The buzz around Bitcoin and blockchain rivals that of talk about the world wide web decades ago. Yet it’s not everybody who can tell you what blockchain and bitcoin are. After all, much like the internet, how can something that has the potential to change life as we know it be explained?

This subject requires the kind of deep dive that goes well beyond a couple blog posts, but let’s begin with a two-part overview. First, let’s discuss basics of the technology.  

 

Start at the beginning

Just to add intrigue to what is already mysterious, no one knows for sure who created Bitcoin. But in 2008, someone (or perhaps a group of people) with the pseudonym Satoshi Nakamoto wrote a white paper about using Bitcoin as a cheaper, quicker, convenient way to spend money. The technology behind Bitcoin is blockchain, an innovative new system of keeping records.

Think of blockchain as a digital ledger. What’s so special about that? It’s an open, decentralized database that is not hackable. Data is verified and encrypted, while transactions can be monitored transparently, and the potential for human mistakes is minimized.

 

How does the blockchain work?

PwC, in its paper, Blockchain Opportunity for Energy Producers and Consumers?, provides a good description: Once a provider and customer agree to a transaction, all of the specifics—including the recipient, sender, size of transaction—are actually combined with other, unrelated transactions that are occurring at the same time. This combined information becomes a new, unified block of data. Then, these transaction blocks are encrypted, split apart and distributed to many individual computers.

This “peer-to-peer” network means that each computer separately stores a portion of the data, and members of the network automatically confirm (verify) the transactions stored on these individual computers.

 

In our next post, we’ll discuss the implications of Bitcoin. But in the meantime, if you’re already using Bitcoin, or you’re wondering how it might affect you or your business, contact us to discuss the legal and business ramifications of Bitcoin, now and tomorrow.


 

Scott is chair of the firm’s Securities practice.  His practice is focused on advising a wide range of clients on SEC matters, securities transactions and corporate governance.  He represents issuers, investment banks / financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities.