Crypto assets such as Bitcoin are a representation of digital value that is not issued or guaranteed by a central bank or public entity and which are not necessarily linked to a legally established currency, do not possess the legal status of a currency or coin, but are accepted as a method of exchange and can be transferred, stored, and exchanged electronically. (EU Directive 2018/843 of May 30, 2018, Article 1 (d).
The definition of "virtual currency" was transposed into Italian law by Legislative Decree 90/2017 (art. 1, paragraph 2, letter qq).
Cryptocurrencies are realized through digital tokens that operate through an electronic protocol managed in a decentralized manner which is distributed ledger technology (DLT) also known as blockchain.
Bitcoin (BTC) was first described in 1998 by Chinese engineer Wei Dai, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions rather than a central authority.
In the blockchain system, institutional authority is replaced by a complex mechanism of collective consensus among the operators of participating computers, called nodes. It is fundamentally based on an incentive system that makes it more economically beneficial and efficient for system operators to follow correct behaviors. Each end user operates through a pair of cryptographic keys: a private one, similar to a pin code, which allows to use the wallet and, in particular, to give credit instructions in favor of another user and the other public (similar to an iban code), necessary for system validation in order to perfect the transaction entered.
The Bitcoin blockchain protocol - General aspects of blockchain operation.
The Bitcoin protocol is one of the declinations of the distributed ledger technology that allows the creation and transfer of cryptocurrencies. It is a complex computer program capable of storing in a secure way (cryptographic) information accessible, manageable and verifiable (even backwards) in a shared mode by subjects operating online. DLT allows for the creation of public digital archival records. Unlike a normal central database with shared access via password, DLT allows for unalterable chronological records and decentralized process updates, without the need to rely on a third party recognized as a guarantor or a trusted custodian by law or custom.
Specifically, there are three types of DLT: public DLT protocols (or permissionless) managed entirely decentralized on the Internet, through the action of independent and autonomous subjects, specialized operators, called miners, as in the DLT of Bitcoin; private DLT protocols, where the nodes are enabled by the manager of the computer protocol "permissioned" (this class of DLT can also operate without miners); hybrid protocols, characterized by a system of decentralized validation through nodes (not all directly enabled by the manager), while leaving to the subject that promotes the protocol full control of the same.
Deciphering complex alphanumeric cryptographic codes requires computers using specific software and hardware capable of making millions of calculations per second. In the Bitcoin protocol, for example, every time a miner solves one of these mathematical problems the transaction is perfected and a new block is completed. With the solution of the problem, a certain number of Bitcoins are released which are distributed proportionally according to the computing power reported by each miner. Miners, then, who are one of the key figures in the process, are in charge of mining (hence the name) new Bitcoins and verifying the validity of the transactions.
In addition to blocks and miners, as mentioned, there are nodes. These are computers connected to the Bitcoin network that are in charge of storing and distributing an updated copy of each block. In case a node gets lost or stops working, nothing will happen to the chain. The rest of the links store all the information and it is not lost. The information is stored in all nodes and when something is entered into the blockchain it is preserved forever.
Currently, the blockchain protocol awards approximately 12.5 newly created Bitcoins to the miner who first finds the solution to the cryptographic puzzle associated with a block of transactions. The blockchain protocol was programmed to create a predefined maximum number of bitcoins (21 million units), as every 210 thousand blocks the system halves the number of Bitcoins allocated to each transaction block.
The creator of Bitcoin, the fictional Satoshi Nakamoto, predicted that this system in order to be efficient and lucrative for a long time would have to provide a limit. So was born the idea of establishing the halving, a process by which the reward that miners get from mining, ie Bitcoins, is halved, in fact, every 4 years once reached 210,000 blocks, given that the first block of Bitcoin was generated in January 2009, this translates into the fact that the last Bitcoin will be mined in 2140 or so, but already around 2030 the new BTC will be very few. Currently about 19 million BTCs out of the total 21 million have been mined.
For this reason, it is argued that Bitcoin is a deflationary instrument and - with Keynesian economists at the forefront - that BTC, while it remains an excellent medium of exchange, is not a stable store of value. Keynesians, inclined by definition to print money, place the emphasis of their criticism precisely on the (deflationary) tendency of BTC that would incentivize individuals and businesses to hoard money rather than invest it.
Virtual currencies such as BTC are fractionable (in so-called Satoshi) and can be used as the underlying for financial instruments or to finance the operations known as Initial Coin Offerings (ICOs). The first State to introduce specific legislation for the entire cryptocurrency sector and ICOs is Malta.
DLT, NFTs, and blockchain in law, economics, art, and international commerce
While there is an open contrast, perhaps irremediable for a few more years, between the subjects (also institutional) that support the investment in cryptoassets and those, instead, like the European authorities ESMA, EIOPA, EBA and Banca d'Italia, who have underlined the risks deriving from the use of these instruments, there is, instead, uniformity of view on the fact that the theme of cryptoassets (in the different typologies, cryptocurrencies included) must be separated from that of the underlying technology: the distributed ledger technology. This technology has great potential especially in the field of cryptographic storage, the use of smart contracts and some types of digital tokens.
There is also agreement on the fact that the technological development linked to DLT opens up far-reaching scenarios for the processes of intermediation and organization of markets on a large scale.
Payment tokens, for example, are digital representations of value issued by a legal entity against a unit of traditional currency. Utility tokens, represent non-transferable and non-negotiable administrative rights.
Security tokens, are transferable and tradable and represent rights such as: voting rights, rights to cash flows, ownership rights to financial assets, or shares in standardizable real assets (commodities) (ESMA, 2019).
Not Fungible Tokens (NFTs), special types of tokens that represent something unique and not replicable or modifiable. This is a new strand of art and collecting that has literally exploded in the first few months of the year. Last month alone, transactions for 400 million dollars were recorded (often settled in cryptocurrencies).
Consider, for example, that a few days ago the work of an artist who calls himself Beeple entitled "Everydays, the first 5000 days", went on auction at Christie's for the monstrous figure of $60,250,000 (!). The digital work is a composition of 5000 files that the artist added every day for five thousand days starting from May 1st 2007.
In digital it is normal to reproduce a file but Beeple's work is unique because it has been authenticated with blockchain technology. On February 16, the artist registered a file of that work via blockchain, obtaining a certificate of authenticity that makes it unique forever. Non-fungible.
Just as the blockchain was born to overcome the criticality of the so-called double spending (a completely virtual currency without a system like the one that regulates Bitcoin could be replicated indefinitely, thus losing its function that derives precisely from the limited number), crypto-art was born to enhance works that would otherwise be plagiarized and spread inevitably losing value.
It's therefore intuitive the bursting future application of DLT and NFT in many areas of law and economy as a function of certainty, authenticity and originality of a particular good, movable or immovable.
DLT allows for unalterable chronological recording and decentralized updating of processes, without the need to rely on a guarantor and/or trustworthy third party such as, for example, a public official, a public body, an insurance company or a trust.
For example, it is possible to allow a third party to approve or reject a transaction, in the event of a disagreement between the parties, without the third party having to have physical control over their money, thereby improving efficiency, time and cost, institutions such as escrow accounts or contractual schemes used to secure claims and rights, with disruptive application in all types of international trade and large-scale exchanges.