So what is Bitcoin? How does Bitcoin work? And what is Bitcoin law? These are just some of the questions we’ll tackle in this article.
Bitcoin is just one of many cryptocurrencies (internet currency). It’s not the first, but it’s the first that works and the one that’s caught everyone’s attention. As with any currency comes regulation and in light of the rise of Bitcoin in recent years, it’s important to consult a Bitcoin lawyer if seeking advice in cryptocurrency law, regarding Bitcoin law.
What is Bitcoin?
In non-technical language, Bitcoin is a digital currency in which transactions can be performed without the need for a credit card or central bank. It’s designed to enable users to send money over the internet in a very simple and efficient way; Bitcoin is essentially internet currency.
How Does Bitcoin Work?
Bitcoins are essentially computer files which are stored in a digital wallet app on a PC or mobile. Every single Bitcoin transaction sent from your digital wallet to other people, and vice versa, is recorded in a public list called the blockchain. A blockchain allows the user’s history to be traced to prevent people from spending other users’ Bitcoins or attempting to make copies.
Who Invented Bitcoin?
The identity of the individual or individuals who created Bitcoin is a mystery. If you type ‘Bitcoin Inventor’ into Google, you will see a reoccurring name popping up in your search results – ‘Satoshi Nakamoto’. This name is, in fact, an alias utilised by the inventor of Bitcoin to conceal their true identity.
There are many reasons why Bitcoin’s inventor could be keeping their identity concealed, such as:
- Desire to maintain their private lifestyle – Bitcoin became a worldwide phenomenon that gathered lots of attention from both media outlets and governments across the globe. The inventor may have predicted that their invention would succeed as a decentralised currency and wanted to avoid this affecting their personal life.
- Negative impact on the current banking system – If Bitcoin were to become part of the mainstream banking systems, this could result in governments taking legal action against the inventor to protect the current banks.
- Avoid becoming a target of criminals – Bitcoin has been known to be utilised for both legal and illegal services. In fact, the cryptocurrency’s association with the dark web marketplace, SilkRoad, brought its invention into disrepute.
Who Runs Bitcoin?
It is important to note that the mysterious inventor of Bitcoin does not run this cryptocurrency. In short, no one runs Bitcoin. Bitcoin is run collectively by the users who use the Bitcoin client, and any changes to the Bitcoin system have to be approved by the majority of users before they are implemented.
What is a Bitcoin address?
A Bitcoin address is a unique identifier which allows you to receive Bitcoins. With PayPal, you send funds to an email address and, similarly, with Bitcoin, you send funds to a Bitcoin address.
The following is an example of a real Bitcoin address: 1JArS6jzE3AJ9sZ3aFij1BmTcpFGgN86hA.
What is a Private Key?
A private key is a secret code which allows the user to prove the ownership of their Bitcoins. Every Bitcoin address has a matching private key, which is saved in the wallet file of the person who owns the balance. The private key is mathematically related to the Bitcoin address and is designed so that the Bitcoin address can be calculated from the private key, but, importantly, the same cannot be done in reverse. This means that if the owner loses their private key, the bitcoins at their public address will be inaccessible.
What is a Public Key?
The public key is a unique personal address that is used to ensure the owner of an address can receive their funds. The user’s public key is mathematically derived from their private key by using extremely complex reverse mathematics. In order to make Bitcoin legal and to avoid complete anonymity, the pubic key is shared in the blockchain where everyone can view it.
IMPORTANT TO NOTE:
Private keys are to be kept safe, with periodic backups made to prevent the loss of Bitcoins. Anyone with your private keys can spend your Bitcoins!
What is ‘Blockchain’?
The blockchain is a public ledger of all transactions in the Bitcoin network. Blockchain.info allows you to navigate the Bitcoin blockchain. We also operate Bitcoin’s largest and most secure wallet service.
For more information regarding the blockchain, visit St Pauls Chambers barrister, Jeremy Barnett, who is also a blockchain and Bitcoin law specialist.
Investing in Bitcoins
It is important to note that, as Bitcoin is a global cryptocurrency, it is less affected by an individual country’s financial situation or stability, good or bad. You should become familiar with Bitcoin law in your country of residence.
Here’s what you will need to get started in Bitcoin investment:
- A digital wallet to store Bitcoins
- Personal identification documents
- A secure internet connection
- A method of payment (e.g. credit card or debit card)
- An account at a cryptocurrency exchange
What fees are involved with Bitcoin?
The transaction is usually free if the sum transacted is greater than 0.01 BTC. A token sum is imposed to provide some incentive to the miners to include the transaction in the blockchain.
At the moment, many transactions are typically processed in a way where no fee is expected at all, but for transactions which draw coins from many Bitcoin addresses, and therefore have a large data size, a small transaction fee is usually expected.
What does ‘unconfirmed’ mean?
It means that the transaction has not yet been included in the blockchain, and is still reversible. A transaction typically takes around 10 minutes to be confirmed. When that happens, it is said that one confirmation has occurred for the transaction. With each subsequent block that is found, the number of confirmations is increased by one. To protect against double-spending, a transaction should not be considered as confirmed until a certain number of confirmations is seen.
What is Bit mining?
Miners are individuals who run computer systems to repeatedly calculate hashes with the intention to create a successful block and earn coins from transaction fees and new coins created with the block itself. The term references an analogy of gold miners who dig gold out of the ground and thus ‘discover’ new gold that can be used to create new coins, with a similar kind of discovery occurring with a successful hash to create new Bitcoins.
Is there a limit to the number of Bitcoins generated?
The number of Bitcoins in existence will never exceed 21 million. See here for how many Bitcoins are in circulation.
How much does a Bitcoin cost?
The current market price for a Bitcoin is always changing due to the supply and demand for it. Bitcoins are traded at Bitcoin Exchanges. See the following for a historical Bitcoin price chart.
What is a Bitcoin Client?
Bitcoin clients are the base level of technology for conducting Bitcoin transactions, and they store the keys needed to conduct a Bitcoin transaction. They come in multiple flavours, and are customised to fit different niches, the most popular of which include;
- The Bitcoin-QT Client is the original software written by Satoshi Nakamoto, the project’s founder. If you aren’t sure which program to pick, this is a good bet. It is suited for enthusiasts, merchants, miners, developers and people who want to help support the project.
- The MultiBit Client is fast and easy to use, even for those with no technical knowledge. It is also able to import Blockchain.info’s wallet backups (Multibit version 5.17 and earlier), making it a versatile tool for all users.
- The Electrum Client focuses at speed, with low resource usage, and simplified Bitcoin usage. Start-up times are instant because it operates in conjunction with high-performance servers that handle the most complicated parts of the Bitcoin system.
Risks of Bitcoin
Many concerns have been raised in governments across the world regarding the decentralised and anonymous nature of Bitcoin that cannot be fully controlled. Thus, it’s understandable why people question if Bitcoin is legal.
The issue with Bitcoin is that it can allow users to remain semi-anonymous as the records only consist of the funds transferred and the public keys. As a result of this, Bitcoin law is in a legal grey area for many parts of the world due to the challenge it presents in attempting to prevent criminal transactions, such as money laundering and tax evasion.
See below for some countries where Bitcoin is allowed and some countries where it’s banned:
- United Kingdom
- The United States
- Saudi Arabia
Bitcoin Legal Assistance with St. Pauls Chambers
If you wish to receive Bitcoin legal assistance or advice regarding any other internet currency, please don’t hesitate to get in touch with our team at St. Paul Chambers. We will then put you in contact with one of our fraud and financial crime barristers suited to the topic of Bitcoin law
Alternatively, for more information on the latest developments in Bitcoin law and technology, follow the blog of our blockchain and Bitcoin lawyer, Jeremy Barnett. The blog includes Bitcoin regulations updates, information on the blockchain and an introduction to smart contracts, amongst other resources.