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Monday, April 12, 2021

Cryptocurrency Bitcoin, blockchain and the future of money

The Fort Worth Business Press presented Reinventing Money: The State of Cryptocurrency at the Fort Worth Club on Jan. 24.

Because of interest in the subject, we’ll present some excerpts from the event over the next two weeks.

The first report is from a speech by Arnold Spencer, who presented a primer on bitcoin, cryptocurrency and blockchain at the event.

Spencer serves as general counsel for Coinsource, the leading operator of bitcoin ATMs in the United States. He speaks and writes about bitcoin, blockchain and compliance challenges in the digital currency industry.

From 2000 to 2010, Spencer served as an Assistant United States Attorney in the Eastern District of Texas. He specialized in securities fraud, financial fraud and money laundering prosecutions and personally prosecuted more than 100 federal cases.

In 2006, the Attorney General for the United States awarded Spencer the John Marshall Award, the highest award presented to a Justice Department attorney for contributions and excellence in legal performance. Prior to his civil service, Spencer worked at Haynes & Boone LLP in Dallas.

The definition of bitcoin:

“I’ve searched around quite a bit for a definition of bitcoin and I’m fascinated that there really isn’t a good one that I’ve found out that’s been accepted.

“Wikipedia has a terrible definition of it. It is better than the standard dictionaries that are out there, but still …

“This is the definition that I cobbled together … It’s a digital unit, it’s computerized and digitized and it’s created and tracked by cryptographic algorithms. That’s a mouthful there, but it covers it.”

How to think about bitcoin and digital currencies:

“Most people think about it as a currency as a way to engage in transactions. I think it’s important to think of it also as a technology. If you can break those two concepts down, if you can look at bitcoin or digital currencies as both a technology and a currency, then I think a lot of the standard thoughts and ideas that we have about currency fall away and becomes much easier to understand what bitcoin actually is.

“It is heavily based in cryptography. … That is a key part of the digital currencies. These currencies can be transferred peer-to-peer in a digital fashion. I want to focus on that for just a second.

“As sort of abstract as that might sound, it is a peer-to-peer transaction. When I buy bitcoin from one of my machines, I am actually doing a direct transaction from that machine to me. I bought a bitcoin sweater for an ugly sweater party for Christmas. I paid with bitcoin.

“That was a direct transaction from me as a consumer to the sweater manufacturer. There’s no third party in their processing that payment. … This is the radical transformation of the bitcoin.

“Again, I want to pause and emphasize the importance of this. This is the first time in history, first time in history of all mankind, that we’ve been able to do peer-to-peer transactions remotely. I can get into a transaction with someone on the other side of the world, never having met them, certainly not seeing them, not being in the same room, not being able to transfer something physically and receive something physically back.

“We can do it directly. That’s never, ever happened before. We start off with basic currency transaction, cave man all the way through 12, 14th century England where you actually get to sell land and pick up a piece of the dirt of the land and physically hand that over to the person who was buying the land from you.

“That was how you evidenced a real estate transaction in King Arthur’s day. Two people together, peer-to-peer, but they had to be together. Then we progress and we use third party transfer systems. … Eventually we got American Express, Visa, MasterCard, we get money transfer businesses and we get the banking institutions. …

“I can buy a sweater online with my credit card but I’m paying a fee and it’s taking a great deal of time to go through that third-party transaction. You can now see where the genius and really the disruptive potential of digital currencies are.”

On blockchain:

“One of the core elements of understanding this whole area is that there’s a fundamental difference; they are two different animals, blockchain and digital currencies. They often get covered very quickly in the press and they get combined and authors sometimes just say well blockchain is part of the digital currency part of the bitcoin system.

“That, I think, fundamentally misunderstands that blockchain is very simply an accounting system, a database. It’s a very sophisticated one and a very powerful one but that’s all it really is, a database. You’ll see that blockchains can be used in literally every single industry that exists right now and several that don’t. Blockchains will fundamentally change the way we interact with one another.

“Ten years from now you’re not going to be able to walk down the street without bumping into three, four, five blockchains. There’s just going to be that much of our society that interacts through blockchains.

“That’s completely distinct from these digital currencies. These digital currencies use blockchain but they operate in and of themselves as either a currency or store value. Blockchain is arguably the greatest advancement since double entry accounting in the world of finance and accounting and data management. That’s going to be applied in zillions of different ways.”

Bitcoin and criminal activity:

“Of course, everybody is worried about bitcoin being engaged in criminal activity. This couldn’t be farther from the, well, on the one hand it’s absolutely true, criminals are using bitcoin. P.S., criminals are also using United States dollars. There are trillions of dollars being laundered every year. There have been several reports by the British enforcement agencies, the U.S. enforcement agencies, [that] bitcoin and digital currencies are rarely used in criminal tracked activity as compared to U.S. dollars.

“Bitcoin is easier to launder than sovereign currency? False. Terrorists use bitcoin? False. … The truth of the matter is, really most of the crime goes on with … dollars.

“Because every bitcoin transaction is recorded on the blockchain, it is vastly easier for a law enforcement agency to track bitcoin transactions than it is to track dollar transactions. There was an article just yesterday or the day before in the New York Times, an opinion piece about how the IRS is all worried about bitcoin because people are going to be able to do these transactions and shift from wallet to wallet and really hide capital gains.

“It was just atrocious. It was someone who did not understand the blockchain who was writing this article. The facts of the matter are the IRS is going to love blockchain transactions because they are going to be able to publicly, immediately on a computer database, look at it and say wow, someone bought Bitcoin at this price on this date at this minute, he transferred it wherever he transferred it, and again time, date and value are going to be established. It’s going to be very easy for them.

“Now if I do the same thing, if I go buy a piece of art or I go buy a piece of real estate, it’s much more difficult to trace those transactions for the government, whether I’m investigating a money laundering scheme or a tax fraud scheme or any other criminal activity.

“Turn it around. I’ll be the criminal instead of the investigator. If I’m a criminal, the last thing I want to be doing is engaging a bunch of transactions that are being recorded publicly. Who wants to say, ‘I really want to steal money but I’m going to keep a ledger that’s open to the public, anybody can come and see where I’m stealing money from and where I’m sending money to.’”

The Reinventing Money event’s key sponsors were Winstead, Coinsource, BDO and Catalyst Partners. Supporting sponsors were Tech Titans, TECH Fort Wroth and Jones Day.

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