A Primer for the Entertainment Industry on the Use of Blockchain Technology

Bitcoin is a leading type of digital or virtual currency that is exchanged by means of a decentralized online network. See, U.S. Securities & Exchange Commission (SEC), “Self-Regulatory Organizations: NYSE Arca Inc.; Notice of Filing of Proposed Rule Change Relating to the Listing and Trading Shares of the Bitcoin Investment Trust under NYSE Arca Equities Rule 8.201,” Release No. 34-79955 (http://bit.ly/2ml7zlk); File No. SR-NYSEArca-2017-06, 82 Fed. Reg. 10,086, 10,087 (Feb. 3. 2017).

Virtual currency itself is not a new concept, but has been a medium of economic exchange within online video games and virtual worlds for years. Over time, virtual currencies used within the economies of the virtual games or worlds began to be exchanged for U.S. dollars and other real-world, or “fiat,” currencies. (A fiat currency is the legal tender that a central authority designates and issues as the medium of economic exchange for goods and services.) People accept and employ fiat currency because regulatory systems support its durability and stability and because they trust the governing central authority.

The evolution of cryptocurrency leapt completely beyond the confines of virtual games and worlds with the 2009 advent of Bitcoin, which became the world's first successful cryptocurrency and has a current market cap of $16.3 billion.

Bitcoin and other cryptocurrencies now participate in exchanges with fiat currencies and are used widely as a medium of economic exchange from goods and services. Cryptocurrencies play a particularly important role in developing economies that lack well-established and well-distributed banking systems.

By early 2015, the number of Bitcoin-accepting merchants worldwide surpassed 100,000. Bitcoin's merchant adoption rate has ascended logarithmically. For example, according to CryptoCoins News, in Japan alone the number of Bitcoin-accepting merchants is expected to quintuple to 20,000 this year in the beginning run-up to the 2020 Summer Olympic Games.

Recall that cryptocurrency exchanges occur through an online network. The decentralized network operates without a bank or other trusted centralized payment authority in processing cryptocurrency exchanges. This means that exchanges operate across national borders with ease and without the need for currency conversions and sizable associated fees. Consequently, cryptocurrency transactions may be more quickly and cost-efficiently completed than fiat currency transactions. For example, some cryptocurrency payment processors charge merchants a 1% settlement charge for handling Bitcoin transactions, comparing that with the up to 3% rates charged by credit card companies.

As with fiat currencies and centralized banking systems, cryptocurrencies would have no value without a system for validating those transactions so that they may be processed and the funds transferred between buyers and sellers. Blockchain is the technological and mathematical means by which such systems are configured and participants operate within those systems and by which transactional trust is achieved.

A blockchain network is made up of numerous P2P, i.e., non-hierarchical, computing resources called “nodes.” The work of the nodes is to execute open source digital protocols that employ cryptographic security and certain other computational methods. The purpose of these protocols is to validate cryptocurrency transactions presented to the nodes. The node operators are called “miners” because, once they carry out the protocols and validate a transaction, assuming that another miner has not bested them in first achieving that validation, the miners earn or “mine” cryptocurrency for that work.

“Blockchain” may serve to collectively label the protocols used by nodes to analyze and seek to validate blocks of data about individual transactions in sequence, that is, in a chain. Some use “blockchain” to refer more generally and collectively to the network, systems or platforms within, upon and around which nodes are organized and miners execute the given security and computational protocols.

Bitcoin and cryptocurrency transactions are the first, but only one set of applications for blockchain technology and systems. The SEC recently published a useful and accessible overview of the Bitcoin network and blockchain, Bitcoin transactions, and the Bitcoin industry and market in the Federal Register. See, U.S. Securities & Exchange Commission, supra note 1, at 10,087-90. Paul Brody of Ernst & Young also publishes a terrific slide presentation with an embedded YouTube video. See, “BitCoin Basics: Doing Ordinary Things in Amazing Ways” (Dec. 2015). The seminal blockchain white paper is “ Bitcoin: A Peer-to-Peer Electronic Cash System” (2008), pseudonymously published by Satoshi Nakamoto, the person or persons who invented Bitcoin.

The tremendous demand from consumers and businesses for cryptocurrency-enabled transactions also drives heavy development and business investments by many of the world's largest companies and financial institutions around blockchain and related technologies. Those blockchain investments include the financial technology, or shortly-named “ fintech,” industry that is rapidly harnessing and leveraging machine-to-machine communication systems collectively known as the Internet of Things.

Given the absence of a “trusted” central authority, cryptocurrency transactions might otherwise never have occurred. Enter science, technology, engineering and mathematics (STEM) and those mighty STEM wielders to save the day and, certainly, to spur significant future innovations. STEM professionals imbue cryptocurrency transactions and other blockchain applications with trust, that fundamental rocket fuel to the future.

***** Emile Loza de Siles is chief technology counsel of Technology & Cybersecurity Law Group PLLC, which she founded in 2003. She is a member of the Board of Editors of Cybersecurity Law & Strategy, an LJN Newsletters sibling newsletter of Entertainment Law & Finance. Her practice emphasizes technology and cybersecurity transactions, due diligence, compliance, litigation and corporate counsel services. She can be reached at [email protected].