no physical paper.
One Youtube Guru describes the ledger which is the basis of cryptocurrency as “effectively one giant spreadsheet” and I agree.
Essentially, Bitcoin is like a Microsoft Excel spreadsheet that records every single bitcoin transaction ever made since 2009 at the invention of Bitcoin.
Let’s say we go to a hotel in Union Island with five friends and no one wants to hand over any cash. So until we leave, I decide to make and control a spreadsheet of who owes what. So for example, “entry 1: Chev owes Rohan 30.00 EC for meal XY 23/08/21” then “entry 2: Rohan owes Keon 20.00 EC for gas 24/08/21.” The idea is to keep adding to the spreadsheet or ledger as the trip goes on and at the end of the holiday, we would exchange real money. This can operate as virtual money amongst the five friends. I could, virtually, give money to my friends for various tasks and vice versa. Imagine then the whole world operating on this spreadsheet giving virtual money without paper money ever exchanging hands.
Assuming that everyone is honest, every entry was legitimate and everyone agreed on it, then you have the basis for bitcoin.
A giant spreadsheet that keeps track of every single transaction that has ever happened regarding bitcoin. It tells you how much bitcoin each user has transferred and you can calculate how much bitcoin a particular user has.
If I were to give a Bitcoin to my son, then the spreadsheet would know because I would change it.
The idea of just one person or entity managing the spreadsheet in this analogy is like the banking and lending institutions in the world. So when there needs to be an edit in the spreadsheet Keon or Rohan would tell me and I would make the changes.
This is fine because I am trusted by my friends and this is exactly what we have currently e.g. US Dollar to the Federal Reserve and the British Pound to the Bank of England and connected to Governments, etc. This is the fundamental difference with Bitcoin and other cryptocurrencies. It is not centralised and not monitored by just one individual or group of actors. It is decentralised meaning there is no single authority or company making edits and policing the master spreadsheet or master ledger. Instead, every single person in the world has optional access to that master spreadsheet/ledger and can run software on their own computers that constantly checks the legitimacy and accuracy of the master spreadsheet/ledger. This makes hacking or tampering with Bitcoin very difficult as you would presumably have to hack millions of accounts at the same time.
Perhaps the most complicated part of cryptocurrencies is cryptography.
Cryptography is how our communications are secured or encrypted. For example, when you use encrypted messaging apps like Wire, Threema or the popular Whatsapp, you send encrypted messages from your end over the end of your contacts, referred to as “end to end encryption.” Cryptocurrencies use cryptography to solve the problem of trust and centralisation.
Cryptography secures the system in a way that removes the reliance on trusting individuals.
Cryptography is incredibly complicated but suffice it to say that hacking bitcoin is extraordinarily difficult.
It uses hash functions, secret keys,public keys & merkle nodes to verify and authenticate user activity.
It gets even more complicated with the entire network being maintained by “Bitcoin Miners.”
Bitcoin, is a controversial topic and it has even more complex legal issues in what is rapidly developing into “Cryptography law.” It will likely, however, cause significant contractual issues, jurisdictional issues, issues with data theft and financial fraud, money laundering, tax implications, intellectual property issues and investor concerns. These legal issues will likely manifest as cryptocurrencies become more useful and applicable in the growing digital age. Nevertheless, if you have spare coins feel free to toss me a coin or two.
Chevanev Charles is a practicing attorney at Temple Stoke Chambers in St Vincent and the Grenadines