WHAT’S THE BIG DEAL WITH BITCOIN?

Bitcoin has been in the news lately, and you may be wondering what it is and whether it’s legal. Before discussing those topics, please understand that Riley & Jackson is a law firm and not an investment service. We don’t offer investment advice, so if you are thinking about buying or using bitcoin, you should discuss that with your financial advisor.

Bitcoin is a type of cryptocurrency that can be used to purchase things from people or businesses who have agreed to accept bitcoin as a form of payment. The transactions take place online using digital wallets, which are like virtual bank accounts. Bitcoin payments are made from the buyer’s digital wallet to the seller’s digital wallet. The transactions show the digital wallet IDs, but do not show the names of the buyers or the sellers. That means that the transactions using bitcoin are private and, for the most part, allow the buyer and seller to remain anonymous.

There are several ways to get bitcoin. Many people purchase it from online marketplaces called “bitcoin exchanges.” It works like other online purchases: bitcoin is offered for a fixed price, and the purchaser buys bitcoin using traditional currency. You can also get bitcoin by “mining” it. Mining is a competition where people use computers to try and solve very complicated math problems, and the winner is paid with bitcoins.

Some view bitcoin as the wave of the future since it’s a currency that is completely digital and not tied to a particular government. That has led some to treat bitcoin as an investment opportunity: buying it at one price and hoping to sell it, later, for a higher price.

Bitcoin does raise some legal issues. For starters, bitcoin is not a traditional currency tied to a particular country (like the United States Dollar). That means bitcoin is not considered “legal tender” issued by or protected by the government. Since it’s not “legal tender,” a seller does not have to accept bitcoin as payment. The fact that bitcoin is not “legal tender” has not stopped some retailers, including some well-known airlines and restaurants, from accepting bitcoin as payment.

Another legal issue is with the lack of certain protections for digital wallets. The Federal Deposit Insurance Corporation, a government agency created in the 1930s during the Great Depression, insures most traditional bank accounts (whether at a brick-and-mortar bank or an online bank). That means that if the bank fails, the customer’s deposits are insured up to a certain limit. Some customers saw how this insurance worked first-hand when their banks went out of business in 2008 and 2009 during the Great Recession. Unlike traditional bank accounts, the Federal Deposit Insurance Corporation does not insure digital wallets. That means if a digital wallet is hacked and bitcoins are stolen, there may not be much that the account holder can do about it.

The last legal issue is uncertainty. For now, bitcoin remains mostly unregulated at the federal level. Some states have attempted to place some restrictions and regulations on using bitcoin, but most have not. Some see the lack of regulation as the best reason to use bitcoin. The lack of regulation makes others wary, especially in a world where hacking and data-breaches seem to be an everyday occurrence.

Riley & Jackson represents people and businesses in securities litigation, and the author has represented financial institutions and investors in various matters.

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