When Blockchain, Bitcoin and Cryptocurrency Come Under Attack
A new legal frontier has formed around digital currency fraud, hacking and disputes
on February 14, 2018
Updated on August 1, 2022
Most of us have at least heard about bitcoin (even if we still don’t really get it). Maybe you’ve even heard about digital blockchain. In either case, chances are you don’t think it applies to you. Perhaps you’re right, but these advancing technologies represent a digital frontier that some believe will become the new normal. If that’s the case, you should be aware of how it works and the risks involved.
Cryptocurrency may seem remote and space age, but there are applications that can affect regular folks, too. Take online shopping, for example. The e-commerce behemoth Amazon is rumored to be looking at incorporating digital currency payments, but until then, you can exchange your bitcoin at Overstock, Expedia, Shopify and many others.
“There are an increasing number of merchants online who accept digital currency, like bitcoin, ethereum and others, in exchange for their products and services,” says Daniel Bakondi, a cryptocurrency attorney in San Francisco. “You can transfer fractions of one bitcoin, so it can be whatever something costs.”
What is cryptocurrency?
Fiat currencies are those we’re familiar with today—money with value backed by a government. Typically, these currencies are manipulable—subject to the relative needs and circumstances of the sponsoring authority. “If you had a dollar 200 years ago, versus a dollar today, that dollar has lost 98 percent of its value,” Bakondi explains. “Like most fiat currencies, a dollar decreases over time. In some cases, it can rapidly become worthless—like in Venezuela—whereas gold is a universal constant.”
Cryptocurrency is designed to operate much like gold, with no centralized authority to alter its value. “The way the computer program was written, there’s a finite amount of bitcoin,” Bakondi continues. “There may be some yet to be released, but after it’s all released, that’s all the bitcoin there can be. When you can’t create any more, just like gold, it derives its value because there’s a limited amount of it.” To date, the total dollar value of cryptocurrency and blockchain technology worldwide, though fluctuating, is in the hundreds of billions.
What is the blockchain?
Cryptocurrency and digital exchanges take place on a universal cyber-mega-spider web known as the blockchain. The blockchain network is a digital ledger network, comprised of a vast number of remote nodes, each of which records and updates every transaction. Because of its lack of centralization and substantial replications, the blockchain is thought to be impenetrable to hackers, and therefore a secure place for financial transactions.
That said, things still can, and do, happen.
Legal problems in cryptocurrency
Legal issues related to these new currencies include addressing liability when things go wrong. Bakondi works at the forefront of this emerging law. “I represent investors going after issuers, the trading platforms and other technology and service providers,” he says. “Basically, I represent anybody with a substantial loss related to cryptocurrency. I’ve been litigating securities and business disputes in the Bay Area for over a decade, where I’ve sued financial institutions for investment losses. What I’m doing now is essentially the same thing, but for people who are losing money in bitcoin and other cryptocurrency investments.”
Bakondi handles a range of claims, including fraud, business disputes, trading disputes, technical errors with a trading platform, cyber attacks, hacking or phishing. “There are people who are losing a tremendous amount of digital currency over these things. Some have technical problems, like a digital wallet malfunctions, or a trading platform locks them out of their account, and some involve being defrauded, or their account is hacked.”
Other legal implications of transacting in major cryptocurrencies remain unsettled, such as still-grey areas relating to when digital financial transactions are exchanges of cybersecurity and therefore subject to SEC requirements. “An [Initial Coin Offering] may constitute a securities offering, even though the transfer from me to you may or may not be a security in itself. It’s not as simple as black or white,” says Bakondi. Other issues still being worked out include how currency gains or losses are tracked and taxed.
If you have legal concerns related to bitcoin, crypto assets, or other blockchain transactions, it’s extremely important to find a lawyer who understands these issues. Talk to an experienced business attorney and investigate their knowledge of this digital frontier.
“I do take my fees in cryptocurrency,” adds Bakondi. “I hear about problems all day, but I haven’t ever had any problems in receiving or spending it.”