Legal Seminar, Denver, CO

071018 Discussion Draft

useful for avoiding government-imposed capital controls imposed by an oppressive government. See Friedman, supra, at 130-31. But it also avoids traditional KYC detection features applicable in regulated systems imposed by comparatively more benevolent governments. As discussed below, “choke points” can restrict the utility of this feature if the user must ultimately convert to fiat currency. 3. Security. Unlike carrying cash, which is bulky (even large denomination bills weigh something!) and subject to loss in custody, cryptocurrencies are secure as long as you maintain control of your private key . Digital wallets are often used to manage the key pairs necessary to transfer bitcoin, and they are generally secure. However, they are not impervious to hacking and large-scale losses have occurred. See Friedman, supra, at 135- 36. Losing your private key means losing your assets. Duplicating your private key means someone else can (potentially) access your assets. a. Note that those who store your cryptocurrency present risks not only from external hackers, but also from internal error/dishonesty. b. Banks face audits/regulation to evaluate their safety and soundness. Who audits a wallet? The cryptocurrency is not money, per se. c. Private audit efforts are emerging in this area to provide assurance to investors/users/depositors. See, e.g., Kraken’s advertised audit regime: https://www.kraken.com/en-us/security/audit . Note how public disclosure of internal blockchains could be possible, but Kraken avoids this approach due to privacy concerns. 4. Finality. Like cash, once a payment is transferred and it has been confirmed, the payment is final. a. Sellers who don’t like the possibility of a charge-back with a payment card will like this feature. Which sellers will fit that category? b. Moreover, if you make a mistake, you are at the mercy of the counterparty. There is no intermediary to fix the problem for you – no “adult” in the room to resolve the dispute. However, this may not be a problem if there are other bonds of trust between the parties. c. Note: finality may take time. It may not occur until there has been more than one blockchain cycle, meaning that it is far from instantaneous. Kraken advises its customers that finality can take up to an hour, depending on the kind of cryptocurrency and the fees incurred. 5. Transaction Costs. Although early reports suggested that transaction costs should be lower without the services of intermediaries (see, e.g., Friedman, supra, at 130), the costs of “mining” have proven greater than previously anticipated, particularly after Bitcoin prices spiked in late 2017/early 2018. a. If you want a miner to prioritize the processing of your transaction, you pay an added charge. Current charges (as of 6/25/18) are stated at about $3.23/transaction, but these spiked at over $30 in early 2018. See https://bitcoinfees.info/ Faster processing means a higher cost.

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