Cryptocurrency 101

Hosts Zachary Pyers and Kenton Steele discuss the basics of crypto, including blockchain, NFTs, and Bitcoin. They also review the current crypto regulation landscape

Be sure to check out the video version of this interview on our YouTube page.

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Transcript

ZBP     Zachary B. Pyers, Esq.

KHS    Kenton H. Steele, Esq.

KHS

            Hello and thank you for joining us again for today’s episode of the Reminger Report Podcast on Emerging Technologies.  Today Zach and I are going to be beginning a discussion that will cover the next few episodes at least on cryptocurrency and issues related to cryptocurrency and before we fully dive into some of the nuances of this subject, it’s probably going to be helpful if we can talk a little bit about some of the basics of cryptocurrency, some of the terms we see commonly and what those terms mean.  So Zach one of the words we hear thrown around a lot and it’s referenced in changing all types of technology is the blockchain. The blockchain is going to change everything.  What is the blockchain?

ZBP

            Sure. So when we talk about the blockchain, the technical terms that are commonly associated with this is something called a distributed ledger.  Now when we kind of break those two words apart I think it’s helpful to separate them because from a fundamental standpoint we have an understanding as to what it means to be distributed.  I think the other term we could use is decentralized and the other term is ledger, right.  So, a ledger is essentially what we commonly would think about what a ledger is like an account almost right.  It is an account or a tracking of various transactions.  And so I think whenever I think of the term ledger, for some reason I think of the old Christmas Carol with scrooge who is in the old bank and I think of the account books and I think of them entering all the transactions in a ledger, right.  Because he was an accountant, a financial institution and so I think of a ledger in that sense of a book that’s where transactions are being recorded.  So, the ledger part is simply just a manner in which transactions are recorded.  The distributive nature of this is the fact that it’s not stored in one place or one location.  And so when you think of a traditional ledger like the Christmas Carol that I was just telling you about, you’re thinking of the fact that there is a physical book located in one specific location and there’s one master copy.  Now, the distributive ledger is not a single copy and it’s not centrally located.  And so what it is, is there are multiple copies of this transaction that are kept across multiple location and there is no one location where they ‘re kept.  It’s decentralized.   Meaning that multiple people will have access and be able to check the transaction and it’s not kept in a single location, it may be kept in multiple places within the blockchain technology.  And so the idea behind all of this is that the blockchain makes it harder to forge transactions or to have fraudulent transactions because all of the transactions are supposed to be able to be, they’re stored on the ledger, they’re not in one central location which means if you, even if you were to effect a transaction on one ledger that would still be the same transactions recorded in other places.  And so it’s harder to have a fraudulent transaction and the fact that it’s decentralized means that multiple people or multiple entities can be involved in ensuring the accuracy of that ledger.

KHS

            Thanks for going through that.  I think I have some understanding of what the blockchain is but what is it used for, what’s the function of this blockchain technology?

ZBP

            So I will tell you that when we think of a blockchain from a pop culture reference, we see the term blockchain used almost interchangeably with cryptocurrency, right.  And so often times when people see the term blockchain, they immediately think bitcoin, right. Or they think ethereum or they think ripple, or they think ______________.  There’s any number of cryptocurrencies that utilize blockchain technology in some form or capacity.  And so but frankly the, and I’m not suggesting to you the blockchain isn’t used in those cryptocurrency or in that capacity, but the blockchain technology itself limited it to the cryptocurrency under sells what it’s actually capable of.  They’re like a public use, that’s where we see it being use in the general public a lot.  There’s also corresponding private use.  Sometimes its actually pubic entities who are using it, but there’s almost a private use for it that is also incredibly valuable.  So, we have started to see certain foreign nations start to record or attempt to record __________ transfers using blockchain technology.  The idea being that instead of simply recording the ownership of, and we talked about the ledger and decentralization aspect of it.  Instead of just taking the ownership of let’s say an individual bitcoin, which is an intangible assert you can also track the ownership of a tangible asset, right.  You think of a parcel of land, right.  Now here in the United States the vast majority of the way that we record and track land ownership is frankly pretty much the same way we’ve been tracking them since the founding of our country if not the colonies.  And that is, there’s usually a county recorder or some other government entity where deeds and mortgages and other legal documents related to the ownership of property are recorded and tracked.  And so if somebody wanted to see who owned my house, they could go down and track that parcel and they could go through you know and have a history of all the transactions related to this specific parcel and they can date it back until it was subdivided from a larger parcel.  The idea being that requires all the deeds and all the transactions to be stored essentially in one single location right.  The county recorders office which could potentially be subject to some sort of manipulation or fraud.  It also requires the risk that there’s one single location so if something happens to those records, it risks the fact that you know we may not know who had ownership of which parcels.  When you date back, you know well before we had the digital age, there would be stories about the county recorder’s office or a courthouse that caught fire, the land transfer records were all stored in one single location and now and entire county’s land records are burnt down, right.  There were no potential duplicate copies of that because it was too time consuming.  And so the idea with the blockchain technology is these types of transaction, and it’s not just limited to land transfers right but its one of the ones that we think about the easiest.  We can use the blockchain technology to help to track these type of transactions and then you’ve got a situation where it’s not just one entity or person who maintains the records, it’s multiple.  But you’re able to track it better and hopefully the thought process is it would help to avoid fraud and help to make the records more accurate.  

KHS

            That is certainly an interesting potential and I  think that some law students were given some interesting facts to work with for property exams.  You mentioned another term in talking about blockchain technology.  Another term we hear thrown around a lot and that’s cryptocurrency.  So what is cryptocurrency?  What does that term mean when we hear people talking about investing in crypto or the blockchain in cryptocurrency.  What is cryptocurrency?

ZBP

            Yea, so when we think about cryptocurrency in a broad sense, and I will tell you that part of the problem with even answering this question is that there’s so many different forms of cryptocurrency path.  I don’t just mean a shear number of them.  There are also ones that function differently in different respects.  Each one of them is designed a little bit differently.  And so you know probably the most dominant one, the one that everybody is probably, I shouldn’t say everybody, but the one that people had heard the most about is bitcoin.  It was the first one, it was the one that kind of came on the market and kind of came to fruition.  Now there’s a whole host of other cryptocurrencies that are used but the idea is that these essentially coins that are tracked with a blockchain have some value.  So I sell my coin to another individual and I can buy, I can sell it, I can trade it.  The idea that it has some value that’s attributed to it, usually US dollars but sometimes in other currency, that I would be able to sell the coin to and then receive an actual ______ currency like US dollars in exchange.  They are generally bought, sold and traded using the blockchain technology.  So the transaction, the transfers of ownership, those are recorded in the blockchain so you would be able to track who owns, not necessarily who owns but you can track where it goes in the chain technology to help authenticate and verify it as being part of the blockchain technology.  And so, you know I told you I used the name bitcoin, I tossed around ripple was another one, it’s slightly different in the fact that it was, it’s designed not to be decentralized so it still uses a blockchain technology but it’s hosted by an entity.  The idea being that by no being decentralized, it can be more abused by financial institutions.  That’s how it was originally kind of marketed.  Think of large international banks using it to make wire transfers between, the idea being whether it’s either faster or more secure than a traditional wire transfer.  There’s also new coins, what we call stable coins.  I won’t go into great detail but they haven’t always proven to be actually all that stable but the idea being that they were tied to a currency meaning one stable coin would be worth one US dollar.  I’m just using that as an example to be tied to a penny or a quarter or to be tied to the Canadian dollar or the British pound.  The idea being that it’s got a direct correlation.  Now when we talk about the way in which these bitcoins are actually, or cryptocurrencies excuse me, are actually stored.  One of the things that I think people have a idea about is that there’s multiple ways in which you actually can store your currency, right.  So one of the ways is what we call an exchange.  So you think of this as, for example, a stockbroker an online stockbroker on an online stock trading platform, a brokerage.  The exchanges are almost like a brokerage except for the cryptocurrency.  So instead of trading stock in let’s say Apple or Tesla, your trading bitcoin on an exchange. There’s been a number of exchanges that we have seen kind of pop, we’ve seen some you know Zach Durant’s, one of our colleagues here at Reminger, did a podcase recently on the FTX exchange and the failure regarding that.  But that’s the idea of an exchange and some of these exchanges have been around a long time.  That’s the idea of an exchange.  The money, your money or your cryptocurrency is actually stored on the exchange.  You contrast that with what we call a hardware wallet, which is where it’s not stored on the exchange but you are storing individual bitcoins or coins in a hardware wall.  Sometimes it’s a flash drive, sometimes it’s an external hard drive. Sometimes it’s on a hard drive, right.  And you store those individuals, these are more secure in the sense that they are less likely to be hacked.  There’s less likely of a chance that something bad would happen to them.  The purpose to this is that sometimes the harder to gain access to.  So we’ve heard these stories about people who have stored bitcoin on a computer hard drive and the hard drive accidently gets thrown away, right.  There’s a famous example of a gentleman in the United Kingdom who had millions of dollars on a hard drive and accidentally threw it away and is now looking to excavate an entire waste facility site in order to locate the hard drive because it’s worth millions of millions of dollars, right.  So that’s one of the issues and there are companies now who specialize in unlocking a locked hardware wallets.  So people will forget their pass keys in order to unlock their cryptocurrency wallets they stored on their hard drive and there are now companies who specialize in working to help you unlock the wallet.  So they’re more stable but they also risk the, because they are more stable and more secure, you can actually run the risk of securing yourself out of them.

KHS

            Yes but a little bit too secure.  So, along with cryptocurrency, one of the other acronyms or terms here is NFTs.  What’s an NFT?  Especially compared to cryptocurrency.

ZBP

            Yea so it definitely has similarities in the fact that cryptocurrency is a token.  So NFTs potentially the acronym for non-functional tokens.  The idea being that they’ve taken a token and they have usually tied it to something visual.  You know I think of like a trading card.  Or you think of an original piece of art in a digital format, right.  And, you then tie it into the code that exists for this image, you then tie it to a specific cryptocurrency.  You tie it to a specific code.  So that the, what it allows it to do is it gives it some value just in the fact that there’s an underlying cryptocurrency tied to it but the other thing it allows you to do is track the ownership and authenticity.  So essentially you would be able to verify that the non-functionable token, this intricate piece of art you know a digital playing card but what have you would be what it purports to be, right.  Because I could theoretically just pull an image off the internet and say oh, ha ha, this is an original Zach Pyer’s doodle.  But, it might not be because the reality is that you might have trouble verifying it.  The non-functional token does is it allows you to verify as this was actually created by that this was one of his doodles and you could trace it back because the non-functional token nature of that allows for you to have, to essentially track it and verity that is what it’s supposed to be.  Now the kind of interesting thing about these, well there’s a couple interesting things is one, the value of non-functional tokens is similar to how we calculate the value of cryptocurrency is it’s a scarcity issue, right.  And so, and it’s supply and demand.  So non-functional tokens are not, I would say are wildly different than let’s say art pieces.  Like an original art piece.  The difference is that they are sometimes much easier to create and can control the market.  So the prices for non-functional token, you know when we were looking back into the pandemic and/or later parts of the pandemic, non-functional tokens were everywhere.  It seemed as if people were releasing non-functional tokens right and left and making plenty of money off it.  We seen the value in general, this is a very general statement.  The value of those non-functional token decline significantly.  I think part of it is the fact that we’ve kind of moved to the point where there’s been a flood of that and people have started to say, can I resell them.  Sometimes the answer is yes but what we’re seeing more is they’re just not holding their value in the market the way that they were when they were first released.  The other interesting thing about them is that it also allows somebody to get a royalty every time the non-functional token trade.  So for example, if I create a non-functional token and sell it to you Kenton Steele, and then Kenton I get the value of that.  But as the creator I can write into the code so that every time you may transfer it and sell the non-functional token I get a 5% commission.  So when you sell it again to let’s say you know John Doe and you sell it for  $100 I get 5% of that or I get $5 and it’s immediately transferred back to me.  So it allows artists and the creators of these non-functional tokens to essentially continue to earn more profit off of their work long into the future which is different than let’s say a starving artists, right.  He may sell the early artwork for pennies because they’re starving and they can’t earn a living off of it.  But fast forward 30 years from later in their career and now their early work is worth millions and millions of dollars but they don’t have any stake in that.  Alright they don’t have any ownership interest in it.  They’ve usually relinquished all of it.  So if the pieces we sold they’re just out of luck.  That’s one of the things that I think is kind of interesting.  We read about this is that it allows the artist to continue to profit from the work if the time __________.  

KHS

            That is very interesting.  The concept of creating ownership and having a stake in the digital asset is certainly part of what the core of this discussion is.  I think that kind of brings us to  bitcoin mining.  What is bitcoin mining?  Where do bitcoins come from?

ZBP

            Yea, so this is, what I will say it when we talk about mining in general.  It’s not, you hear a lot about bitcoin mining because it’s the most, it’s largest, it’s the oldest, it’s got the biggest market cap.  So there’s a lot of, the conversation focuses around bitcoin mining but other cryptocurrencies are mining too.  So, when we have this conversation I want to make sure that we’re not just limited it to bitcoin.  We need to be thinking of it in the context of there’s a whole host of other cryptocurrencies that utilize similar, and not just cryptocurrencies but blockchain technology in general.  So part of the way in which that we authenticate and prove that something is part of the blockchain is that we have to solve algorithms, right.  There are sophisticated algorithms behind this technology that essentially allows the next piece of the chain to be built and so theoretically the chain is always being added to  and algorithms are always being solved by various computers that are part of the network.  So from the idea essentially is that by solving these algorithms it helps to not only increase the blockchain so that more transactions can occur because essentially every time a transaction occurs it has to be recorded in the chain so we have to keep solving the algorithms, which takes a huge amou8nt of computer resources to do these problems.  It’s not, when you think about like math problem, this is not like 4x8 you is 32.  We are talking about complex math problems that really only a computer can solve in order to help verify the blockchain technology to build out the chain.  So, this also a decentralized process which means anybody can be a part of the blockchain mining and part of the process.  In order to reward people who participate in this technology, every time a new chain is added a new bitcoin essentially, I’m using this in certain bitcoin or amount of bitcoin are created.  And so what the miners incentive is to put their computers into the process so that they’re computers can mine the bitcoin and then they’re rewarded with more bitcoin.  So that’s now they get, the bitcoin gets mined in general but also have these people essentially make a living sometimes just mining the bitcoin.  

KHS

            So well we’ve covered a lot of ground and I think that this sort of next logical place here, the next question is there’s obviously a lot of money involved in cryptocurrency and NFT sales and when we start talking about transferring huge sums of money, these types of transactions we’re discussing creates a question of who is in charge here.  Who is regulating and overseeing this process?

ZBP     

            Yea so what we have seen, and you and I have been talking this on this podcast for practically two years at this point, but it seems like the with the ________ of almost every new technology.  You know regulators are caught off guard.  Legislatures are caught off guard and then there’s kind of a scramble in order to determine does this need regulated?  Do we need walls around this and how are we going to handle this new concept. And so when bitcoin was first introduced, there really wasn’t a lot of regulation.  There really wasn’t a lot of legislation.  People didn’t really know what it was.  And some people thought okay it’s a joke.  I mean I still can remember that bitcoin was traded for less than a dollar.  I really wish I would have invested you know money at that point and time, but I didn’t.  But the reality is that we’ve seen a time has gone wrong we’ve seen more regulation.  So we’ve seen certain states step in and say okay we’re going to start regulating in some form or capacity.  The reality though is that because of the way that our financial systems work in the United States, date regulations while they can be important are not necessarily as expected to say federal regulations.  Because the reality is that while states have a capacity and ability to regulate financial transactions and issues within their state so many of these transactions have been across state lines.  And, frankly some of them have ____________ across country borders.  So we’ve got some state regulators that are encouraging the use, we’ve got some state regulators that have discouraged the use of blockchain and cryptocurrency.  I will tell you that within the last 2, 3, 4 years we have seen an incredible increase push from federal regulation and legislation.  So we have seen the treasury, we’ve see the IRS step in and say we want more information regarding all of your cryptocurrency transactions.  For a long time it was kind of a wild, wild west if you went to try to collect taxes on cryptocurrency trades because people weren’t keeping track of their basis, they weren’t keeping track of how much they bought or they sold and they were just pocketing money.  While you can have huge sums of money sitting in your bank account because of these types of transactions.  So we’ve seen the IRS and the treasury step in on some of these.  The other are that we’ve now started to see is the Securities Exchange Commission.  Because what have seen especially as of late and I have discussed this in later podcasts is we’ve seen issues where some of these exchanges have failed and then the questions becomes not only regulation over the exchanges but also regulation of the cryptocurrency in general is how is it being handled or regulated.  Is it in fact a security. Some people in the industry have been pushing for years to have cryptocurrencies recognized as securities.  Other people have said you know absolutely not, there are not securities, these are something totally different.  So we’ve seen this push right up to essentially try to regulate it especially as of late.  The other thing that’s been happening, and I’ll just mention kind of here is the last point, we’ve stated to see more litigation about this, right. Especially after kind of the boom from the pandemic we’ve started to see exchanges and we’ve started to see individual coins fail.  Individual cryptocurrency just fail.  So as that happened, every time, I won’t say every time, but often times when a lot of investors lose money they bring a lawsuit.  So, we’ve started to see a lot of civil lawsuits about this point too, most of this litigation now is in the form of a class action or some sort of enforcement like by the Securities Exchange Commission.  But we started to see this rise too kind of exponentially simply because we have as of late, we’ve had a handful of these card and significantly decrease in value if the exchanges collapse or the value of some of these coins just ____________.  So, there’s a lot of private civil litigation  on this as well.

KHS    

            Well, thank you for all of that explanation.  As you said, this is a topic we will be exploring further and what can go right, what can go wrong when we’re talking about cryptocurrencies are some things we’ll be exploring in a later episodes.  Thank you all for joining us for this edition of the Reminger Report Podcast on Emerging Technologies.  Please be sure to follow us wherever you get your podcasts and stay tuned for more discussions on cryptocurrencies, NFTs, blockchain technologies, things in this space.  Thank you.

ZBP     

            Thank you.