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Bitcoin continues to be the most popular cryptocurrency. Despite its fluctuating value, investors are still drawn to investing in the cryptocurrency and using it for financing purposes. Financing secured by bitcoin could help increase the cryptocurrency’s value. However, because cryptocurrency regulations are in the early stages, there are a variety of obstacles in the way.

Bitcoin uses blockchain technology, a decentralized digital ledger, which allows users to anonymously transfer payments on the internet without an intermediary, such as a financial institution. How are payments tracked? Since blockchain is not centralized, the users control the database using cryptographic keys. These keys essentially secure the users financial assets and the ledger will track every purchase or transfer bitcoin. There are two types of keys, public and private. Where the public key provides the blockchain users identity, the private key allows the user to send the cryptocurrency. The private key, however, should not be shared with anyone. This is what creates a security problem when securing bitcoin for financing.

Can bitcoin be used to secure financing? The issue is that the law has not developed at the same pace as the technology, so how can bitcoin be used as collateral for a loan and provide the lender security, such as in the event of bankruptcy? Article 9 of the Uniform Commercial Code (UCC) provides provisions regulating security interests in property. Typically a commodity is used as collateral for a loan, however, cryptocurrencies do not fall neatly within its provisions because regulators cannot agree on what cryptocurrencies are. Cryptocurrencies have been defined as “virtual currenc[ies]”, “property” and even a “commodit[ies]”, but this does not provide clear guidelines.[1] Matthew Frankle and Nora Wong suggest that in order to perfect a security interest for cryptocurrencies, such as bitcoin, and satisfy Article 9 of the UCC, “the lender would need a security agreement with the borrower to establish the lien and to file a financing statement in the borrower’s jurisdiction.”[2]

However, although this may fulfill the requirements for the UCC, it falls short it other areas. The issue relates to the blockchain and the use of private keys. At the moment, although the technology is protected, it does not provide adequate security for the lender as a third party can be aware of the key and transaction and the lender lacks full control. “To alleviate the risk of destruction or theft of the collateral, no untrusted third party must know or have access to the private key.”[3] There have been instances where individuals have lost their private keys; this possibility creates a risk to the lender.[4] To secure bitcoin for financing the technology and regulators need to find a solution that alleviates a risk to lenders, protects their interest, and ensures there is actual delivery to the lender.

[1] Frankle, M. and Wong, N. (Jan. 18, 2018) “The Challenges of Bitcoin Financing.” Law360. Available at: Accessed on Jan. 19, 2018.

[2] Ib.

[3] Ib.

[4] Ib. See footnote 27.

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