Cryptocurrency: A Commodity, a Security, or a Scam? – Jackson Walker
Despite recent setbacks and scandals, cryptocurrency and other blockchain technologies are increasingly being utilized in the finance and corporate world. However, transitioning to legitimacy also means regulation, which raises new questions about how cryptocurrencies will be treated by government agencies such as the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC). On this episode of FRB, we explore what cryptocurrency is, how various types differ from one another, and how they could potentially fit into our country’s regulatory framework.
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Erin Camp: Hi, I’m Erin Camp, a corporate finance lawyer with Jackson Walker.
Art Cavazos: And I’m Art Cavazos, corporate and finance lawyer with Jackson Walker. And this is Future Ready Business.
Erin Camp: As always, we’d like to remind our listeners, that the opinions expressed today are ours and do not necessarily reflect the views of Jackson Walker, its clients, or any of their respective affiliates.
Art Cavazos: This podcast is for informational and entertainment purposes only and does not constitute legal advice. Also, we’ll be talking about some financial topics today, but we’re not financial advisors and we’re not giving investment advice. Now, we have a great show lined up for you today. In the previously recorded episode that follows, we’ll be talking about cryptocurrency and blockchain, but I think we had a few, kind of, updates to that previously recorded episode first.
Erin Camp: Yeah, in the time since we recorded the episode that you’re about to hear, there have been a lot of changes in the economy and in the world, overall.
Art Cavazos: And definitely in the world of crypto.
Erin Camp: Oh, yeah. I think – I don’t know how to really accurately encompass how many changes there have been and in how many different ways. First, I don’t think our predictions were exactly correct in where, maybe, we are with our relationship to cryptocurrency. I don’t think we really — in terms of trends and how long lasting it is — I’m not sure we are at a point where it is going to be stable. Like, we were optimistically predicting back in I think early June or late May when we first recorded this.
Art Cavazos: Yeah, and, you know, we’re presenting the episode exactly as it was recorded back in May. So, you know, we’ll let the record speak for itself. But the way I remember it, I don’t know if we were unnecessarily optimistic that we were already there, but I think we weren’t questioning if we might be there. I do still think that, despite recent events and that there’s obviously been a bit of a bubble, and there’s been some scam artists, you know, large and small, participating in the market, you know, kind of in a rampant fashion. I still don’t think that means, you know, the end of cryptocurrency or blockchain assets. I think Bitcoin is actually still doing pretty well. I think a lot of the kind of more legitimate, or what some market participants have viewed as more legitimate, coins are still doing okay. So, you know, it’s kind of like, you know, Enron happened and the financial markets were shaken, but stocks didn’t disappear as an asset class because of that. This has definitely been kind of a big blow to crypto with FTX going down, and the market overall going down.
Erin Camp: I mean, I think it’s made things absolutely terrifying for a lot of different people. I don’t necessarily just mean like individual investors and the mainstream sort of people that we’ve started seeing participate that hadn’t been participating. But a lot of the long-time, long-term players that are really big, you know, they’re scared too. All of a sudden, it looks like they can be held liable for what they’ve been doing and for the risks they’ve been taking.
Art Cavazos: Yeah, and I think one thing we have been anticipating is more regulation in this space. So, what this may result in is more concrete steps by the SEC, by the CFTC.
Erin Camp: Yeah.
Art Cavazos: Well, I think that’s enough of a preview. We’ll go ahead and shut up now and let you all enjoy the episode.
Today, we’re going to be talking about cryptocurrency, which is something that we both been interested in for a long time, but only recently have we actually started doing deals in it. I think that’s really legitimized it a lot for both of us.
Erin Camp: Yeah. So, since we are such early adopters, whenever something new pops up, it isn’t necessarily something we’re going to see in the finance world or in the corporate world. And we keep seeing cryptocurrency lately. I mean, really, just the last couple of months have come across many new clients and current clients wanting to trade with cryptocurrency. That’s when we realized that something that we previously were just interested in as sort of natural early adopters was something that was increasingly legitimate, and something that we not only were interested in, but something we’re going to need to know about in our own practice.
Art Cavazos: So far, we’ve done deals involving crypto mining hosting agreements, which is basically where you take specialized equipment and place it in a computer server farm. That can be millions of dollars of equipment, and there’s a lot of specialized considerations that go into that. Also, we’ve done formation of crypto funds. You have quite a bit of fund formation experience, but not necessarily with cryptocurrency—
Erin Camp: Right.
Art Cavazos: So, that’s kind of a new angle on it. And also, some of our colleagues have been working with energy companies using natural gas runoff and things like that to power crypto mining machines. So, there’s been a lot of activity in the space this year.
Erin Camp: And it’s really touched, you know, many facets of our lives and our practices as a firm and as individual attorneys.
First, we should probably clarify that, you know, we’re not really experts in the space, and that’s okay. Part of the point of this podcast is really just to talk about topics that come up and interest us. One big thing we have in common as attorneys is that we have to learn about things quickly. And so, we thought we could bring some of those topics, including cryptocurrency to light through this podcast.
Art Cavazos: We’re not giving legal advice. We’re lawyers. So, we’re definitely not giving investment advice. That’s not really the purpose of this podcast. It’s really just to explore interesting topics. And like you said, that is something we do a lot in our practice, you were doing deals in lots of different spaces. As deal lawyers, we’re not always the subject-matter experts, we might bring in subject-matter experts to talk about things in future episodes. And that’s one of the advantages of being at a large law firm like Jackson Walker is we have folks with deep experience in a lot of different arenas that we can tap in and call upon.
Erin Camp: Right. So, for example, when these transactions started coming up that concern cryptocurrency, particularly in relation to these like crypto funds, one of our colleagues has a lot of experience in this space. His name is Mike Lassaude. Because of him, we’ve been able to work with all these new clients who’ve been able to take them on as clients, but also, we’ve been able to learn a lot from working with him right and are probably able to have this podcast.
Art Cavazos: Diving into cryptocurrency—First, let’s talk about just a little bit what is cryptocurrency. Despite the fact that you and I have really gotten steeped in it over the past six months, that have been a little bit familiar with it before that, there’s probably still a lot of folks out there that have maybe heard the term but don’t really know what it is, why it matters. So, I think let’s start there.
Erin Camp: Yeah, let’s start with just a simple, clear, crisp definition first.
Art Cavazos: Sure. What cryptocurrency is — it essentially started as a cryptology problem. Cryptographers back in the ’80s, ’90s were trying to figure out is there a way you can create a digital asset on the internet that can’t just be easily copied or easily manipulated. Anybody who’s pressed copy and paste knows that that’s actually not an easy thing to do with a digital asset. That was a problem that stumped cryptographers for decades. Really, it was in 2008 when somebody under the name Satoshi Nakamoto released a white paper describing how Bitcoin — specifically Bitcoin was the first — would work. Cryptographers have looked at that and thought, ‘This works, this solves the problem,’ and it actually went live in January 2009. There was one computer mining Bitcoin — we’ll talk a little bit in a minute about what Bitcoin mining is exactly — but it was just one computer at first. It snowballed to be a few more computers, a few more, until really kind of culminating most recently in about 2017 with a huge price increase and started to get mainstream attention.
But essentially what cryptocurrency is, is a software program that, in the Bitcoin model, has a difficult mathematical puzzle that needs to be solved. When you solve that puzzle, you’re rewarded with more Bitcoin. It’s kind of like the proverbial pancake-eating contest where the prize is more pancakes. But in this case, they’re very valuable pancakes, so people really want them. As you solve these problems and get more Bitcoin and they become more valuable, more people get onto the network and try to solve problems to get more Bitcoin themselves. So, it’s this snowballing thing where it actually becomes more and more difficult to solve those problems as more and more computing power is put towards solving those problems. All of that’s by design, and it’s turned out to work pretty well. You know, here we are more than a decade later and Bitcoin is still the leader in this space.
Erin Camp: Yep. The leader and arguably the only cryptocurrency that’s been able to achieve the ultimate objective of a lot of these cryptocurrencies, which is decentralization. Another good point I think to bring up here is the term cryptocurrency actually includes a lot of different types of crypto currencies, which that’s the word currency may or may not be accurately used there. The two leading coins are Bitcoin and Ethereum. We’ll talk a little bit more about what makes those different in a little bit. But then there are also all these other sorts of alternative, or alt, coins.
Art Cavazos: And also, just to say that Ethereum technically, for technical folks out there, is the blockchain technology platform, and ether is the actual coin on the Ethereum platform. And that’s just for Ethereum people, because all of this is also very tribal. There’s like the Bitcoin team and the Ethereum team, and everybody has their favorite…
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