BLOCKCHAIN THROUGH A LEGAL LENS Abstract Blockchain technology is one of the most promising new technologies since the advent of the Internet. With blockchain’s decentralized, immutable, and anonymous features, it has the capability of changing the way we interact, how digital information is stored and retrieved, and who has access to such information. As companies of all sizes, along with a robust development community, are devoting substantial resources to blockchain applications, legal practitioners need to become acquainted with the technology. Practitioners not only need to understand how blockchain technology may be governed by existing laws and regulations, but also be participants in the creation of, and advocacy for, new laws and regulations that protect individuals while also encouraging innovation in the blockchain ecosystem. As is common with emerging technologies, blockchain development is far outpacing efforts by regulators and courts to address the myriad of unique issues that the technology raises. Blockchain Through A Legal Lens provides a comprehensive overview of current federal, state, and select international laws governing blockchain technology. Where laws or regulations do not exist, or potentially relevant laws or regulations have not yet been applied, the treatise aims to provide thoughtful analysis of how the existing U.S. legal framework and jurisprudence may apply to the intersection of blockchain technology and a variety of practice areas, such as intellectual property, anti-money laundering, consumer protection, property, and contracts. COPYRIGHT © 2019, BY BLOCKCHAINS, LLC JANUARY 2019 v1.0 i BLOCKCHAIN THROUGH A LEGAL LENS Contributing Authors Lee Weiss, Blockchains General Counsel Stephanie Sciarani, Blockchains Deputy General Counsel Emily Friedman Albert Lum Editors Lee Weiss, Blockchains General Counsel Stephanie Sciarani, Blockchains Deputy General Counsel Andrew Wilmar Eric Berlin Acknowledgements Nicole Emmerich, Blockchains Marketing Specialist Elaina Duffy, Blockchains Marketing Director Richard Escalante, Blockchains Digital Media Director COPYRIGHT © 2019, BY BLOCKCHAINS, LLC JANUARY 2019 v1.0 ii BLOCKCHAIN THROUGH A LEGAL LENS Disclaimer Blockchain Through A Legal Lens is a work in progress. Since blockchain technology and the law change rapidly, there may be portions of the treatise that are not current. In order to provide the reader with the most up-to-date information, the treatise will be updated on a regular basis. However, it is advised that you conduct your own research, including whether the statements of law contained in the treatise are applicable to the jurisdiction in which you are practicing or conducting business. It is important that prior to relying upon, or using, such information you verify the information is still accurate as laws may have been amended or overturned by subsequent case law or legislation since the treatise was published. The content in Blockchain Through A Legal Lens is provided for informational purposes only. None of the content is intended to be, and does not, constitute legal advice, or any other advice. All of the content is general in nature and not specific to your circumstances. You should not rely on the treatise to make any legal decisions. It is recommended that you retain an attorney for all legal advice and issues. Nothing in the treatise forms an attorney-client relationship between you and the authors, editors, or contributors. Blockchains, the authors, editors, and contributors do not accept responsibility for any loss or inconvenience caused by your reliance on any material contained in this treatise. COPYRIGHT © 2019, BY BLOCKCHAINS, LLC JANUARY 2019 v1.0 iii Table of Contents Chapter 1: The History of Virtual Currency ...........................................................................1 1.1 Precursors to Decentralized Virtual Currencies ................................................................... 1 1.1.1 E-Cash ......................................................................................................................................... 2 1.1.2 E-Gold ............................................................................................................................. 3 1.1.3 B-Money.......................................................................................................................... 4 1.1.4 WebMoney ...................................................................................................................... 4 1.1.5 Linden Dollars ................................................................................................................ 5 1.1.6 Bit Gold and Reusable Proof-of-Work .......................................................................... 5 1.1.7 Liberty Reserve .............................................................................................................. 6 1.1.8 M-Pesa ............................................................................................................................ 7 1.1.9 SUCRE ............................................................................................................................ 8 1.2 Decentralized Virtual Currencies .......................................................................................... 8 1.2.1 Bitcoin ............................................................................................................................. 8 1.2.2 Ethereum ........................................................................................................................ 9 1.2.3 Dash .............................................................................................................................. 10 1.2.4 Ripple ............................................................................................................................ 11 Chapter 2: Blockchain Technology ........................................................................................ 12 2.1 Public Key Cryptography .................................................................................................... 12 2.1.1 Encryption .................................................................................................................... 12 2.1.2 Digital Signatures ......................................................................................................... 12 2.2. Blockchain ............................................................................................................................ 13 2.2.1 Blockchain as a Ledger of Transactions ...................................................................... 13 2.2.2 The Mining Process and Verification of Transactions ................................................ 15 2.2.2.1 Peer-to-Peer Network ............................................................................................... 16 2.2.2.2 Proof-of-Work........................................................................................................... 17 2.2.2.3 Proof-of-Stake ........................................................................................................... 18 2.2.2.4 Cloud Mining ............................................................................................................ 20 2.2.3 GHOST and Uncles ...................................................................................................... 20 2.3 Tokens .................................................................................................................................. 21 2.4 Wallets .................................................................................................................................. 22 2.5 Transaction Fees .................................................................................................................. 23 2.5.1 The Bitcoin Network .................................................................................................... 23 2.5.2 The Ethereum Network ................................................................................................ 24 2.6 Exchanges ............................................................................................................................. 25 2.6.1 Centralized Exchanges ................................................................................................. 25 2.6.2 Decentralized Exchanges .............................................................................................. 26 2.7 Virtual Currency ATMs ...................................................................................................... 27 2.8 Executable Distributed Code Contracts .............................................................................. 28 2.9 Decentralized Applications .................................................................................................. 29 2.10 Decentralized Autonomous Organizations .......................................................................... 29 iv BLOCKCHAIN THROUGH A LEGAL LENS Chapter 3: Threats to Blockchain Networks.......................................................................... 31 3.1 Cyberattacks ........................................................................................................................ 31 3.1.1 Social Engineering ........................................................................................................ 31 3.1.2 Phishing .......................................................................................................................