As the virtual world of digital assets advances, the acronyms and terminology used are also evolving. We appreciate that coupled with the fact that the law and the terms used can be complicated, we have set out an A-Z guide that defines the key terms that solicitors in England and Wales may use when working on legal cases involving cryptocurrency. If you have any specific questions or would like to speak to one of our digital asset experts, please do not hesitate to get in touch.
Altcoin – Any cryptocurrency other than bitcoin.
Arbitration – A form of dispute resolution that provides for claims to be resolved by arbitrators and rules agreed between the parties rather than the courts. It is suited to digital asset disputes due its neutrality and flexibility in dealing with the complex legal and technical issues that often arise across multiple jurisdictions.
Bitcoin – The original and best-known cryptocurrency. Traded on the bitcoin blockchain, its status as the largest cryptocurrency demonstrated by the term altcoin, used to refer to any cryptocurrency other than bitcoin.
Blockchain – Blockchain is a type of distributed ledger; a shared digital database, where data is stored in data structures known as “blocks”. Cryptocurrencies use blockchain technology to provide a secure, immutable record of every instance that cryptocurrency is traded. Each cryptocurrency transaction on the blockchain must be verified, and mining is the process that rewards cryptocurrency to those who verify transactions.
Cryptocurrency – A digital currency that allows people to make electronic payments without going through any financial institutions. Cryptocurrency is an umbrella term, and bitcoin, tether and ether are all examples of well-known cryptocurrencies.
DAO (decentralised autonomous organisation) – An emerging form of organisation that is run on a blockchain and governed by rules that are automatically enforced through smart contracts. There is no central authority or leadership and it is collectively owned and managed by its members who participate and vote on proposals, typically through ownership of a governance token.
DeFi (decentralised finance) – DeFi is an alternative to the traditional centralised finance system. It does away with traditional banks and instead uses cryptocurrencies and distributed ledger technology to manage financial transactions. Arguably, it was one of the key motivations behind the creation of cryptocurrencies.
Digital asset – Any asset that is created and stored digitally. The asset will be identifiable and hold value. Individuals can exchange existing digital assets or create (mint) new ones. Examples include cryptocurrencies and NFTs.
Distributed ledger – Traditional banks hold ledgers of all their customers’ transactions. By contrast, a distributed ledger is a ledger of transactions that is shared and synchronised among network users across the world. A blockchain is a type of distributed ledger.
Ether/Ethereum – Another well-known cryptocurrency, ether is traded on the Ethereum blockchain. The Ethereum blockchain supports smart contracts and is a popular (if not the most popular) blockchain for the creation of NFTs.
Exchange – A platform on which you can buy, sell and exchange cryptocurrency or other digital assets.
A centralised exchange has a third party or central intermediary monitoring the transactions and will typically require users to submit verification details before trading. A decentralised exchange is a peer-to-peer exchange and allows users to trade digital assets without a central intermediary.
Fiat currency – Describes any regulated, centrally controlled currency, such as sterling or euro.
Governance token – A token that gives its holder voting powers on a blockchain project. Governance tokens are often used to ensure that a system remains decentralised by spreading decision-making across the community of token holders, as opposed to a central management team making decisions.
Hacking – When exploit security vulnerabilities and weaknesses are exploited in order to steal cryptocurrency. Two of the main targets for hackers are “hot” wallet hacks and exchange hacks.
Mining – Mining describes the process of verifying transactions on a blockchain, by solving cryptographic calculations. The first “miner” to verify a transaction is rewarded with cryptocurrency for preserving the security of the blockchain.
Minting – The process of creating new tokens so that they can be bought and sold on a blockchain, typically used in reference to the creation of NFTs.
NFT (non-fungible token) – Like cryptocurrencies, these are tokens that can be traded on a blockchain, but unlike cryptocurrencies NFTs are distinct to one another. In other words, you can trade one bitcoin for one bitcoin, but you cannot trade one NFT for one NFT. The NFT will certify ownership of something (one of the most common assets being a digital artwork). Most NFTs are currently traded on the Ethereum blockchain.
Private key / Public key – Each cryptocurrency wallet has a public key. Sharing your public key is similar to sharing your bank account number and sort code; another person will be able to send you money, but they will not be able to withdraw funds or access your wallet.
Your private key is the password needed to log in to your wallet. In the same way that you would not give out your online banking password, your private key should not be shared. Anyone who knows your private key can access (and withdraw) your cryptocurrency.
Proof-of-stake / Proof-of-work – The consensus mechanisms by which transactions on a blockchain are verified.
Proof-of-stake requires users to stake their cryptocurrency for the chance to become a validator, who is then chosen at random to check a transaction and verify a block. The more cryptocurrency coins a user has, the better their chance of becoming a validator. The incentive is the return of their stake and a cryptocurrency reward. The proof-of-stake consensus mechanism is used in crypto minting.
Proof-of-work requires a miner to solve a cryptographic calculation to verify a block. Miners gain profit in return for their mining skills and are rewarded with cryptocurrency in return for solving the calculation.
Ransomware – A type of malware (malicious software) that prevents a victim from accessing their system and the data on it, usually by encrypting it, until a sum of money is paid to the attacker. Payment is usually demanded via an anonymous webpage and in cryptocurrency, after which the victim may receive the decryption key.
Security token – Whilst cryptocurrency is designed to be used as a currency, a security token represents rights or interests in particular assets. It is a type of digital asset and can be considered a digital form of traditional investments such as shares or bonds.
Smart contract – A smart contract is a self-executing contract. It is a programme stored on a blockchain, which sets out the terms of an agreement, and once the agreement’s pre-determined conditions are met, any agreed actions will be executed (for example, sending funds to the appropriate parties).
Stablecoin – A type of cryptocurrency whose value is tied to another asset, such as traditional fiat currency like the US dollar, or a commodity such as gold. Linking a cryptocurrency to a stable underlying asset means that the price of stablecoins should not fluctuate wildly unlike other cryptocurrencies such as bitcoin, whose value can be notoriously volatile. Pax Gold, for example, is a stablecoin where each token represents one fine troy ounce of gold.
Staking – The process of “locking” your cryptocurrency for a period of time as a way of earning rewards, much like earning interest or dividends from traditional fiat currencies. It is used in the proof-of-stake consensus mechanism for verifying blockchain transactions.
Tracing – A blockchain provides a secure, immutable record of transactions. If someone was able to access your wallet, they could transfer your cryptocurrency to their own wallet. Tracing is the technique used to track down these transactions via the record on the blockchain with the aim of determining how the transfer was made, who made it and where the funds are now. However, a blockchain stores the address of your wallet rather than your real-world identity, meaning expert tools are often required to dig further.
Utility – A form of crypto token that gives its holders access to a blockchain-based product or service (the utility) which they can purchase and then redeem later. It is helpful to think of the utility as a voucher, access code or coupon. It can be distinguished from a security token as there is no guaranteed return or ownership involved, just a form of coupon that can be redeemed in the future.
Wallet – As with cash, you also need a wallet to hold your cryptocurrency. There are two types of wallet: hot or cold. A “hot” wallet is accessed online whilst a “cold” wallet is held offline (for example, on a device similar to a USB stick). Whilst a hot wallet is more convenient for its owner to access, the fact that it is stored online means that it is vulnerable to being hacked.
A cold wallet, although not as convenient, is considered a more secure method of storing cryptocurrency; as well as needing to know your private key, a hacker would also have to be in physical possession of the cold wallet in order to access your cryptocurrency. As we flag in this article, where cryptocurrency is held for investment purposes and does not need to be accessed frequently, a cold wallet will provide extra security.
