Bitcoin. Litecoin. Namecoin. PPCoin. Ethereum. The proliferation of cryptocurrencies — digital or virtual currencies that employ cryptography as their primary security control — has captured the imagination of entrepreneurs and investors alike and, more recently, has elicited regulatory scrutiny.
Although first introduced in 2009 with the creation of bitcoin, cryptocurrencies moved into the mainstream in 2017 after years of lingering on the periphery of the financial markets.
A cryptocurrency is digital money bought and sold online that has no tangible form and is not transmitted through a traditional third party (such as a financial institution or bank) for verification. Instead, cryptocurrencies use a decentralized system called blockchain technology to track transactions across the network.
A blockchain is a distributed database of peer-to-peer networked computers that records a continuous list of ordered records called blocks, each carrying its own time stamp and a link to a previous record. It facilitates the transfer of monetary value across the internet without the need for a central third party for verification.
A simple transaction using a cryptocurrency might go like this: A person initiates a purchase by logging in to a cryptocurrency wallet using a private (and long) key, or password. In a traditional transaction, a third party, such as a bank, would record and verify the transaction on both sides, subtracting the funds from one account and adding them to another. In a cryptocurrency transaction, the transaction is shared with everyone across the peer-to-peer network where the transaction is added to a shared ledger of recent transactions called a “block,” each carrying its own time stamp.
Every few minutes, the newest block of transactions is added on, or “chained,” to all the previous blocks, constituting a “blockchain.” The new transaction block is then verified through another decentralized (and therefore tamperresistant) process called “mining.”
In 2017, the market witnessed a rapid rise in the number and value of initial coin offerings (ICOs), a fundraising model whereby a venture will issue a cryptographic token in exchange for startup capital. Although cryptocurrencies are not regulated by governments or other centralized regulatory entities, their rapid rise has attracted the attention of regulatory agencies. Most recently, the SEC announced that these currencies may be subject to U.S. securities laws, though this announcement has done
little to reduce the growth of and interest in cryptocurrencies.
Kramer Levin is one of a handful of law firms at the forefront of the regulatory and transactional aspects in the cryptocurrency space. Our Corporate teams currently are advising on the world’s first cryptocurrency exchange, as well as providing counsel on regulatory issues, fund formation strategies and investment strategies on behalf of fund managers, family offices, endowments and funds of funds. A global participant in the space, our Paris team has been involved in a dozen ICOs in Europe, mainly as legal counsel to the issuer of the tokens. Our work with DomRaider, the first French ICO in July 2017 ($50 million), and the creation of an investment fund bringing together investors to participate in Telegram’s ICO ($800 million) underscore the firm’s ability to help clients navigate this complex and rapidly changing landscape.