Why Bitcoin Technology is Changing National law firm Parker Waichman LLP has successfully represented individuals who suffered losses due to company policy changes and technology issues. The firm is investigating potential lawsuits over losses suffered due to Coinbase’s refusal to honor Bitcoin Cash.
Bitcoin is approximately 10 years old and has been working to manage a recent increase in popularity that led to a significant price increase earlier in 2017. This followed with a significant increase in bitcoin transactions, a change that challenges current technology, according to Telegraph.co.UK.
Bitcoin transactions are completed when a so-called “block” is added to the blockchain database, which supports the currency. Right now, blocks are limited to one megabyte every 10 minutes, which is approximately seven transactions per second. Consider that Visa processes some 2,000 transactions per second. This means that, at peak times, bitcoin transactions may take hours to be fulfilled, an inhibition of the currency.
There are two rival proposals—Segwit2x and Bitcoin Cash—seeking to solve this issue differently. Segwit2x proposes moving some bitcoin transaction data outside of the block and to a parallel track that will allow an increase in transactions. Blocks would double in size some time in November 2017. Rather than proposing to move transaction data outside of each block, Bitcoin Cash seeks to increase the size of each to eight megabytes.
Coinbase chose Segwit2x, not Bitcoin Cash. According to Coinbase, it did not go with the split as its system is unable to support Bitcoin Cash without major system reworking. In Coinbase blogs and its terms of service it indicates it will only support one version of a coin. Coinbase advised customers in advance that it will not support the fork, allowing customers to download their Bitcoins and take them to another exchange, noted Telegraph.co.UK. The deadline was July 31, 2017.
Bitcoin Cash Release
A new version of bitcoin—known as Bitcoin Cash—was released to the market on August 1, 2017 and, on its second day of trading, tripled in price. Its market cap is currently the third largest of all digital currencies. Bitcoin Cash arrived by way of a so-called “fork,” Forbes reported.
A “fork” involves a group of people who run the software that controls bitcoin to start a breakaway version, Forbes explained. Coindesk explained that “a fork is a technical event that takes place when diverse participants must agree on common rules. Essentially, a fork takes place when a blockchain diverges into two possible paths. The paths either concern a network’s transaction history or a new rule in choosing what makes a transaction valid. When this occurs, individuals who use the blockchain must show support for one of the options. A blockchain is a software ledger that permanently records all transactions.
New Bitcoin Cash is expected to be worth significant money. As of July 31, futures markets predicted that a unit of the new currency would be worth hundreds of dollars. Meanwhile, Coinbase message boards have been riddled with angry messages from consumers accusing the company of theft and threatening class action lawsuits. In fact, one lawsuit is expected to be filed by the end of week ending August 4, 2017
The price of Bitcoin Cash continued to remain at about $200-$300 for the majority of August 2, 2017 and then rapidly rose and appreciated in value in relation to bitcoin. One unit of Bitcoin Cash is valued at about 30 percent of bitcoin, according to Forbes. The price of the original bitcoin has maintained its value and was trading around $2,700, not far from its all-time high of $3000.
Bitcoin Cash is seen as a new asset class that reached a valuation of $12 billion overnight; however, by mid-afternoon, the price fell to approximately to $450 for a market cap closer to $8 billion. It remains unclear if Bitcoin Cash will be able maintain its value as, similar to other digital currencies, its real world use is limited and its value is derived from what investors assign. Meanwhile, part of Bitcoin Cash’s increase in value may be tied to a liquidity issue arising from a decision by some exchanges that would not distribute the new currency to their customers.
Bitcoin “Fork” Leads to Threatened Lawsuits
Coinbase, one of the largest cryptocurrency exchanges will not back Bitcoin Cash, a fork of the original bitcoin, according to Business Insider. Creation of the fork in bitcoin’s blockchain followed a period of acrimonious infighting in the bitcoin community. Now, notes Forbes, there are now two bitcoin blockchains, each with its own currency. The breakaway group opted to award Bitcoin Cash on a one-for-one ratio to every bitcoin owner. If an individual owns seven bitcoins, he or she is entitled to seven units of Bitcoin Cash.
Meanwhile, the world’s biggest bitcoin exchange, Coinbase, does not support Bitcoin Cash. This means that millions of people who maintain a wallet on Coinbase did not receive the new “Cash” and have no way of doing so, according to Forbes.
Coinbase indicates that it is not taking customers’ Bitcoin Cash for itself; however, its decision to withhold the new currency has led one prominent legal scholar to suggest the company will be sued. Also, an activist group claims Coinbase’s decision is akin to a brokerage withholding new shares from its investors and warns it will commence a class action lawsuit after August 15, 2017 if the company does not release the Bitcoin Cash.
Coinbase advised its customers in part that, “On August 1st, 2017 there is a proposal to make changes to the bitcoin software. This proposal, known as Bitcoin Cash, is likely to create a fork in the Bitcoin network. This means that after August 1st, 2017 there are likely to be two versions of the Bitcoin blockchain and two separate digital currencies.
“In the event of two separate blockchains after August 1, 2017 we will only support one version. We have no plans to support the Bitcoin Cash fork. We have made this decision because it is hard to predict how long the alternative version of bitcoin will survive and if Bitcoin Cash will have future market value.
“This means if there are two separate digital currencies—bitcoin (BTC) and bitcoin cash (BCC)—customers with Bitcoin stored on Coinbase will only have access to the current version of bitcoin we support (BTC). Customers will not have access to, or be able to withdraw, bitcoin cash (BCC).
We plan to temporarily suspend bitcoin buy/sells, deposits, and withdrawals on August 1, 2017 as the fork is likely to cause disruption to the bitcoin network. This means your funds will be safe but you will be unable to access your bitcoin (BTC) for a short period of time.”
Coinbase is the most popular digital currency exchange worldwide. As of August 2017, however, Coinbase is facing consumer wrath over its decision against supporting a new bitcoin version that may make it vulnerable to “ruinous legal trouble,” a legal scholar noted, according to Fortune.
A group of bitcoin miners have broken away and are responsible for generating new coins, as well as software known as a blockchain. A blockchain is used to record transactions and, as of August 1, 2017, the miners implemented a software update to create a so-called “fork” which will cause there to be two versions of the bitcoin blockchain, as well as two currency forms, according to Forbes. “Bitcoin mining is the process by which the transaction information distributed within the Bitcoin network is validated and stored on the blockchain. … They receive fees attached to all of the transactions that they successfully validate and include in a block,” wrote NASDAQ
This means that, with the new currency, all bitcoin holders are entitled to an equal amount of what the breakaway miners call “Bitcoin Cash.” Coinbase’s decision, which does not support the new version, leaves customers without this benefit, according to Forbes.
Prominent legal scholar, Tim Wu, who writes extensively about technology has indicated that such a lawsuit is possible and, in various tweets, he compared Coinbase’s decision to a broker who withholds shares from its customers, wrote Forbes. In an email he wrote to Forbes, Wu noted that common law property rules mean that the newly issued Bitcoin Cash belongs to the Coinbase customers in the same way that “a newborn calf belongs to the owner of a cow.”
Coinbase has been advising its customers it will not be supporting new currency that emerges from a Bitcoin fork. In fact, a section of Coinbase’s Terms of Service entitled “forked protocols” indicate that Coinbase has the discretion to support, or not, any changes to the software that underlies digital currency, including Bitcoin. According to Wu, the Terms of Service may not be sufficient for Coinbase to deflect responsibility for Bitcoin Cash. “My bottom line is that, if you’re holding cows for someone else, I’m not sure it’s enough to say ‘we don’t sell veal’,” said Wu, Forbes reported.
A Coinbase spokesperson stated that the company does not intend to keep customers’ Bitcoin Cash for itself or even access the “cash” at all, adding that, if Coinbase decides to support Bitcoin Cash in the future, it will distribute the balances that accrue at the time of August 1st’s fork. Meanwhile, until July 31, Coinbase customers who sought to access their Bitcoin Cash had to transfer their funds to an outside bitcoin wallet.
“If I put myself into the mind of one of those exchanges, they’re kind of damned if they do and damned if they don’t [support a fork] because their success depends on the price of bitcoin,” said Stefan Thomas, the Chief Technology Officer (CTO) of crypto-currency company Ripple. Thomas explained that exchanges dislike forks as they challenge network effects that raise the value of digital currencies such as bitcoin. On the other hand, said Thomas, a failure to support a forked version of the currency may cause companies leaving an exchange in favor of one that will. Also, said Thomas, Ripple’s digital currency—XRP—is not as vulnerable to forks or unpredictable changes because, unlike bitcoin, XRP relies on voting measures that favor users over miners.
A Coinbase source close to the company who did not wish to speak publicly told Forbes that a key reason for its decision concerns the cost and complexity of supporting a new type of currency and for ensuring any new currency is secure from theft.
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