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CryptoLogic: Insights into Cryptocurrency and the Digital Asset Ecosystem

03.16.2018 | CryptoLogic

Hi there and welcome to CryptoLogic, Berdon’s new blog-ish focused on tax, and other, issues related to the digital/crypto asset space! As these writings progress over the upcoming weeks and months, I hope to do a deep dive into some seriously complex and unsettled tax issues, as well as the technical aspects of digital assets. However, as this is the “kick off special,” a brief introduction into the space would probably be helpful for the uninitiated.

In 2009, the Bitcoin blockchain was launched and was intended to serve as a peer-to-peer digital payment system. Its creator, the still unidentified Satoshi Nakamoto, came up with a computer linked system whereby parties around the world could conduct and record transactions without an intermediary. In the Bitcoin ecosystem, the Bitcoin is the native crypto asset on the Bitcoin blockchain. All blockchains use their own native crypto assets or require use of major ones, such as Bitcoin or Ether (which is the native asset of the Ethereum blockchain). These crypto assets are necessary to the functionality of a blockchain system; they are the incentive mechanism for computers in the network to validate and confirm transactions.

You’ll notice in the above paragraph there was no mention of the phrase “cryptocurrency,” and this was very intentional. While these coins (or tokens) utilize asymmetric cryptography as a security measure, most crypto assets are not intended to actually serve as a currency. For example, while Bitcoin may have originally aspired to be a peer-to-peer currency (looks a little bit more like a digital gold now though), other assets, particularly as this space grows and expands, have completely different goals. For example, here are a few coins and tokens, followed by their trading symbols, and their intended/hopeful uses:

  • Ethereum (ETH): Programmable contracts and money
  • Ripple (XRP): Enterprise payment settlement network
  • Lisk (LSK): Decentralized applications in JavaScript
  • Augur (REP): Decentralized prediction market

This list could go on and on. So, while all coins and tokens are often referred to as cryptocurrencies, this term shouldn’t be a referendum on the intended use of any digital asset.

One other linguistic item of note before we call it quits for today: token versus coin. While I’ll probably use these terms interchangeably (probably due to my own grammatical inefficiencies and proofreading malaise), I still want the readers to know the difference. Essentially, “coins” (or Altcoins, which is anything other than Bitcoin) actually refer to the crypto assets with their own separate blockchains. Tokens, on the other hand, operate on top of a different blockchain platform (mostly Ethereum at this time, but other platforms like Neo, Ardor & Qtum are growing) that facilitates the creation of decentralized applications.

With that quick introduction I’ll leave you all for now. I expect my insights to come fast and furious, especially in the beginning, because there is so much to catch up on in the space. Future issues will cover a variety of topics, including the various consensus mechanisms and cryptoeconomics behind transaction validation, asymmetric cryptography as a security measure and Hard Forks. Next time I will take ten leaps forward and write about the basic taxation of digital assets – I wouldn’t be much of a tax attorney if I didn’t! Thanks for reading.

Questions? Please email ContactUs@berdonllp.com.

Note: The thoughts and opinions expressed here should not be taken as investment or financial advice. The goal of CryptoLogic is to educate and enhance interest in the crypto space or a particular asset. It is important that when considering your investment and financial situation, you do your own research and speak with your trusted advisors.