Continuing with our explorations of cryptocurrencies and blockchain technologies, we highlight a fascinating risk of supporting a cryptocurrency.
As part of the nature of the distributed ledger systems that make up cryptocurrencies like Bitcoin, all participants maintain their own copy of the ledger. It is possible to embed messages in that ledger, which will then be propagated to all participants in that scheme. This might be as simple as using a memo field or coding messages in the quantities of transactions to embed simple messages. In the case of Bitcoin, the design of the scheme includes the ability to embed arbitrary information. This easily leads to methods to embed text, images or other content in the Bitcoin blockchain. For those looking to really “geek out,” this white paper (PDF) takes a deep dive. There are even automated services to facilitate this, should the reader care to make their mark on the Bitcoin blockchain.
This leads to both some entertaining and worrying implications. In the simplest case, you as a participant in a cryptocurrency may propagate and store digital graffiti. “R-Squared was here!” might very well be embedded into the Bitcoin ledger for example. Your foray into fringe investing could be spreading my slogans, images or even music embedded within. This ability can also lead to some interesting possibilities. For example, varying topics are regularly banned on Chinese social media. Most recently, criticism of the decision to end term limits in China were met with the censors’ ire. It would be quite easy to irrevocably embed criticism of the Chinese government within the Bitcoin blockchain. Again, Bitcoin’s very distributed nature cripples the ability of any central authority to censor the content within.
In a more worrying case, it is possible that you are storing and propagating copyrighted content. This could lead to you being accused of both copyright infringement and distribution of copyrighted materials. In the most worrying case, that content could also be illegal to possess. This would be more worrying in authoritarian regimes or nations with strict controls on certain content. We have seen prosecution for distributing content insulting the Thai monarch. Could insulting material embedded in the Bitcoin blockchain be grounds for prosecution for any Bitcoin user in Thailand? Even here in the United States, publishing the number “09 F9 11 02 9D 74 E3 5B D8 41 56 C5 63 56 88 C0” was grounds for legal action at one time.
It remains to be seen if prosecution or legal action will occur due to these various cases. In reality, we see these cases as being more likely to be used by governments as reasons to limit the spread of cryptocurrencies or as a pretext in cases of selective enforcement. It should be noted that many of the participants in cryptocurrencies are not really well educated in how the underlying networks and systems work and may be blissfully ignorant of what is happening under the hood until something unexpected happens. We remind the reader that ignorance of the law is rarely a workable legal defense.
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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.
FROM THE DESK OF HARRY POLISHOOK
Harry Polishook is a Partner and Analyst at R Squared Capital Management.
Prior to joining R Squared, Harry was a Portfolio Manager and Analyst with the International Equities team at Artio Global Management. In 2000, he joined the firm, which was part of the Julius Baer Group, after serving six years as a Securitization Programmer at Deloitte and Touche.
Harry received a Bachelor of Science in Computer Science and Applied Math from the State University of New York at Albany.
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