We end this month’s blog with an overview on virtual currencies and the risks. Last month, we fleshed out our understanding of blockchain technology and the legal quandaries that surround it. This month we narrowed our focus to the specifics of one of its uses: currency. Virtual currencies have great potential to provide liquidity and trust to markets, and have ushered in the beginning of a modern era of prosperity and exponential economic growth. Regulators have not quite figured out how to manage them because they are innovative and unique. Also, the courts have not quite figured out how to handle cases brought about by disputes surrounding them.
Despite their many attributes, digital currencies pose risks as well. For example, their largely unregulated status leaves them more vulnerable to the threat of hacking and any crime that might be associated with it. There have been cases where virtual currencies have been used for illegal and immoral activities, like sex trafficking and purchasing illegal narcotics. Not only companies, but potential investors, should be aware of all the risks of noncompliance with regulation.
To quickly clarify, digital currency is any currency that exists in digital form, whereas virtual currency, a subset of digital currency, is digital currency that is not tethered to any “real” or official currency. All digital currencies pose risks of hacking, but legal approaches to the broader category of digital currency might differ from legal approaches to the narrower category of virtual currency.