Pulat Yunusov and Alyssa Tomkins

1Hello, I'm your host, Pulat Yunusov. This episode is supported by my law practice. Once in a while, I record this show for you. I love it, but my day job is commercial litigation, and I've been doing it for 12 years. I'd like you to know that your referrals are safe with me. You can find my contact information on my website at www.lawco.ca. Thank you very much and enjoy the show. Hello everyone, this is quite an interesting episode of The Yunusov Question. Today the format will be different from our normal format. I have a wonderful lawyer, wonderful friend Alyssa Tomkins here with me. She will be the host. Of this episode today. Just a few words about Alyssa.

2She's a really incredible person. So she clerked at the Supreme Court of Canada, she has extensive trial and appeal experience, she's a lawyer, she is a partner at Caza Saikaley LLP in Ottawa, but she also trained as an engineer before law school, and I think this is quite material to today's discussion. And I'm really thankful to Alyssa to— for appearing today and for having this chat with me about cryptocurrency and law. This is going to be our topic: cryptocurrency and law, cryptocurrency and law practice. And I know that Alyssa has a lot of questions, but she will also contribute her knowledge and her expertise I just want to say this again, Alyssa is one of the very few lawyers in Ontario or maybe even in Canada who trained as an engineer.

3I wasn't trained as an engineer. I was a computer programmer before law school for years. I never had any formal training except for a few courses in university. I do have some footing to speak about cryptocurrencies. I wrote about this subject and I talked about the subject since 2016, and you can find my writing about it on slaw.ca. I also represent a few clients in cryptocurrency-related matters. I worked as a software developer before law school, and I never stopped coding. So this is my One of my favorite pastimes is to write computer code. I implemented a blockchain to learn about blockchain. I wrote a blockchain in the Rust programming language. So I do— I think I am qualified to speak about cryptocurrency.

4Look me up, look Alyssa up, and then decide for yourself. Sorry for this long-winded introduction, Alyssa, and hello to you.

6Yes, and you just said something that I think is really, really important. And when I was thinking about this chat, I myself thought of this word, used this word mentally several times. You use the word simulate, and to me this word is in the context of a computer simulation And one of the key things about cryptocurrency is that cryptocurrency is a computer simulation of money. So I'll stop here. I'll let— I will let Alyssa take the floor and guide us and host this show today.

9It's our audience now, Alyssa, right? Not just, not just my audience. You're the host. So thank you for the first question. Cryptocurrency is several things. So just like any word can have several meanings, the word cryptocurrency has several meanings. One meaning is software. So it's a computer program. It's a distributed computer program. Distributed means it runs on several computers, not one computer at a time, but on several computers at a time all over the world. And these computers are connected but through the internet. So it's a computer program. Number 2 it's a computer simulation of money, or it's a computer simulation of a valuable asset. The computer simulation is a really important term.

10Ever since computers were invented, that's what they did. They did really two things. They computed, they calculated, they're really good at it, and they're also simulated things from real life. For example, email is a simulation of a letter. It's a computer simulation of a letter. A picture on your phone— when you look at your phone, you look at the picture. For those of us who remember pictures and frames standing on a, you know, dresser, on a table, That's a computer simulation of a photograph printed on paper. Computer games are computer simulations of games that kids play. You know, kids used to play with cars— well, they still do— on carpets or on the floor or with toy soldiers.

11Now grown-ups play the same games, but computers simulate them for grown-ups. Computers— that's what computers do. They simulate real-life experiences. For example, word processing is a simulation— Microsoft Word is a simulation of a typewriter. For many years, this problem existed: how do we simulate something that is scarce and something that has value with computers, knowing that anything digital can be infinitely copied and reproduced for next to nothing? So you all know that you can make a copy of any file. It costs next to nothing, and you can almost, you know, if it's a relatively small file, you can make as many copies as you want. So let's say I write a text file, I open a text editor and I write $100 in the text file, and I email that text file or Word file to Alyssa, and we agree that this is $100.

12But the thing about $100 that makes it $100 is that Alyssa cannot then make a copy of that, keep the original original copy and send on her copy and say, okay, here's $100. So the problem with computer simulation of money is that computers inherently can replicate anything for free. And how do you create a computer simulation of money, a pure computer simulation of money, and bypass this inherent quality of computers to replicate things and make copies for free? And the solution was quite ingenious. It was really a, a powerful solution, but it was only possible after the growth of the internet. The internet is what made it possible because the solution is this: let's have a record of who has how much money.

13Okay, let's have a record, a computer record. We have a computer record, a ledger, some people call it a ledger, some people call it a database, some people call it blockchain. Let's call this record, let's have this record, and then this record will keep, will document who has how much money. So instead of sending each other bytes or text files saying that it's $100, you will simply refer your payee, someone you want to pay $100, to that central record and say, here's $100, I will sign off my $100 to you now. So we will change the name of the owner in that central ledger from me to you. That's how I'm going to pay you $100.

15Yes, and this is a very good remark because Cryptocurrency emulates banknotes and coins. It is not emulating bank accounts. And I have to talk a little bit about the difference between bank accounts and banknotes and coins for everyone to understand this. But it's important that you said that it's a simulation of cash, of physical banknotes. How do you do that? The— like I said, the most obvious approach is to just write a text file, you know, or maybe create a drawing, or maybe even a picture of money and email it. But it doesn't work, you know. It's, it's, it's a head-on approach, but it's stupid. It doesn't work because computers copy everything. So the inventors of cryptocurrency decide we're going to have a central record, and we simply are going to let people sign ownership of money, or rather a record of who has how much money.

16So you, Alyssa, will have a record for yourself in that central ledger, and under that record it will be possible to tell how much money you have in that central ledger. And when you want to pay someone, you don't need anybody's help. You don't need to send instructions to an intermediary. You don't need to ask a bank to pay on your behalf. You simply use computer— you simply use your part of this computer system that gives you access to that ledger. You will identify yourself to this ledger. Some people call it ledger, some people call it database, some people call it blockchain. It doesn't have to be a blockchain, by the way. This, this is where, this is where your mind will explode, right?

17What matters is it's a computer simulation of money. You, you tell your— the system who you are, and you tell the system, from now on, this part of my money, this much of my money, take my name off of it and put this person's name on it. Then that person now owns that money. It's a computer simulation of money changing hands, okay? Of course, there are layers there. The first layer is that you don't have to identify yourself to the system as Alyssa. In fact, Alyssa is meaningless. Our names are meaningless, meaningless to that system. That system relies, relies for authentication and identification. It relies on a well-known cryptographic a tool known as public-private key infrastructure or architecture.

18So I don't wanna dive too deep on that, but basically it doesn't recognize names like Alyssa, Pulat, John Smith, whatnot. It recognizes people who own money registered in the system by long strings of characters. And everyone who owns money in this system will have at least one such identifier, and that identifier always consists of two parts. The public key, that's the part of the identifier, a long string of characters that everybody can see. Right, it's, you know, think of it as your username on Twitter or whatever, right? But again, it's a long string of characters. No vanity public keys. But, you know, people love vanity, so actually there are things built on top of that that allow you to have a vanity blockchain address if you want, that later is interpreted into the public key, the long string of characters, the boring string of characters.

19But the second part of your identity is secret. It's called private key. And private key is like a password. And that private key is necessary to sign ownership over to someone else. The public key is who— the public key is how the world knows you. The public key is how the world, or For example, someone who owes you money can sign money over to you. You always— when you sign money over to someone, you sign money over to a public key because you don't know their private key. It's a secret. But you sign your money over to that public key, that person's public key, using your private key. So the system will know your private key to be able to change the signature.

20under the money. That's the public-private key infrastructure. It's the absolute foundation of encryption. It's the absolute foundation of encryption on the internet in general, the public-private key technique or technology. It's not used only in cryptocurrency. It had been used before cryptocurrency was invented. It's used for all of our online banking, for everything. Everything that's encrypted on the internet uses public-private— pretty much everything— the public-private key infrastructure. So the beauty of this is also that you can have as many public key or as many identities as you want on blockchain, right? That's why you don't have one name on in cryptocurrency. You can have one name, you can if you want, you can have only one public key.

21But I— many say that it's a good practice to initiate to accept payments, every payment, to a new public key, to generate a new identity to accept every payment. Why that's a good practice, you know, that's probably a something for a deeper dive, something that we can discuss separately. And it, by the way, is relevant to injunctions, and it's relevant to Marevas and to freezing cryptocurrency. And but that I will not jump ahead of myself. Did I answer your question? So cryptocurrency is a computer simulation of money. I briefly explained the public-private infrastructure that allows people to use this computer simulation and to sign money over to someone they want to pay. And this is a really bird's-eye view.

22Please ask me more questions about it. I'm really happy to answer.

25Bitcoin is the cryptocurrency. It wasn't the first cryptocurrency, but it is the most successful cryptocurrency by volume. So if you go to a website called coinmarketcap.com, I think, then it's, it's really a list of various cryptocurrencies, and they have a lot of information about capitalization of every cryptocurrency and value of every cryptocurrency and things like that. So by capitalization, that is by in, in the US dollar equivalent or Canadian dollar equivalent, Bitcoin is by far the biggest cryptocurrency in the world. It was invented around 2008, and it is still probably a role model for how cryptocurrencies are done and for how one should design a cryptocurrency. And there is another cryptocurrency that uses a slightly, fairly different approach— Ethereum.

26So Ethereum is more than a cryptocurrency. I would say that Bitcoin is mostly a cryptocurrency, and Ethereum, I think it's mostly not a cryptocurrency. Let me explain. So Ethereum is the number 2 cryptocurrency in the world by market cap after Bitcoin, and it was launched several years after Bitcoin. And why I think that Ethereum is not— is mostly not a cryptocurrency— well, Ethereum— so let's start with Bitcoin. Bitcoin is, is truly a simulation of banknotes or coins that I spoke about earlier. The thing about computer simulations that makes them really interesting and useful is that you can give them behavior, right? So for example, with letters that you write on paper, you can't give them any behavior.

27Write a letter with a pen on your piece of paper, and you put it on your desk, and it's going to sit there on your desk unless you take it, seal it in the envelope, and put it in the mailbox. With emails, because they are computer simulation, you can actually add behaviors to them. So for example, some email clients allow you to schedule emails to be sent later, right? Some computer clients allow you to add signature to your emails automatically. All lawyers know this, you know, they love long signatures with long notices about how everything is privileged and confidential and whatnot, right? So, so the beautiful and useful thing about computer simulations is that you can add behavior to them.

28With Bitcoin, because it's a computer simulation of money, you can also add behavior to money. To Bitcoins. For example, you can require that any payment of this particular amount of Bitcoin in possession of this particular person requires permission of a second person. So one signature, computer signature, is not going to be enough to me— it's to pay that money. The second signature will be required. The computer term is multisig. And that behavior, or that property of this particular money, is programmed by owner. The owner can add that behavior to its own money. It can— the owner can say, this is my money and I want to add this behavior to it, for example, to implement an escrow, right?

29All lawyers are familiar with this term. And then a second party, an independent escrow agent, will assign the money only if a certain condition is fulfilled. For example, if a settlement is completed, something like that, right? So now that's a trivial but powerful example of computer-simulated money having useful behaviors. But that behavior is very limited. So Bitcoin allows behavior, allows to program money, but in a limited way. You cannot write full computer programs within Bitcoin itself to have money perform arbitrary things. For example, receive, receive calls from outside of Bitcoin about the world, the outside world, or about any kind of events in the outside world triggering anything with the money. You can't do that with Bitcoin using Bitcoin itself.

30You can do it using outside systems, but you can have limited behavior with Bitcoin. So the difference between Bitcoin and Ethereum is that people who created Ethereum wanted Ethereum to be a full computer a full world computer that could have arbitrary behavior attached to money. So with Ethereum, you can write full computer programs and attach them to money that Ethereum uses, and that money is called Ether. All right, Ethereum is not the name of the cryptocurrency. Ethereum is the name of the world computer that is run on many, many computers all over the world at the same time, or almost at the same time, and, and in a way synchronized over the internet.

32always interrupt, always.

34Thank you. So mining is the way for Bitcoin network, for the Bitcoin network to decide if any transaction is valid or not, any transaction in network is valid or not, and to build the Bitcoin ledger, the blockchain. They do it through mining. Why mining? What is mining? So people who designed Bitcoin, they were actually concerned about the problem of spam, email spam. And spam is possible because there's next to nothing— the cost to send an email is next to nothing, it's almost zero. Right, and the cost of sending a million emails is still almost zero. That was a flaw in the original design of the email protocol. People who designed the email decades ago, they were all scientists, academics, computer scientists, and they did it for themselves, and they didn't expect spam.

35Spam appeared very quickly though. And then spam became such a big problem that countries passed legislation banning it. So people who invented my Bitcoin, they first thought about spam, and they thought, what if we add some cost to sending an email? That's a tiny cost. It will not stop you from sending legitimate emails. It's going to be so small. But it will add up to something massive if you are trying to spam 10 million people, right? What if the cost of sending one email was one cent or an equivalent of one cent? No one would have— no, no one legitimate would have noticed it, right? But someone who wants to send 100 million emails or 10 million, 10 million emails, they're finished, right?

36It's not worth it anymore. Of course, they— the first problem they had is how do you charge people 1 cent to send an email? Like, what are you going to use, credit cards? Back in the day, even, you know, back in the day, money, electronic money was really deficient, backward, and it still is. You couldn't do it unless you had to scrap the entire email system, rewrite and change the internet from scratch and incorporate banks and credit cards in it, that, that would be a disaster. One of the things we love the internet for is that you don't have to deal with credit cards just to get online. So they had another idea. Cost is not always in the form of money.

37Cost can also be in the form of work. Right, what if every lawyer who wants to send you a nasty email had to read the entire Rules of Civil Procedure first? I mean, the number of nasty emails would probably go down by a lot. That's an exaggeration, but what if someone who wanted to send an email had to execute a small program that does nothing but consume your computer's power. Nothing, just, you know, consume your power. Just a program that adds 1 repeatedly to itself for like fractions of a second for each email, but then for 10 million emails, your computer would grind to a standstill to send 10 million emails, and you would have to wait for a day.

38Time is another cost. Time. So work is just another word for time. That's why lawyers bill by the hour, right? So the idea was, okay, we're gonna make computers— we're gonna make senders do some work to be able to send email, and that way we will weed out illegitimate senders. So they just transplanted this idea to Bitcoin, because in Bitcoin what you need to do, you need to have someone construct the record of transactions which keeps track of who owns what money, who owns how much, what, and so on and so forth. And these people, first of all, they had to be rewarded There is a reward mechanism. We can talk about it later.

39The reward is also in Bitcoin, but they also had to pay a price for joining this reward scheme. For the reward scheme is you maintain the record, but you have to do it in an honest way. You have to be a legitimate maintainer. And the, the idea that the people had at the time is, okay, we're just going to make them run this computation that's really expensive, and until they run this computation, they cannot try to extend the blockchain or add new transactions to the blockchain. Basically keep up the blockchain and maintain the record of all transactions. And that ballooned in the beginning, you know, because people compete for that job, people compete for that work to maintain the blockchain.

40They competed for it because you get a reward at the end, but you also have to prove that you're legitimate by doing some work, by performing this arbitrary computation, absolutely arbitrary, you know. There is no practical purpose of this computation other than to simply be a cost of entry. There is no search for extraterrestrials or anything like that. And in the beginning, just like with email, it was just the enthusiasts who were mining. So mining is, is competition for the job of adding the next block to the blockchain. And in the beginning, people could do it on their laptops. I know people who did it on their laptops in around 2010. You know, they're very rich today, these people because the rewards they got back then were like 50 Bitcoin or 100 Bitcoin, right?

41So multiply that by the Bitcoin exchange rate, so I guess we all wish we took Bitcoin seriously back then, but they did. So they did it on their laptops. So the story I heard from one guy publicly and he just said, you know to an audience of people listening to him about he was giving a presentation about Bitcoin, he said I was a student and I tried to play, playing with this Bitcoin thing back in the day around 2009 or '10 or something. And it was possible to mine Bitcoin back in the day with your laptop. So he just tried mining it and then he forgot about it. And years later, Bitcoin went through the roof and he called his parents, said, are my laptop still in that basement?

42Right, because his wallet where he kept the rewards from mining were on those laptops. And then thankfully they were, and now this guy has a very different lifestyle from all of us. So, you know, this is just a story about being an early adopter. And the point is you do this work You compete for this job to add the next block to the blockchain, make sure it's properly formed, that it's correct and everything. And you have to do this mindless computation to prove that you're not a spammer or a scammer. And the more people enter this arena and compete for this job, the more complex this computation becomes. And at some point, because the value of Bitcoin went through the roof, thousands, thousands upon thousands of percent— one Bitcoin used to be worth cents, like literally cents.

43Now it's what, $60,000 for one Bitcoin, right? Or something like that. And of course, there were a lot of people who wanted to enter this market to compete for these mining jobs. And get the reward. Because when you, when you win in this contest, at the end there is a reward for you in the form of Bitcoin. And that's how it became a little bit too much, where you had to have a farm of hundreds of specialized computers. And the one thing about computer CPUs, central processing units, is that they consume a lot of electricity. That's why you have— you used to have fans in those computers because they generate a lot of heat.

44So, so that's why mining farms, they build them near hydroelectricity stations. So in Quebec, they have a lot of mining projects. They build them up north. They build them in northern countries because of the climate, because it's cheaper to cool them down. And yes, they can consume a lot of electricity to maintain this this network of money.

46Yes.

48Yes. So the second Ethereum also uses mining. It's very similar to Bitcoin, but there is a second, an alternative approach to paying the price or proving that you're legit to get the privilege of maintaining the system, the network, it's called staking. And so with staking, instead of performing a computation, a cost of computation, you stake some assets on the network which you forfeit if you turn out to be a scammer or a spammer or some such person, right? And of course, that doesn't require any computation. And so it means that it doesn't require computing power, it doesn't require consumption of electricity, it doesn't cause any environmental concerns. So that's the second approach.

49A lot of cryptocurrencies use that. Ethereum is on track to transition to staking They've been on that track for a long time. It's taking a while, and because it's really complicated, because Ethereum is already widely adopted and you need to protect existing users and their interests and their cryptocurrency to make sure that the transition is not going to be buggy and causing a loss. So Ethereum is on track to switch to staking.

51So Ethereum is really a world computer. They, apart from any money part, apart from any cryptocurrency part, what they achieved is they achieved building a world computing engine. Where many computers are connected over the internet. Many computers are members of the Ethereum network, and they perform the same computation, or they execute the same program in, in sync. And the output of this program is recorded in the Ethereum blockchain.

53Blockchain is simply a way to record output of computer transactions. It doesn't have to be a blockchain. Blockchain makes sense in Bitcoin because blockchain is simply a timeline. It's a timeline where every transaction is fixed on the timeline, so you can always go back in time and you can always tell which transaction came first and which transaction came second. That's the main property of blockchain— the order, the sequence of transactions is protected. In theory, you don't even have to timestamp transactions to have cryptocurrency, it's enough that you preserve the order of transactions in that record. But in Bitcoin and in Ethereum, every transaction is also timestamped. So it's a, it's a world computer with a, with a, with a clock.

54Every transaction is timestamped. And that way you can tell who has how much money. So in Bitcoin, you have to scan this person's transactions and see what the bottom line is, what the total is at the end. That's how you know how much this public key

56or how much is behind that public key, how much Bitcoin is behind that public key. Ethereum uses the account system. Where it simply keeps the total for, for the public key. But the theorem— the thing about Ethereum is that it also allows you to— because it's a computer, it's a full computer. Bitcoin, the Bitcoin network, is not a full computer. It's a limited scripting engine that allows you to do limited scripting for Bitcoin. With Ethereum, you can do full scripting. You can write arbitrary computer programs that will manipulate Ether or other assets simulated on this computer, in, in this computer system. That's the thing about Ethereum— you can simulate further assets. That's how they that, that spawned thousands upon thousands of tokens, crypto tokens.

57That are based on Ethereum. So you can create your own money in Ethereum really in minutes.

59Well, this is an economics question.

61The beautiful part, the beautiful thing about cryptocurrency is that we always veer into economics. Why people are willing to pay for Bitcoin? Why are people willing to pay for Ether? Why does Ether have value in US dollars or Canadian dollars? Why are there exchanges where people offer Ether for USD and people offer USD for Ether? That's, that's a an economics question. That's— and you know, if you want—

63This is a LexisNexis text called A Practical Guide to Smart Contracts Blockchain Law, edited by Aaron Grinhaus, one of the early and original Bitcoin blockchain lawyers here in Canada. He's a great guy, and I authored a chapter in this book about smart contracts. The second edition is coming out soon, I think in a couple of months or something like that, and I, I will have two chapters in the second edition.