William Dooley
Senior Associate Solicitor
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Date Published:17 Aug 2021 Last Updated:21 Sep 2021

Understanding Cryptocurrencies

Banking & Finance Litigation

The aftermath of the 2008 financial crisis saw the emergence of a new phenomenon: Bitcoin. Against this economic background, Satoshi Nakamoto introduced a new trading system made possible by cryptographically produced currencies. The financial crisis raised one of the problems associated with the traditional banking system and the potential consequents of sole reliance on this method of finance.

Cryptocurrencies offered a possibility to transact without a centralised system and arguably less risk.

What is a Cryptocurrency?

The term cryptocurrency includes cryptocurrency coins and tokens.

A cryptocurrency coin, the most recognisable of which is Bitcoin, is designed to act as traditional money to purchase goods and services even if it does not respond to the universal criteria of currency.

Tokens can be described as a financial technology which can perform different functionality. For instance a utility token gives holders access to specific rights and privileges such as use or access rights to a building or a service while a security token represents ownership or interest associated with an underlying asset.

In addition, there are non-fungible tokens (NFT) which are valued uniquely and currently making headlines as they have been described as the future of art. Recently, a digital-only artwork has sold at Christie’s auction house for $69 million (£50 million)  (“The First 5000 Days”) positioning its artist in the top 3 of current most valuable living artist worldwide. However, the winning bidder did not receive a sculpture, painting or even a print but instead a NFT security token.

How Can We Use Them?

Despite a primary purpose to use cryptocurrency coins as a currency, it is hard to argue that it is a good network for transactions. It is more of an investment that you hope gains value, like gold. For instance, before stepping back a few weeks later due to environmental concerns, Tesla allowed customers to purchase their cars via Bitcoin. The initial excitement has been followed by different concerns and questions; in the case of a refund, if the price of Bitcoin moves up before the refund is issued, the customer could lose out.

The Initial Coin Offering (“ICO”) via token has become a new means of raising capital for companies associated with the principle of crowdfunding. The mechanisms of an ICO are relatively simple: a company generates its own money which will be embodied by tokens. The token will then be sold in a limited number at a specified date corresponding to the ICO. The investors will be able to acquire goods and services issued by the company by the means of the tokens released. Tokens can also become a speculation tool, completely detached from the initial project. Investors can buy tokens, merely, with the aim to resell them at a higher price to people interested in the services provided by the company.

For instance, Ethereum is an open-source blockchain-based platform used to create and run decentralized applications as well as implement and use smart contracts. Ethereum was originally funded through an ICO where buyers received Ether for their investments which took place in 2014. However, it is hard to argue that people are buying Ether in the means to support the development of smart contracts, rather than as a speculative tool.

How Can Ellis Jones Help?

Ellis Jones’ Banking & Finance Litigation solicitors have specialist knowledge and expertise across a broad range of areas. We act for a broad range of individual and commercial clients in finance related matters.  If you feel you need any advice on cryptocurrency please contact either  William Fox Bregman, Paul Kanolik or William Dooley  in our Banking and Financial Litigation team by calling 01202 057733. Alternatively, please email us at banking@ellisjones.co.uk.