Understanding Cryptocurrencies

The aftermath of the 2008 financial crisis saw the emergence of a new phenomenon: Bitcoin. 

Against this economic background, Satoshi Nakamoto introduced a new trading system made possible by cryptographically produced currencies. The financial crisis raised one of the problems associated with the traditional banking system and the potential consequences of sole reliance on this method of finance.

Cryptocurrencies offered the possibility to transact without a centralised system and arguably improved levels of risk and transparency. And in doing so, they are subject to a range of unique and nuanced areas of cryptocurrency law.

What is a Cryptocurrency?

The term cryptocurrency includes cryptocurrency coins and tokens.

A cryptocurrency coin, the most recognisable of which is Bitcoin, is designed to act as traditional money to purchase goods and services even if it does not respond to the universal criteria of currency.

Tokens can be described as a financial technology that can perform different functionality. For instance, a utility token gives holders access to specific rights and privileges such as use or access rights to a building or a service, while a security token represents ownership or interest associated with an underlying asset.

In addition, there are non-fungible tokens (NFT) which are valued uniquely and currently making headlines as they have been described as the future of art. Recently, a digital-only artwork has sold at Christie’s auction house for $69 million (£50 million)  (“The First 5000 Days”) positioning its artist in the top 3 of current most valuable living artists worldwide. 

However, the winning bidder did not receive a sculpture, painting, or even a print but instead a NFT security token.

How can we use Cryptocurrencies?

Despite the primary purpose to use cryptocurrency coins as a currency, it is hard to argue that it is a good network for transactions. It is more of an investment that you hope gains value, like gold. 

For instance, before stepping back a few weeks later due to environmental concerns, Tesla allowed customers to purchase their cars via Bitcoin. The initial excitement has been followed by different concerns and questions; in the case of a refund, if the price of Bitcoin moves up before the refund is issued, the customer could lose out significantly.

The Initial Coin Offering (“ICO”) via token has become a new means of raising capital for companies associated with the principle of crowdfunding. The mechanisms of an ICO are relatively simple: 

• A company generates its own money which will be embodied by tokens 
• The token will then be sold in a limited number at a specified date corresponding to the ICO
• The investors will be able to acquire goods and services issued by the company by the means of the tokens released.

Tokens can also become a speculation tool, completely detached from the initial project. Investors can buy tokens, merely with the aim of reselling them at a higher price to people interested in the services provided by the company.

For instance, Ethereum is an open-source blockchain-based platform used to create and run decentralised applications as well as implement and use smart contracts. Ethereum was originally funded through an ICO where buyers received Ether for their investments which took place in 2014. However, it is hard to argue that people are buying Ether as the means to support the development of smart contracts, rather than as a speculative tool.

Specialist cryptocurrency solicitors

Ellis Jones’ Cryptocurrency solicitors have specialist knowledge and expertise across a broad range of areas. We act for a wide range of individual and commercial clients in cryptocurrency-related matters.  

• Cryptocurrency Fraud & Scams
• Dividing Cryptocurrency in Divorce
• Cryptocurrency in Wills & Inheritance
• Cryptocurrency as Shares/Salaries/Dividends

If you feel you need any advice on cryptocurrency please contact either William Fox Bregman or  Paul Kanolik in our Banking and Financial Litigation team by calling 01202 057733. Alternatively, please email us at banking@ellisjones.co.uk.