Cryptocurrency: a Primer

Many Americans have heard something about cryptocurrencies (also known as “crypto”). Most people have probably heard about Bitcoin, but there are a vast multitude of digital coins that are in circulation. Crypto has emerged to be a disruptive force in finance, and the law has expectedly lagged in addressing the emerging issues. If you suspect your spouse may have hidden assets in Bitcoin or other type of cryptocurrency, this information may be helpful. So, as we begin a journey into the practical and legal effects of crypto, our first stop is to give a brief overview on what exactly is crypto. Our Greensboro divorce attorneys with expertise in cryptocurrency are knowledgeable in this area.

What is Cryptocurrency?

Crypto is virtual currency that can be used, much like the traditional currencies, in transactions for goods and services. The goal is to create a seamless, secure, decentralized currency, that makes transactions quickly verifiable. These transactions are unique in that they are also typically recorded and verified with strong cryptography methods, in a decentralized distributed ledger (more on this later) which makes them nearly impossible to defraud or double-pay. Crypto is typically denoted by a digital coin or token, that is not issued by any centralized authority (such as a bank).

So, what is the point of crypto and why does it exist? The concept has roots in anonymity as early as 1983, when the concept of electronic money as a medium for exchange was first conceived by cryptographer David Chaum.

However, the modern day crypto has less to do with being anonymous as it does with being decentralized, secure, and efficient. In its simplest form, crypto is a form of currency. You use it to buy goods or pay for services. Since it is online and digital, it operates on a much faster scale than traditional currency transfers that require the middleman (often a bank). The fact that it is decentralized means that it is free from direct control by banks or governments—which means that there is no limit or censorship of what can be purchased with crypto. Moreover, it offers a financial tool for those without access to the traditional banks—all that is needed is an internet connection and a crypto wallet.

Blockchain Basics:

To make the transactions secure, most cryptos rely of a distributed ledger technology, an example being Bitcoin utilizing blockchain. A blockchain is essentially a ledger of all transactions that are verified by cryptographic methods. Most blockchains, as in the case of Bitcoin, are decentralized and operate on a public peer-to-peer network. This means that crypto uses computational power of members of the network to verify new transactions to the blockchain. Once a number of transactions are verified, they are compiled into a new block and then permanently tethered to the blockchain. The blockchain will contain a history of all transactions, and because it is distributed to all members, it is highly resistant to tampering and fraud because it would require a majority of the members to all have the same tampered blockchain, requiring an insurmountable amount of computing power. For instance,

if one tried to manipulate a block, that version of the blockchain would be very quickly flagged by all other members of the network because it would differ from all the other blockchains.

To understand further discussions on crypto, some basic vocabulary is required:

Blockchain – generally refers to a decentralized distributed ledger that captures all transactions in a secure fashion its decentralized and cryptographic nature.

Public/Private keys – the PIN or password to allow a crypto transaction to go through. A crypto transaction is essentially an encrypted key pair of a public key and private key—the public key is like an account number, and the private key like the PIN to access the account. As an example: If player 1 seeks to transfer 4 bitcoins to player 2, then player 2 makes a new bitcoin address (comprised of a public key and his own private key) and then player 1 can send the bitcoins to that address and sign with her private key. If player 2 then wants to transfer 4 bitcoins to player 3, then he sends the bitcoins to player 3’s address and signs with his own private key that was generated in the transaction between player 1 and 2.

Proof of Work – the use of computational power to assemble new blocks to the blockchain, and usually be paid a small crypto award. Miners are the computers/individuals that validate blockchain transactions performing the proof of work.

Proof of Stake – an alternative, less power-intensive validation protocol than Proof of Work. Here, the miner is chosen by chance, and those with more crypto staked in the network have a higher chance. Think of it almost like a raffle, except the winner gets to add a new block and rewarded a transaction fee.

Wallet – a place to store crypto. Can be hardware based (memory/USB), paper (literally paper), or software (online wallets/exchanges).

Hash – the identifier for a block in the blockchain, and also the operation by the computer that generates the identifier. Each hash contains information about all previous transactions, which is essential to the immutable concept of the blockchain, to alter one block, one would need to alter all the previous blocks in the chain—a computationally impossible feat.

Exchange – a marketplace to buy/sell/trade crypto; typically from fiat currency to virtual.

Non-Fungible Token - the NFT is a token stored on the blockchain. NFTs may be conveyed and recorded on a blockchain (e.g., Ethereum) to a new identity. NFTs are commonly stored in a digital wallet (e.g., MetaMask), and most if not all of these wallets will have the function to transfer the NFT to someone else's public address, for a transaction fee ("gas"). That transaction will be added to the blockchain, and people will see that the transferee is the new owner of that NFT.

NFTs are tricky regarding ownership. The crux of the issue is that the NFT may be transferred, but was the copyright transferred? Did the holder of the NFT get exclusive title? That is an emerging area of the law. However, in the marital case, whatever a spouse owns as an NFT can be transferred in equitable distribution. An NFT is property, in our opinion.