Published in 2011
by Christopher B. Hopkins
In this economy, it has become commonplace for clients to seek alternative fee structures for their legal bills. Most law firms, in the last few years, have accepted credit cards, payment plans, reduced rates, flat fee arrangements or even Paypal. Coupled with the fact that potential clients can be anywhere around the globe and seek your assistance via Internet, a potential client may seek to pay your hourly rate in “bitcoins.”
Bitcoins are an alternative, electronic currency which began as a fringe concept two years ago but has drawn mainstream attention in mid-2011 from The Atlantic, The Economist, New York Times, USA Today and other large publications. If you recall the struggle to define “Twitter” five years ago, explaining bitcoins is another mind-expanding riddle from the Internet which, in time, might become a household name.
Unlike Twitter, however, a discussion of bitcoins involves some understanding of currency, Internet security, and potentially some criminal and securities laws. According to its inventor, bitcoin is a “purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution.” The exchange system has no hub but is simply a connection of nodes on the Internet which verify transactions via a two-step public and private key signature system (in cryptological terms, it involves an irreversible hashing algorithm). The inventor boasts that security is baked into transactions thus creating a “system for electronic transactions without relying on trust.”
Bitcoin is not a bank account, Paypal, frequent flyer miles, Facebook Credits or even Xbox points. It is a free-standing, virtual, de-centralized money system which lives on the Internet without reliance upon any nation’s economy or government. It is not currency based upon gold (neither is the US dollar) but a collective fiat based currency with a fixed supply: in other words, bitcoin has value based upon what people claim it is worth and there can only be a maximum of 21 million bitcoins. Critics contend that bitcoins does not offer advantages over the dollar or yuan but may hold some promise in emerging, unstable countries. For the non-economic minded, it is hard not to bring this back to dollars. You can buy bitcoins on a trading market website, Mt Gox, which, like the stock market or eBay, reflects the current value of bitcoin based upon US dollars (in the last year, a bitcoin has generally been valued between $7-17).
Even though a bitcoin is simply a string of numbers, it can be created or “mined” just as you would mine for gold. This is where the “peer to peer” system comes in. During the process of verifying a bitcoin transaction, nodes process the security algorithm “blocks” and are compensated for their processing cycles with a small amount of bitcoin. Since bitcoin currency is capped at 21 million bitcoins (not all of which have been “mined” yet), new bitcoins are slow to be created.
At this early stage, it appears that the bitcoin algorithm is an admirable security tool. Cheating the system, hower, does not necessarily mean taking on the mathematics. Every security system faces its greatest weakness at the point of computer-human interaction. It seems in 2011 that every major corporation and government has been the victim of hackers who exploit weak passwords, compromised accounts, and website loopholes. In June 2011, Bitcoins were temporarily halted when it was reported that an account was stolen and a massive sell-off led to a system wide “bank run.” Nonetheless, this can happen with “real life” money (e.g., from a stolen wallet to a Madoff scheme) and, at least with online transactions, there are some stopgap measures.
Two problems exist with bitcoin: perception and the law. Bitcoin’s murky origin is an unpublished “white paper” written under a pseudonym and distributed via an anonymous source. The bitcoin trading post, Mt Gox, exists offshore (purportedly in Japan) and is reasonably outside the grasp of the U.S. government if something goes awry. That is not a reliable foundation for steadfast currency. Then again, Internet gambling seems largely unreliable yet people spend millions of dollars every year. Bitcoins advocates arise from the tech and libertarian crowds and enjoyed a quick hit of attention when Wikileaks turned to bitcoin after its Paypal account was frozen. However, extensive boasting about tax-free and government-free transactions from the bitcoin populous may hinder its development. At the moment, bitcoin’s perception is more akin to Wesley Snipes than Jack Kervorkian.
Likewise, as “bitcoin” is only beginning to become recognized, the June 2011 system-crashing security hack was not a good introduction to the mainstream world. Finally, some attention has been drawn to a single website, Silk Road, which sells illegal drugs and happens to accepts bitcoin. Two U.S. Senators seized the opportunity to gain some tech-credibility by writing a public letter to the Department of Justice expressing concerns about illegal Internet drug sales purchased with virtual money. If bitcoins are ultimately seen as the tool of illegal Internet trade, it may never gain traction.
The second problem with bitcoin is whether it is legal. Once again, Internet innovation can be a confounding application of written law and the question of whether bitcoin is an illegal private currency may lie ahead of us (starting withTitle 18, Chapter 95 of the US Code). The Electronic Frontier Foundation (EFF) accepted bitcoin donations for several months but removed the option under concerns that, “Bitcoin raises untested legal concerns related to securities law, the Stamp Payments Act, tax evasion, consumer protection and money laundering, among others.” Others claim it is simply permissible bartering as long as the transactions are reported.
So will your law firm accept bitcoins? Perhaps it is a marketing angle: two law firms have already announced that they accept bitcoins (http://bit.ly/kb5RBU).
Christopher B. Hopkins is a shareholder at Akerman Senterfitt and is the chairperson of the Palm Beach County Bar’s Technology Committee. He prefers legal Paypal transfers sent to email@example.com