Are Exchanges Legally Allowed To Reverse Coin Transactions?

reverse coin transactionsMonths ago, a Quoine (also Quoinex) system glitch triggered an erroneous 3,085 bitcoin transfer. Ultimately, the exchange reversed the transaction. In response, the beneficiary sued.

A possible landmark cryptocurrency case, the presiding court may be forced to consider a still unanswered legal question:  Is it legal for exchanges to reverse coin transactions?

The Glitch That Triggered A Multi-Million-Dollar “Erroneous” Bitcoin Transfer

In mid-April, Quoine ran a hack-prevention script. Unfortunately, the protective program triggered a glitch that artificially lowered Bitcoin’s price on its system. Because of the snafu, Quoine user B2C2  was able to purchase ten bitcoins for one ETH. So, he grabbed 3,085 bitcoins, which calculated to US $3.78 million, at the time.

Quoine discovered the out-size exchange and reversed the trade.

B2C2’s Argument: Fraud

B2C2 sued on the grounds that Quoine “acted fraudulently.”

To make matters more (legally) interesting, Quoine’s trading agreement says orders are irreversible — a cornerstone of B2C2’s case. And since the exchange did reverse the trade, the market maker believes Quoine made a tortious misstep by violating its own agreement.

Quoine’s Argument: Obvious Mistake

Quoine, as you may have already guessed, doesn’t think B2C2 has a solid case. It’s primary counter argument? The plaintiff is “being opportunistic and seeking to profit from a technical glitch.”

Who Will Probably Win This Bitcoin Lawsuit?

Who will win? It’s way too early to tell; arguments and evidence have yet to be presented. But if we were to guess, the enforceability of Quoine’s trading agreement, in this scenario, will likely be a crux of the case.

The “Quoine reversal” decision could be a game-changer. Irreversibility is a large part of blockchain’s allure. If exchanges start executing reversals on their own, with global support from courts, the philosophical and technical standards debate will rage, elusively, on.

Connect With A Blockchain Lawyer

Kelly / Warner works with businesses on certain blockchain, cryptocurrency, and fintech law matters.

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Article Sources

Helms, K. (2017, August 01). Exchange Sued for 3085 Bitcoins After Reversing Bitcoin-Ether Trades. Retrieved October 04, 2017, from https://news.bitcoin.com/bitcoin-exchange-sued-bitcoins-reversing-bitcoin-ether-trades/

Bitcoin Foundation: Dear Congress, Early Regulation Kills Innovation

bitcoin foundation regulations warning legalThe Bitcoin Foundation wants to establish a “more open and diverse dialogue with the U.S. Congress” because it worries that federal legislation will “stifle the adoption and use of so-called ‘virtual currencies’ such as Bitcoin.”

The advocacy group, which envisions “economic participation without a bank account or credit history,” may have reason for concern. Over the past 24 months, several states have implemented cryptocurrency licensing requirements; the SEC issued an ICO alert and Canada responded in kind; China flat out banned initial coin offerings.

Bitcoin Foundation Worried About Excessive and Early Regulations

In response to officials’ regulatory knee-jerks, the Bitcoin Foundation partnered with a law firm to “fight against increasing federal and state regulation in the U.S.”

Below are excerpts from the Bitcoin Foundation’s announcement, plus comments by Llew Claasen — one of the foundation’s principals — about why over-burdening the burgeoning blockchain industry is bad news.

On Over-regulating Crypto and Fintech Startups: “The increased regulatory push by federal and state authorities, if it continues, is sure to threaten the existence of the fintech industry nationwide.”

On New York’s Bitlicense Law: “Just as the fintech industry’s use of cryptocurrency was stifled in New York by the adoption of the so-called Bitlicence, it is highly likely that increased regulatory and legislative burdens [placed upon Bitcoin] will have a similar negative impact.”

On Industry Uncertainty: “[The Bitcoin Foundation’s] view is that it is not yet clear what bitcoin and cryptocurrencies are. But by regulating the technology prematurely, you put it into a box it might not fit into later on. It’s not that we don’t believe there’s a time and place to regulate Bitcoin, we’re just saying that it’s too early and that regulation will just do harm to very innovative businesses and technologies.”

On Criminals Using Cryptocurrencies: “Reports by the European commission in June specifically found that there is very little of that activity, particularly there is very little terrorist funding and money laundering. Bitcoin is too hard for criminals to use at the moment. It’s easier for a criminal to use the United States dollar.”

On Bitcoin’s Usefulness: “Bitcoin has the potential to be a store of value that’s outside the control of central banks. In the future, we would like to see more adoption of Bitcoin. It’s not going to be the only currency, and it won’t replace the current system, but among other options it’s a useful case for the future.”

On Bitcoin’s Current Limitations: “It’s immature technology. There is a perception that it allows unlimited transfer of value, but it can only do three or four transfers a second. The network cannot handle larger transactions. “

On Delaying Cryptocurrency Regulations: “I understand that regulators need to protect the currency and people from risk. [In the future] regulators will probably regulate at the end points of the cryptocurrency network. I get that, it’s inevitable. Around the world the view is the same. But governments and financial services are already struggling, as in Venezuela, and people need an alternative way.”

Connect With A Bitcoin Lawyer

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Article Sources

Nixon, M. (2017, August 30). Bitcoin Foundation seeks legal protection from US currency regulation. Retrieved September 28, 2017, from http://www.independent.co.uk/news/business/news/bitcoin-foundation-legal-protection-us-currency-regulation-llew-claasen-cryptocurrency-bitlicence-a7919401.html

Are In-Person Bitcoin Sales Legal?

in-person Bitcoin sales legalAre in-person Bitcoin sales a crim? Is it OK for U.S. residents to use sites like localbitcoins.com? To answer both questions: In some instances, yes it is; in others, no it’s not. Everything depends on frequency and jurisdiction.

Bitcoin Business Crimes: The SEC’s Stance

We’re in the midst of a cryptocurrency boom. Unfortunately, inchoate fintech regulations make for unclear transactional parameters. This year alone, at least four U.S. citizens have pleaded guilty to improper fiat-to-crypto currency exchanges. As such, people are asking: “If the SEC hasn’t officially declared Bitcoin and other altcoins to be securities in and of themselves, why are Bitcoiners getting busted?”

For starters, even though the SEC hasn’t officially declared all digital currencies intrinsic securities, financial vehicles and ICOs featuring cryptocurrency components often fall under the securities umbrella. In fact, the agency recently published an alert regarding the potentially risky nature of initial coin offerings and further outlined registration requirements for digital currency investment opportunities.

“Operating An Illegal Money Transmission Business”

In 2013, the U.S. Financial Crimes Enforcement Network instituted licensing requirements for Bitcoin re-sellers. The rule specifically targeted parties selling cryptocurrencies “as a business.” Some states, like New York, followed the network’s lead and passed Cryptocurrency licensing laws.

Frequency Matters

The “as a business” stipulation is crucial. A single transaction doesn’t amount to a business, but frequents transactions are another story. A Palo Alto-based attorney, with whom Motherboard.com spoke, explained: “If you come to me and ask to buy $100 worth of Bitcoin and I sell that to you, in no state is that sole activity considered to be money transmission. It must occur in a sufficient frequency and volume and you have to accept all comers. It’s a fact-based test.”

So, what’s the bottom line? Well, first and foremost, the law is a case-by-case journey. Just as no two people are exactly alike, neither are any two lawsuits. A minuscule detail can radically alter an outcome. Caveats aside, and generally speaking, the SEC probably (not definitely) won’t consider one-off, in-person Bitcoin sales probably businesses. Two or more, though, may land you in the company category, which would require registration.

People Have Landed In Legal Trouble Over In-Person Bitcoin Sales

Earlier this summer, a grand jury accused two Arizona men with “operating an unlicensed money transmitting business” between 2013 and 2017. Motherboard sniffed around and found a localbitcoins.com account bearing one of the defendant’s aliases. According to the media outlet, the account in question conducted over a hundred transactions. Again, every time an individual engages in an in-person token sale, the likelihood of being classified as regulation-bound business increases.

Similarly, a man in New York offered a legal mea culpa after “conducting over 100 bitcoin transactions ‘locally and across the United States.’” And in Detroit, the long arm of the law grabbed someone suspected of laundering $2.4 million in tokens through another business account.

Not All States Are Clamoring For Cryptocurrency Regulation

Some states, like New York and Washington, have embraced a regulatory approach to cryptocurrency sales; others are choosing a different path. In the not too distant past, a Florida judge tossed an in-person Bitcoin sales case because “selling bitcoins isn’t the same as transmitting money to a third party.” Who knows, maybe Bitcoin will be for the Sunshine State what Gambling was for Las Vegas.

 

Article Sources

Pearson, J. (2017, July 18). People Keep Getting Charged With a Crime for Selling Bitcoin. Retrieved September 26, 2017, from https://motherboard.vice.com/en_us/article/j5qa7y/people-keep-getting-charged-with-a-crime-for-selling-bitcoin

Britschgi, C. (2017, July 04). Phoenix Neurologist is Charged With Selling Bitcoin Without a License. Retrieved September 26, 2017, from http://reason.com/blog/2017/07/04/phoenix-neurologist-is-charged-with-sell

The Uniform Regulation of Virtual Currency Business Act: What Is It?

picture of law books on shelf to accompany blog post about Uniform Regulation of Virtual Currency Business ActIn the not too distant past, anti-regulation bitcoiner Theo Chino sent a letter to the Uniform Law Commission (ULC), urging the group not to meddle in cryptocurrency just yet. Welp, it appears the panel didn’t heed his advice, because the legislative review body recently green lit the Uniform Regulation of Virtual Currency Business Act.

First things First: What Is The ULC?

Mainly, the ULC creates state law templates to ensure federal compliance and a degree of — albeit, mutable — national legislative conformity.

Yes, states do enjoy significant legislative autonomy, but they’re still beholden to federal statutes. And yes, laws differ by state, but a certain degree of statutory continuity helps maintain a healthy market and social stability, nationwide. That’s where the ULC comes into play; the group drafts “ideal” pieces of legislation that comply with federal parameters. States can then choose — or not choose — to run proposals through the ratification process and tweak measures to best fit their respective jurisdictions.

The Uniform Regulation of Virtual Currency Business Act

The Uniform Regulation of Virtual Currency Business Act is a piece of draft legislation that addresses licensing requirements, reciprocity, consumer protection, cyber security, money laundering prevention, and supervision of bitcoins, ether, and other tokens.

A long time in the making, the ULC has been working on the draft for two years.  And perhaps a boon for fintech companies, Coin Center, a virtual currency trade group, worked closely with commissioners during the process.

When Will The Uniform Regulation of Virtual Currency Business Act Go Into Effect?

Since the ULC is not a governing body, the Act may never see the light of day in certain states. Some states may choose to adopt it; other states may tweak parts or refuse to adopt the measure. But before it’s even presented to states for consideration, the American Bar Associations House of Delegates must first scrutinize and approve it.

Connect With A Cryptocurrency Lawyer

Kelly / Warner works with businesses in the fintech and cryptocurrency space.

To learn more about the firm head to the About Us section of the website. If you’re ready to speak with a cryptocurrency lawyer, get in touch.

Want to read more about Bitcoin and altcoin legalities? Please head to the virtual currency section of our blog.

Article Sources

Cummings, D. (2017, July 20). ULC Approves Proposal For The Regulation Of Virtual Currency Businesses. Retrieved September 25, 2017, from https://www.ethnews.com/ulc-approves-proposal-for-the-regulation-of-virtual-currency-businesses

Three Takeaways From The SEC Cryptocurrency Alert

SEC cryptocurrency alert legalVirtual currencies have been around since 2009 (or 1998, depending on how you look at it); yet, legal and regulatory questions remain. Are digital currencies securities? Is it OK to sell tokens, even if you’re not registered with the SEC or state equivalent? Are Initial coin offerings subject to the Securities and Exchange Acts?

Recently, the SEC issued an investor alert (in an attempt) to clarify these quandaries. Let’s review three takeaways from the memo.

SEC Cryptocurrency Alert Point #1: The SEC Is Open To Blockchain Opportunities

Sure, the Securities and Exchange Commission is a regulatory body, but they’re not opposed to market opportunities.

In its recent alert, the agency enthused that ICOs “may provide fair and lawful investment opportunities.” The memo, however, also warned that some ventures “can be used improperly to entice investors with the promise of high returns in a new investment space.”

SEC Cryptocurrency Alert Point #2: Some Investment Opportunities Fall Under The Securities Umbrella; Others Don’t

Are digital currencies securities? It’s the temporal chicken or egg dilemma of our, financial, times. And like the fowl-centric brain teaser, the answer remains elusive. Yes, various regulatory bodies and judges have deemed certain crypto-investment opportunities — particularly initial coin offerings — securities that are subject to financial regulations. However, officials have yet to establish a consensus, and virtual tokens aren’t necessarily considered securities in and of themselves — though many ICOs are.

The SEC ICO Investment alert advised:

“Depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities […] subject to the federal securities law.”

SEC Cryptocurrency Alert Point #3: The DAO ICO Violated Regulations

In 2015, The DAO — a.k.a., The Decentralized Autonomous Organization — held an initial coin offering that netted about $150 million. Unfortunately, the best laid plans of mice and DAO went awry: hackers exploited a hole in the overlaying code — not the blockchain — and siphoned $50 million.

In its alert, the SEC made an example of the DAO ICO — ultimately deeming it in violation of securities regulations. Ars Technica succinctly summarized the SEC’s position: “If coin owners are promised voting rights in an organization or the right to a share of profits, that’s likely to be a security. By contrast, if users mostly buy tokens for a utilitarian purpose—for example, to buy network storage—it’s less likely to be a security.”

Article Sources

Roof, K. (2017, July 25). SEC regulators are coming after ICOs. Retrieved September 18, 2017, from https://techcrunch.com/2017/07/25/sec-regulators-are-coming-after-icos/?ncid=mobilenavtrendLee, T. B. (2017, July 26). Using a blockchain doesn’t exempt you from securities regulations. Retrieved September 18, 2017, from https://arstechnica.com/tech-policy/2017/07/using-a-blockchain-doesnt-exempt-you-from-securities-regulations/

Popper, N. (2017, July 25). S.E.C. Issues Warning on Initial Coin Offerings. Retrieved September 18, 2017, from https://www.nytimes.com/2017/07/25/business/sec-issues-warning-on-initial-coin-offerings.html?_r=1

Investor Bulletin: Initial Coin Offerings. (2017, July 25). Retrieved September 18, 2017, from https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings

Washington Cryptocurrency Regulation: Registration and Disclosure Rules

Washington cryptocurrency laws“Cryptohating legislature.” A Reddit user coined the phrase after Washington passed a cryptocurrency regulation. An update to the Washington Uniform Money Services Act, many fintech businesses must now secure licenses, submit to disclosure requirements, and implement investor safeguard measures.

Washington Cryptocurrency Regulations: Registration, Disclosure, Consumer Safeguards

Washington State’s money transmitter bill — the Washington Uniform Money Services Act — now includes crypto-regulatory parameters. Moving forward, token exchanges must:

  1. Secure operating licenses from the Washington State Department of Financial Institutions;
  2. Submit to third party data audits; and
  3.  Adhere to a surety bond system.

The law doesn’t just apply to exchanges operating out of Washington State; instead, it applies to all exchanges that accept Washington State residents.

Many crypto enthusiasts didn’t take the news well, but Charles Clark, who helped draft Washington’s new rules, is surprised by the backlash. He reminded, recently, that the state issued similar guidance way back in 2014 when it published an alert highlighting FinCen’s position that exchanges should register with public banking authorities.

Clark also explained: “We had these old regulations for money transmitters in the state, and they were clearly meant for older business models. The virtual currency industry had issue with that. This gives them some clarification and guidance.”

Some Exchanges Flee State; Major One Stays

Several exchanges — like Kraken, Poloniex, and Bitfinex — are no longer allowing evergreen state residents to use their services. The popular Coinbase, however, decided to stick it out and comply with the regulations.

The Divided States of Crypto America

Some states are trying to attract blockchain startups by scrubbing regulatory roadblocks from law books. For example, New Hampshire recently updated its code to exempt blockchain and fintech businesses from certain registration requirements. Nevada, for its part, illegalized taxation on token transactions.

On the flip side of the token, other states like New York and now Washington — ostensibly more focused on consumer protection concerns — are taking a more cautionary approach and implementing registration and licensing requirements.

Connect With A Blockchain Lawyer

Kelly / Warner works with some types of blockchain and fintech businesses. Let’s talk.

Article Sources

Atkins, D. (2017, August 01). New Bitcoin regulations shake up Washington state’s cryptocurrency industry. Retrieved September 16, 2017, from https://www.geekwire.com/2017/new-bitcoin-regulations-shake-washington-states-cryptocurrency-industry/

Althauser, J. (2017, July 28). Washington State Requires Bitcoin Exchanges to Secure Licenses. Retrieved September 16, 2017, from https://cointelegraph.com/news/washington-state-requires-bitcoin-exchanges-to-secure-licenses

New Hampshire Cryptocurrency Law: Registration Exemption

New Hampshire Cryptocurrency LawThe New Hampshire cryptocurrency law is fintech-startup-friendly.

Lawmakers passed a statute that fertilizes the state’s legal soil for blockchain and virtual currency businesses.

New Hampshire Cryptocurrency Law: Registration Exemptions

Granite State legislators updated existing regulations that currently require “money transmission companies” and certain financial professionals to register with a regulatory body. The new law removes this requirement for parties engaged “in the business of selling or issuing payment instruments or stored value solely in the form of convertible virtual currency or receive convertible virtual currency for transmission to another location.”

New Hampshire Cryptocurrency Law: Fixed 2015 Measure

The latest statute fixed a 2015 measure that chucked cryptocurrency businesses under the purview of state banking authorities, making New Hampshire unattractive to emerging fintech operations. At least one company fled the state on account of the 2015 vote.

New Hampshire Cryptocurrency Law: Close Vote

Not a runaway decision, lawmakers were split on the latest New Hampshire cryptocurrency statute, garnering a 185-170 vote in the house, and a 13-10 count in the Senate.

Connect With A Cryptocurrency Lawyer

Kelly / Warner works with cryptocurrency entrepreneurs and blockchain companies on certain types of transactional legal matters. IGet in touch.

Article Sources

Doherty, B. (2017, June 13). New Hampshire Exempts Bitcoin and Other Virtual Currency Businesses from Money Transmitter Regulation. Retrieved September 05, 2017, from http://reason.com/blog/2017/06/13/new-hampshire-exempts-bitcoin-and-other

Delaware Blockchain: State Lawmakers Pass Important Fintech Measure

Delaware blockchain lawIn Delaware, it’s now legal to trade stocks over blockchain platforms — so says a new state law.

Delaware Legally Embraces Blockchain Technology

Eager to keep on top of technological advancements, with only one dissenting vote, Delaware legislators passed a series of new amendments to accommodate blockchain technology initiatives.

The law will likely go into effect on August 1st of this year.

Delaware: A Corporate-Friendly State

Delaware notoriously caters to corporations. (Fun Fact: There are more companies registered in Delaware than residents.) As such, the state’s early blockchain embrace isn’t surprising. As Matthew O’Toole, Delaware bar association corporate law chair, explained to CoinDesk.com: Delaware wants to stay “at the forefront of corporate law and in the lead in terms of enabling the use of ‘distributed ledger shares.'”

Private Sector Reps Helped Draft Delaware’s Blockchain Bill

Delaware legislators sought the guidance of a well-known blockchain attorney and fintech executive when drafting the bill.

We’re in the midst of yet another exciting technological time. Blockchain technology is a game-changer that could force some market remodeling. Industry insiders speculate that blockchain platforms could eradicate finance middle men, which would shatter the current banking ecosystem.

Caitlin Long, of blockchain startup Symbiont, helped shape the legislation. She praised the measure, extolling in an interview: “The bill solidifies its leadership in corporate registry services by enabling end-to-end digitization for administration of securities. Banks are eager to use the automated filing procedures it enables for liens on collateral.”

Connect With A Blockchain Lawyer

Kelly / Warner assists startups and established businesses with some cryptocurrency and blockchain legal matters. Get in touch today to see how we can help.

Article Sources

Castillo, M. (2017, July 02). Delaware House Passes Historic Blockchain Regulation. Retrieved July 14, 2017, from http://www.coindesk.com/delaware-house-passes-historic-blockchain-regulation/

Blockchain Is To Kazakhstan As Movie Making Is To Hollywood?

Kasakhstan blockchainThe Kazakhstani government wants to do for fintech what Hollywood did for the movie industry. The Eastern European country is going all-in on blockchain technology and creating a market environment where fintech companies can flourish.

Kazakhstan’s (Fintech) Squad Goals

Right now, fintech initiatives are hotter than a field of Carolina Reapers. So, how does Kazakhstan plan to court startups in the space? The nation’s Astana International Financial Center (AIFC) is working with Deloitte, Waves, Kesarev Consulting, and Justcutum (a Ukrainian law firm) to establish “the most favorable business climate” for cryptocurrency and blockchain businesses by developing a “highly progressive regulatory framework.”

Nurlan Kussainov, the AIFC’s CEO, explained:

“AIFC aims to become a most favorable fintech jurisdiction with an open ecosystem and the most progressive regulating framework. We thank our partners for the support given to our blockchain regulatory development initiative. In the next phase of the project, our working team will be looking at widening the participation to include other industry stakeholders.”

Kazakhstan Takes Investment Stand

The partnership isn’t the only way the Eastern European country is luring fintech companies. Recently, the National Bank of Kazakhstan introduced a program that allows investors to buy government bonds backed by “a mobile application for the population to conduct transactions for the purchase and sale of securities on the basis of blockchain.” The setup eliminates middle men — and middle men’s commissions — therein lowering transaction fees and increasing settlements times.

Article Sources

Haig, S. (2017, July 18). Kazakhstan Seeks to Become Regional Hub for Cryptocurrency Industry. Retrieved September 03, 2017, from https://news.bitcoin.com/kazakhstan-seeks-to-become-regional-hub-for-cryptocurrency-industry/

ICO Hacks: CoinDash Takes $7 Million Hit; Soldiers On

ICO hacks CoinDashHere’s an unfortunate truth: ICO hacks are part of the initial coin offering ecosystem. CoinDash learned this lesson the hard way when someone siphoned $7 million from its ICO.

ICO Hacks: Manipulated Email Leads To Breach

A self-described social-trading platform, CoinDash planned a 28-day ICO in the hopes of raising $12 million. But a hacker spoiled the plan by grabbing $7 million from investors in a mid-transaction scam.

How’d they do it? An unauthorized party altered the ETH address the funds were to be sent to. When CoinDash learned of the problem, it immediately halted the sale.

Thankfully, stakeholders will not lose money; CoinDash is honoring all investments, even for individuals who inadvertently funneled coins to the wrong email address. Presumably, though, it may take a little time to sort out.

When asked about the incident, a CoinDash spokesperson persevered:

“This was a damaging event to both our contributors and our company, but it is surely not the end of our project. CoinDash is responsible to all of its contributors and will send coins ‘reflective of each contribution.’”

Contact A Blockchain Attorney

Kelly / Warner works with blockchain based startups. If you’re interested in speaking to an attorney about the ins-and-outs of blockchain or coin offerings get in touch today. We’ll guide you through the process and assess the specifics of your situation to ensure you’re structuring your sale in the best way possible.

Article Sources

Arnold, A. (2017, July 17). CoinDash Says Hacker Stole $7 Million at Initial Coin Offering. Retrieved July 25, 2017, from https://www.bloomberg.com/news/articles/2017-07-17/coindash-says-hacker-stole-7-million-at-initial-coin-offering

The Big Bitcoin Fork: Core v. Cash Predictions

Bitcoin Core v. Cash legalA couple of months ago, a new Bitcoin “strain” hit the street — Bitcoin Cash. The product of a technical and philosophical split in the Bitcoin community, the“forking of ways” is a reminder of miners’ importance and their inherent influence on valuations. So, let’s first deconstruct the Core v. Cash issue, and then discuss what the cryptocurrency’s future may hold.

How Does Bitcoin Work?

Before we delve into the Bitcoin Core (“Core”) v. Bitcoin Cash (“Cash”) situation, let’s quickly review five operational and functional points about digital currencies.

  • Bitcoin — (and other digital currencies) — are created and managed using blockchain technology, which is both decentralized and exceptionally secure.
  • New Bitcoins are created through a process called mining. Think of it this way: back in the day, when prospectors rushed west for gold, they used pans and pikes to salvage nuggets from stream bottoms and rocks. These days, cryptocurrency “miners” use computers to unearth tokens from complex algorithms.
  • In the simplest terms, since blockchain databases are decentralized, multiple computers must confirm any given transaction before it’s committed to the public ledger.
  • Transaction rates are directly proportional to computer resources: the more transactions, the more computer power is needed.
  • To compensate for providing the necessary computational power to keep the system functioning, miners collect transaction fees — and those fees are, in large part, determined by the number of transactions in the queue.
  • The “mempool” is the queue of transactions waiting to be processed in the Bitcoin environment.

Bitcoin’s Popularity Is Directly Proportional To Bitcoin Transaction Fees

As you may have already surmised, due to the operational nature of the beast, the more Bitcoin increases in popularity, the higher the transaction fees soar. Now, couple that with something Mark Friedenbach of Blockstream stated, “The mempool will always be full. Get used to it.” So, if the mempool remains in a perpetual state of saturation, and transaction fees are directly related to transaction times, it’s fair to speculate that Core’s fees will continue to rise.

Bitcoin Fork Highlighted Transaction Fee Issues

Since the Core-Cash fork, Core’s transaction fees have been climbing, while the offshoot’s — Cash’s — transaction fees have been lower.

You may be thinking: “Of course Cash’s transaction fees are lower; less people are using it.” Fair enough. But, is that the whole story — or are other market forces at play? Are Core’s infrastructure and operational protocols configured in such a way that will impede growth?

Bitcoin Scalability Solutions: Segwit, Block Size Increases, & Segwit2x

Scalability has been on the Bitcoin radar since the currency’s inception. Satoshi Nakamoto’s — (the elusive creator(s) of Bitcoin’s) — original white paper predicted that increased adoption of the currency would lead to increased mining and solve the scalability problem. Moore’s Law also figured into Nakamoto’s calculations: hashrates would improve over the years because processing chips would be able to handle more data and a quicker rate.

And for the most part, Nakamoto’s hypothesis has held. Processing boards are predictably improving alongside the public’s acceptance of Bitcoin. Still, the mempool is piling up, transaction fees are rising, as are processing times. The latter is of particular concern. Because if Bitcoin is going to truly transition to a widely accepted currency, then transactions times must be near instantaneous. Think about it: McDonalds can’t accept Bitcoin, globally, if Bitcoin transactions take two hours to rectify.

So, to solve the processing problem, Bitcoin luminaries started proposing solutions. The two ideas that rose to the top were 1) SegWit and 2) a block size increase.

SegWit: (Short for “segregated witness”) SegWit is a code processing change that seeks to shrink the size of transaction “packets” (we’re using this term loosely, not technically) by stripping them of signatory data. The “signatures” wouldn’t be eliminated, but instead stored differently. The theory goes that smaller transaction “packets” translates into faster transaction processing times.

Block Size Increase: To solve the sluggish transaction problem, another facet of the Bitcoin community advocated for increasing block capacities from 1MB to 2MB.

SegWit2X: A hybrid of the SegWit and Block Size Increase approaches to unclog the Bitcoin blockchain, SegWit2x is a platform modification plan wherein participating computers “first activate Segregated Witness and then a 2 MB hard fork.”

Bitcoin Core v. Bitcoin Cash

On August 1, 2017, the Bitcoin community split in two. The original Bitcoin became Bitcoin Core; the offshoot adopted the name Bitcoin Cash. For the purposes of this article, suffice it to say that the miners who opted to stay with Core felt it wise to implement SegWit, but not increase the block size.

The main difference between Core and Cash is that Cash has a larger block size capacity — 8MB compared to Core’s 1MB. Moreover, the structure of Core is debatably more suited for investment opportunities; Cash aims to be a more transactional platform. To drive this point home, Cash’s ultimate goal is to be able to process transactions as quickly as, say, Paypal, which can handle up to 2,000 transactions a second. To give you an idea how far Bitcoin has to go, Core is averaging about four to seven transactions per second (arguably on account of the low block size).

Bitcoin Miners: Essential and Powerful

The Core v. Cash fork further shed light on another essential cog in the Bitcoin machine: respected, committed, and engaged miners. They hold a large chunk of the power. Without miners, the Bitcoin blockchain collapses. And in order for any code changes or upgrades to work, the miners must be on board — especially the big block miners.

Predictions: Cash Reaches Core Parity

The core-cash split. Though firm figures are not available at the time of this writing, several “big block” miners abandoned core and moved to cash. As of today, Cash is steadily climbing the cryptocurrency status index, weighing in at a respectable third place with only a short time on the scene.

What does that mean for Core? To be fair and certain, both Cash and Core are currently in flux. A fork of this size needs time to work through kinks. Caveats in place, we think it’s reasonable to speculate that Cash will catch up with Core over the coming months and reach parity.

Why?

As discussed, miners are essential to a properly functioning digital monetary system that is able to process transactions in real time. And though 97% of miners reportedly voted to implement the Bitcoin Improvement Proposal 91 (BIP 91), some important big miners weren’t among them.

So, what are the two strains of Bitcoin looking like after the split?

For starters, some of the larger miners immediately moved to Cash because of the larger block size. Moreover, the fork created a situation in which Cash blocks required less resources to mine and build new blocks. Since building new blocks is how miners can earn money, many of them transferred resources to the Cash chain to…well…cash in. And according to an Investopedia article, over the past several days, the Core network has slowed down, thus prompting a rise in transaction prices. If this trend continues, there’s a chance that Cash will not only catch up to Core, but maybe eventually overtake it.

 

Article Sources

Segwit Flops, Almost No One Uses it More Than a Day After Activation. (2017, August 25). Retrieved October 09, 2017, from http://www.trustnodes.com/2017/08/25/segwit-flops-almost-no-one-uses-day-activation