Comprehensive Guide to Crypto and Blockchain Terminology

Guide to Cryptocurrency Terminology: Key Terms to Know

Cryptocurrency and blockchain technology are increasingly integral to modern finance and business. But for those unfamiliar with the space, navigating legal issues related to cryptocurrency can feel overwhelming due to the specialized terminology involved. To help our clients better understand the legal and technical language surrounding crypto, Dynamis has compiled a glossary of key terms and concepts to complement our first guide published some time ago.

Blockchain

A blockchain is a decentralized digital ledger that records transactions across multiple computers. It is the underlying technology behind cryptocurrencies like Bitcoin and Ethereum. Each "block" contains transaction data, and blocks are linked chronologically in a secure, tamper-proof chain.

Legal Context: Understanding blockchain is crucial for evaluating the transparency and immutability of crypto transactions, which can be central in fraud or asset recovery cases.

Cryptocurrency

Cryptocurrency is a digital or virtual form of currency that uses cryptography for security. It operates on a blockchain and is typically decentralized, meaning it is not controlled by any government or central authority.

Legal Context: Cryptocurrencies can raise questions about regulatory compliance, tax obligations, and the legality of transactions under specific jurisdictions.

Wallet

A cryptocurrency wallet is a digital tool used to store, send, and receive cryptocurrencies. Wallets can be hot (connected to the internet) or cold (offline and considered more secure).

Legal Context: Wallets are often at the center of disputes over crypto ownership in cases involving fraud, theft, or divorce settlements.

Private Key

A private key is a string of numbers and letters that acts as a password for accessing and managing cryptocurrency in a wallet. It is essential for authorizing transactions.

Legal Context: Losing a private key can mean losing access to assets. Additionally, disputes may arise over rightful ownership if multiple parties claim access to the same wallet.

Token

A digital asset issued on a blockchain, which can represent various forms of value, such as utility, security, or governance rights.

Legal Context: Tokens may be classified as securities, commodities, or other financial instruments under regulatory frameworks like the SEC's Howey Test.

Stablecoin

A cryptocurrency pegged to the value of a stable asset, such as fiat currency (e.g., USD Coin, Tether).

Legal Context: Stablecoins are subject to scrutiny regarding their reserve backing, operational transparency, and potential use in money laundering.

Smart Contracts

Smart contracts are self-executing contracts with terms directly written into code on a blockchain. Whether a smart contract is immutable or mutable depends on its ability to be altered after deployment.

Legal Context: Smart contracts are increasingly used in business transactions, but their legal enforceability may vary by jurisdiction. Understanding their operation is critical in contract disputes.

Immutable Smart Contracts

Definition: Once deployed, immutable smart contracts cannot be modified, updated, or changed in any way. The code and rules embedded in the contract are fixed and permanent. This was the contract at issue in the Tornado cash case.

Advantages:

• Security: Immutable contracts reduce the risk of malicious actors altering the contract after deployment.

• Trust: Users can trust that the terms of the contract will remain consistent and predictable.

• Transparency: Immutable contracts align with blockchain's principles of transparency and permanency.

Legal Context: Immutable contracts are often at the center of disputes when coding errors lead to financial loss. Determining accountability becomes complex since the contract cannot be altered.

Mutable Smart Contracts

Definition: Mutable smart contracts are designed to allow updates or modifications after deployment. This is typically achieved by including administrative functions or mechanisms in the code.

Advantages:

• Flexibility: Errors can be fixed, and functionalities can be upgraded to adapt to changing needs.

• User Experience: Developers can improve the contract over time, ensuring a better service or product.

Disadvantages:

• Reduced Trust: The ability to modify a contract introduces the potential for abuse or unauthorized changes.

• Security Risks: Admin privileges or update mechanisms may create vulnerabilities that could be exploited by hackers.

Legal Context: Mutable contracts raise questions about authority and control. For example:

• Who has the right to modify the contract?

• Were updates made in compliance with the original agreement? Disputes often arise over whether changes were authorized or transparent.

Decentralized Finance (DeFi)

DeFi refers to financial systems built on blockchain technology that aim to eliminate intermediaries like banks. Common DeFi applications include lending platforms and decentralized exchanges.

Legal Context: DeFi platforms often operate in regulatory gray areas, raising questions about liability, fraud, and consumer protections.

Initial Coin Offering (ICO)

An ICO is a fundraising method where new cryptocurrencies or tokens are sold to investors. It is similar to an IPO in traditional finance.

Legal Context: Many ICOs have faced scrutiny for violating securities laws. Legal analysis often involves determining whether a token qualifies as a security under laws like the Howey Test.

Cross-Chain Interoperability

The ability for different blockchains to communicate and exchange data or assets seamlessly.

• Legal Relevance: Cross-chain systems can create complex legal questions about jurisdiction, liability, and compliance across multiple networks.

Regulatory Compliance

Cryptocurrency businesses and investors must navigate a web of regulatory frameworks that vary across jurisdictions. Key compliance areas include:

• Registration Requirements: Some tokens or platforms may need to register with regulatory authorities.

• AML/KYC: Platforms must implement robust measures to comply with international financial crime laws.

• Securities Law: Determining whether a token qualifies as a security is critical to avoiding enforcement actions.

Rug Pull

A type of fraud where developers or insiders abandon a project after securing significant investments, often draining liquidity pools in the process.

• Legal Relevance: Victims may pursue legal recourse under fraud laws, but jurisdictional and enforcement challenges often arise.

Crypto Mining

Mining is the process of verifying and adding transactions to a blockchain by solving complex mathematical problems. Miners are rewarded with cryptocurrency for their work.

Legal Context: Mining operations can involve disputes over energy usage, taxation, or compliance with local regulations.

Central Bank Digital Currencies (CBDCs)

CBDCs are digital currencies issued by central banks. They aim to combine the benefits of blockchain technology with the stability of fiat currencies.

Legal Implications: CBDCs may alter the regulatory landscape, particularly around privacy, monetary policy, and competition with private cryptocurrencies.

Non-Fungible Tokens (NFTs)

NFTs are unique digital assets that represent ownership of specific items or rights, such as digital art or real estate, on a blockchain.

Legal Context: NFTs raise unique questions about copyright, intellectual property, and fraud.

Decentralized Autonomous Organizations (DAOs)

DAOs are blockchain-based organizations governed by code rather than traditional management structures.

Legal Challenges:

• Liability: Establishing legal liability in DAOs is complex.

• Recognition: Many jurisdictions do not recognize DAOs as legal entities.

Centralized Exchange

A centralized exchange (CEX) is a platform where users can buy, sell, or trade cryptocurrencies through a third-party intermediary. These exchanges are managed by a centralized organization that oversees the platform, maintains order books, and facilitates transactions between buyers and sellers.

Legal Context: Legal disputes often involve exchange hacks, loss of funds, or regulatory non-compliance.

Decentralized Exchange

A decentralized exchange (DEX) is a cryptocurrency trading platform that operates without a central authority or intermediary. Instead of relying on a centralized organization to facilitate trades, DEXs use blockchain technology and smart contracts to enable peer-to-peer transactions directly between users.

Legal Context for DEXs

1. Regulatory Compliance: The lack of KYC and AML measures on DEXs has drawn scrutiny from regulators, who may hold developers or participants accountable.

2. Liability: In cases of smart contract bugs or exploits, determining who is responsible for losses can be legally challenging.

3. Consumer Protection: Users are fully responsible for their own funds and transactions, often with limited recourse in the event of errors or fraud.

DAPP

A DApp (short for Decentralized Application) is a software application that operates on a blockchain or decentralized network rather than being hosted on a single centralized server. Unlike traditional apps, DApps are designed to be open, transparent, and easy to use from a smart phone:

Legal Context for DApps

DApps often face a range of legal issues, including:

• Compliance: Determining which entity is responsible for ensuring regulatory compliance (e.g., anti-money laundering or securities laws).

• Accountability: In a decentralized ecosystem, assigning liability in the event of disputes or fraud can be complex.

• Intellectual Property: Open-source nature may lead to IP disputes over code or branding.

Regulatory Compliance

Regulatory compliance in the cryptocurrency industry refers to adhering to laws and regulations governing crypto activities, including anti-money laundering (AML) and know-your-customer (KYC) requirements.

Legal Context: Non-compliance can lead to significant penalties or criminal charges, making it essential for businesses and individuals to understand their obligations.

How Dynamis Can Help

At Dynamis LLP, we specialize in navigating the complexities of cryptocurrency law. Whether you’re a business incorporating blockchain technology, an individual facing regulatory scrutiny, or a client involved in a crypto dispute, our experienced team can provide guidance tailored to your unique needs.

If you have questions about cryptocurrency-related legal matters, contact us today or email Eric Rosen. We’re here to help you stay informed and protected in this rapidly evolving space.