A Guide to Bitcoin, Blockchain & Cryptocurrency

Del Wright, a professor at the University of Missouri-Kansas City School of Law and author of “A Short & Happy Guide to Bitcoin, Blockchain, and Crypto,” recounted cryptocurrency’s inception and evolution at the ACG monthly breakfast on April 15.

Wright teaches law in finance, business, securities, venture capital and tax at UMKC. He currently focuses his research on cryptoassets and blockchain technology regulation. He previously was a lawyer with the U.S. Department of Justice and several law firms and was an investment banker with Banc of America Securities.

He opened his remarks with a reference to comedian John Oliver’s description of cryptocurrency as “everything you don’t understand about money combined with everything you don’t understand about computers.”

The crypto industry’s market capitalization is about $1 trillion, Wright said, “and that’s just the top two cryptos, Bitcoin and Ethereum.” Bitcoin started in 2009 and Ethereum around 2013.

“Any market that can create a trillion dollars of value in that short a time is an important market,” he said.

Crypto is based on blockchain technology, which started after the 2008 financial meltdown when a group of computer experts who opposed the government’s bailouts took action.

“They got the technology together and figured this out,” Wright said. “This was really something that was Nobel Prize worthy, but no one knows who to give the prize to because Satoshi Nakamoto (thought to be blockchain technology’s inventor) is an unknown person or group.”

Wright described blockchain technology as comprising “chains of blocks.” Blocks are files containing permanent records of transactional data. When a transaction is executed and recorded in the block, “it can’t be undone or altered, ever.” It effectively is a global, publicly accessible distributed transaction ledger, “but nobody can change your data except you.”

Blockchain systems are secured with a cryptographic “hash,” which takes data and creates an algorithm that secures it. Bitcoin uses a hash so complicated a supercomputer would require 30 years to crack it, Wright said.

Blockchain is based on three technologies: private key cryptography, peer-to-peer (P2P) network and protocol (software). This eliminates the need for a trusted third party to facilitate digital relationships. No intermediary is needed between your wealth and anyone else, so “no one controls your wealth except you,” Wright said.

For example, real estate transactions involve many parties. If they’re represented on Bitcoin and proof of asset ownership is in place, then the transactions are simple, with no need for a title company or a lawyer. A bank can verify the transaction. Transactions are easier and cheaper. Some cities are experimenting with blockchain for real estate transactions.

A blockchain is a “trust machine,” Wright said. Transparency, decentralization, consensus and game theory ensure that trust, changing it from analog to digital. This eliminates the need to trust people, which is “scary” because for thousands of years, that trust was in people.

Bitcoin and other cryptocurrencies do, however, use huge amounts of energy because thousands of computers are used for mining. The Digiconomist’s Bitcoin Energy Consumption Index estimated that one Bitcoin transaction used 1,544 kilowatt-hours to execute, equivalent to roughly 53 days of power for the average U.S. household, according to a cnet.com story from August 2021.

But Wright said Bitcoin has “done more for renewable energy than any other asset ever.” For example, big oil companies use energy that they typically burn off of oil wells to mine Bitcoin because the companies make money doing it and it reduces the use of fossil fuels.

Another cryptocurrency application is stablecoins, which can be pegged to the dollar or other currencies. Stablecoins avoid the risk of having Bitcoin’s value rise and fall because stablecoins are stable assets. When you turn your crypto into fiat currency, you must report it for taxes. Wright’s law firm accepts crypto and gives its clients a credit for paying in crypto. But Wright maintains his respect for Uncle Sam.

“Do I want to avoid paying taxes?” he said. “Nope, because I’m a tax lawyer and I know the problems with that. I also worked at the DOJ, and I know if you evade taxes the prize you win is handcuffs. And I’m too old to go to jail.”