Disclosure: The views and opinions expressed herein are those of the author only and do not represent the views and opinions of the crypto.news editorial.
There is a growing industry in FinTech and Web3, however, and people often struggle to find legal professionals for a variety of legal jobs in this field. Typical inquiries might include how to issue tokens, launch a DAO, or manage a crypto fund. It turns out that the issue that ended up on my desk became more commonplace, namely a dispute involving a client and a crypto exchange that refused to release cryptocurrency, citing compliance with Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regulations. However, this case was significant because it highlighted the competency gap between ‘crypto’ lawyers who had tried to solve it before.
One day, a friend of mine brought me the problem. I wasn’t practicing law at the time, I was busy with academic research on blockchain, but my curiosity was piqued when I learned that two other lawyers, who were experts in the field of cryptocurrency and blockchain, couldn’t solve it. Hence, I agreed to help.
My friend deposited some cryptocurrency on a crypto exchange, but the exchange froze the funds and required proof of their origin for AML/CFT purposes. It turned out that my friend mined cryptocurrency. The first lawyers proposed launching a massive legal campaign against the cryptocurrency exchange. However, my friend was not keen on the prospect of being involved in a lawsuit. Moreover, the exchange was located abroad, which would greatly increase legal expenses. The second lawyer proposed a somewhat dubious solution of drafting a purchase contract for the coins, but this was not applicable in this case. The question arose: Who would the ‘seller’ be, and how would my friend justify the source of the money he didn’t spend in the first place, considering he was one of the lucky miners who managed to mine the coins on his laptop before the mining difficulty went up?
The situation was complicated by the fact that my client first transferred the coins from the address where they were mined to another wallet. Then send them from that wallet to the exchange.
For the exchange, it looked as if someone initially mined the coins, sold them to my client, who then transferred them to the exchange. After making some small trades, my client decided to withdraw the coins. It is an open secret that some exchanges store coins at shared addresses, effectively mixing the coins of different customers. As a result, it looked as if my client was trying to use the exchange for money laundering. As a result, the exchange halted the transaction, demanding proof of the opposite.
However, I had a straightforward solution to this problem, rooted in my understanding of cryptography. I asked my client if he still had the private key from the address where he mined the coins. confirmed that he did. The solution was plain and simple. At this point, I realized that the former lawyers lacked the experience necessary to be considered true “crypto” lawyers.
For most ordinary users, understanding basic cryptography ends with “private keys are required to unlock coins”. However, the private key is part of the wonder of asymmetric cryptography, where the cryptographic origin is linked to the user’s public key, or more precisely, to its representation in the form of a cryptocurrency address. Any subsequent transaction involving coins requires authorization to be obtained using a so-called “digital signature”, which can only be generated using the corresponding private key.
I have heard many times in my life that a scanned copy of a handwritten signature on paper is referred to as a digital signature. In cryptographic terms, a digital signature means something completely different. Refers to a cipher string generated from a hash of user data.
This string – or digital signature – can then be decrypted by anyone using the public key. Since the private and public keys are mathematically linked in a way that allows the hash to be decrypted, this proves that the hash has been signed with its corresponding private key. As such, the holder of the private key is the “author” of that digital signature. However, they do not show this private key, because the whole point is to keep it secret. To prove authorship, one must sign something else again, which indicates that they have the relevant private key.
Blockchain technology uses asymmetric encryption to verify ownership of the currency, but this is essentially the same technology that someone might use in their day-to-day business procedures, for example, digitally signing files, contracts, or messages to ensure their authenticity.
I suggested the exchange send a validation chain (that is, a random one) to the client. The client then signs it with the private key from the original address, proving that it is a coin miner. The exchange agreed to this proposal, and the customer successfully verified ownership of the funds, regaining access to their cryptocurrency.
This example emphasizes the importance of understanding the basics of cryptography for professionals working in the field of cryptography. In this scenario, a lawyer with knowledge of private keys and digital signatures can provide a simple and effective solution to a legal issue related to cryptocurrency ownership. By grasping the basics of cryptography, lawyers can more effectively advise their clients on issues related to blockchain technology and cryptocurrencies, thereby helping them overcome the legal challenges that arise in this rapidly evolving field.
But do law schools teach cryptography these days? Do all blockchain and fintech lawyers make an effort to study the fundamentals of the technology they are dealing with? More importantly, how many clients around the world find themselves stuck because their lawyers are unable to search for and extract evidence from the blockchain or smart contract, interpret blockchain transactions, or simply understand how a crypto wallet works? This situation shows that many professionals have missed the wave of the crypto revolution.