Eight Social Media Rules For Kids

“Mommy? I need more Candy Crush lives!”

Coming up with rules for kids on social media is hard.  First, coming up with any set of rules for kids is hard as any parent can attest.  But when you’re talking about a complicated subject like social media it can be even trickier.  There are very real risks of kids not realizing what’s appropriate or not on social media or not realizing who can see their content.  There are also scary but not true stories about predators seeking kids on social media or other online boogeymen that even if we rationally don’t believe we also don’t want to be the one parent whose child actually faced the monster.

Even though I work in the social media space I hadn’t given the topic of social media rules for kids much thought until a co-worker (hat tip to Gretchen) asked me about it this week.  My boys are too young for any social media platforms and still young enough that their friends aren’t pressuring them to join.  But I know that will change and it will change faster than I want it too.  And while it may be a simple rule to say “No social media until you’re [AGE]!” I also know that social media is as much a part of young culture as it is adult culture.  Banning something isn’t as effective as teaching them the right way to do it.

But for young kids first experiencing social media it’s a huge topic to cover.  In some ways I compare it to driving a car–it’s a tool that everyone uses and it’s important to learn how to use it properly because bad things can happen if you mess around.  But in other ways this is a bad comparison–when a teenager learns to drive they’ve been sitting in a car as a passenger for many, many years.  Children first going online typically haven’t been a backseat passenger to their parents’ online activities so we have to teach them the rules of a road they’ve never been on.

This topic prompted me to post some initial rules for kids on social media which I invited comments on and then revised.  I share them here because it was a good conversation but let me make a few important call-outs.

  • As with any set of rules for kids, these are completely customizable for your family and your children.  I am not saying this is the right way to do it, this is just one way to start thinking about it.
  • The rules are written a bit strongly but that’s because social media is similar to a car that weighs several tons–use it correctly and you’re good.  One bad accident can have serious consequences.  I’m not trying to scare people, I’ve just worked long enough in the space to know better.  I imagine ambulance drivers and emergency room workers have similar conversations with their kids about driving motorcycles.
  • These are basic rules that I want to apply to all platforms but also to trigger a series of conversations about how to use social media.  That’s the basis of rule five. Nobody should think you can give these rules to a child and then they know what to do–this is the foundation for you to teach them about posting appropriate content, providing appropriate responses, and engaging with people they do or do not know in real life.  This is the start of the conversation, not the end or the totality.

That said, here are the Eight Rules.  If you have additions, please leave me a comment below.

  1. This is not your account, this is my account with your name on it.
  2. I will set the password and you will not change it. If the platform requires you to change it then you will come to me and I will change it for you.
  3. I will be monitoring your account. Don’t post or say anything that you don’t want me to see because I will see it. If you’d like something more private I’m happy to buy you a diary and a pen.
  4. When I say I will be monitoring your account I mean that I will be actively watching your account and so will many other people. All of these people, like me, have your best interest in mind when we stop you from doing unwise things.
  5. I understand you’ll be learning how to use social media and that the learning process is a journey so I will be patient and explain the things you should and shouldn’t do. You, in turn, need to understand that there are risks and concerns you can’t comprehend right now so while some of my advice may seem odd you will still need to follow it.
  6. If you ever have a question about posting something, ask me first. Social media is about conversations but it is also very different from the actual conversations you’ve had with family and friends. It takes time to learn but it’s better to ask first than regret later.
  7. I will warn you once before I remove your access to the account. Unless you do something really awful in which case you won’t get a warning. Trying to circumvent these rules (making another account, deleting accounts, etc.) is automatically awful.
  8. If you think these rules are strict just wait until we talk about driving when you’re 16.

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Filed under Cyberbullying, Kids, Privacy, Social Content, Social Media Risks, Social Platforms

Iceholes: How The ALSA May Win The Battle But Lose The War

You know what we do to bad ice on a pedestal?

The biggest surprise hit of the summer is not Guardians of the Galaxy but rather the megaviral smash Ice Bucket Challenge benefiting the ALS Association. Rather than be thankful for this windfall the ALSA has recently decided that they should own this challenge and prevent any other cause or organization from using it. What do you think they are, a charity?

Oh yeah, they are.  Then maybe they should start acting like it and not a bunch of selfish iceholes.

First, some background. The ALSA did not create the ice bucket challenge. The gimmick has been around for a long time. In fact, when this latest round started over the summer it began as a challenge to dump a bucket of ice water on your head or donate $100 to a charity of your choice.  It was only when the challenge first passed to professional golfer Chris Kennedy that the donation was flagged for the ALSA and the individuals he tagged kept the charity when they made their videos.  Later, there was a significant wave of ice bucket activity in Boston due to native ALS sufferer Pete Frates and concerted actions by the Red Sox organization.  Facebook’s data team’s analysis shows that Boston does appear to be the epicenter of the challenge going truly viral.

Nobody is exactly sure why the challenge has reached its current level of popularity, but that’s true for most viral hits in the social media age.  Sure, the videos are funny. And having one person tag several others to participate makes for an exponential reach. And having the challenge somehow associated with charity so we all think we can have fun while helping out a worthy cause makes it seem nice too. There are even a scattering of super serious videos in the mix depicting a bit of what the disease means to its victims and their families. We can identify all the elements but we still don’t know what made this challenge go viral like it did.  Heck, even I did one.  Although I’m not linking it after the reasons behind this post.

That doesn’t really matter though. It doesn’t matter that we can’t explain why it went viral; it went viral. It doesn’t matter that perhaps the amount of money we give to charities is out of proportion to the impact of the disease as IFLScience linked in a Vox article infographic; there is no doubt this is a horrific disease and increased attention to it is a good thing. It doesn’t matter that ALSA only spends a small percentage of its budget on research; it performs several other valuable services and all charities have to spend a lot of money to ultimately make more money in the end.

Here’s what does matter: the ALSA was given the greatest gift of their life in terms of this ice bucket challenge.  Donations are through the roof.  Yesterday they reported making over $94.3 million in donations in just the last month.  Last year, in the same time period, they received around $2.7 million.  Rather than just say thanks or give the tearful Sally Field “You like me, you really like me!” Oscar acceptance speech they decided to go another direction. They decided to take that warm fuzzy feeling we’ve had from watching or making these videos and donating to a worthy cause and pour a giant bucket of ice water on our flames of altruism.

As first reported on the Erik M Pelton & Associates blog, the ALSA filed an application with the US Patent and Trademark Office to be granted a trademark for the term ICE BUCKET CHALLENGE as used for any charitable fundraising.  They also filed an application for ALS ICE BUCKET CHALLENGE but it’s the main application that should make people furious.  Heck, it made me enough to write a blog post on a Thursday night and I never do that.

Filing a trademark for the term “Ice Bucket Challenge” would allow them to prevent any other charity from promoting a campaign that the ALSA had fall into their lap.  The ALSA did not create this concept.  They did not market this campaign until it already went viral.  They have no responsibility whatsoever for this going viral.  If the ice bucket challenge had found a connection to the American Heart Association or the American Cancer Society then it could have gone just as viral.

What on earth could make the ALSA think they should have any right whatsoever to prevent someone else from using this challenge?

I can’t think of a good reason.  I can think of reasons, mind you.  They just aren’t good.  Fortune was able to get a statement from ALSA spokesperson Carrie Munk:

The ALS Association took steps to trademark Ice Bucket Challenge after securing the blessings of the families who initiated the challenge this summer. We did this as a good faith effort after hearing that for-profit businesses were creating confusion by marketing ALS products in order to capitalize on this grassroots charitable effort.

Sorry, ALSA, but that excuse doesn’t hold water.

First, obtaining the blessings of the families who created this challenge is nonsense.  Even if you got permission from everyone who ever did an ice bucket challenge–SO WHAT?  This was a charity drive.  You think the first charity to earn a million dollars from a bake sale should get to stop all other bake sales?  Because that’s what filing a trademark on the challenge is an attempt to do–you’re trying to stop any other charity from using the term for fundraising.

Second, you heard some shady companies were making money off the Ice Bucket Challenge?  Wow, that must be weird.  To think there are these companies just sitting around making money off something they didn’t create.  JUST LIKE YOU.  Who cares if someone makes an Ice Bucket Challenge shirt and sells it?  If it says ALSA on it or has your logo you can already go after them without this new trademark application.

The ALSA’s actions are atrocious and reprehensible.  They may have raised a ton of money this summer but it could all backfire over a move like this.

But here, ALSA, I’m going to be nicer than you appear to be.  Here’s a way for you to cover your cold, soaked behinds and spin this in a favorable way.  What you should have done is post on your website the day you filed the application, saying that you are only doing so to protect all charities from shady profiteers but that all charities would be free to use the mark forever for no charge if you received the trademark.  The fact that you didn’t tell anyone about the application and only commented when it was called out on social media (by the way, you’ve heard about this social media thing and how a lot of people use it, right?) you can just blame on being so busy counting all your money.  It’s a bad excuse, but maybe it can save some face.

Because right now you look like a bunch of iceholes and I resent every penny I gave you.  Not for the good work you’ve done, which is a lot, or the families you’ve helped, which are numerous, but for being greedy instead of generous, selfish instead of, you know, charitable.

Update Aug 29: The ALSA has withdrawn their trademark application. Good.

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Filed under Celebrities, Crowdfunding, Facebook, Social Content, Social Tracking

Wish I Was Legal

It’s a movie.

I’m a social media law geek.  I have long accepted this fact and it shouldn’t be a revelation to you since you’re, you know, reading a blog about social media law.  So nobody should be surprised that when I attended a movie premiere for Wish I Was Here last week and everyone took out their smartphones to take pictures of Zach Braff and Donald Faison I, instead, took pictures of the disclosure form and privacy warning.  Because I’m geek like that.

I was a backer of Mr Braff’s Kickstarter campaign and paid to get two tickets to the Austin premiere and Q&A session.  I am not a superfan of Mr. Braff–I thought Garden State was okay and I only watched a season or two of Scrubs–but I do think he’s a talented actor and saw him perform in Twelfth Night at Shakespeare in the Park.  I was also intrigued by the Kickstarter project, being the first high publicity original movie to be funded after Veronica Mars.  I sent my money, read the updates, and watched the backlash roll in with curiousity.

There were four items of interest that struck me regarding social media law at the movie premiere.  I’m going to tell you three of them.  Just kidding, here’s all four.

photo 11. The release form

I’ve enclosed a picture of the consent and release form that all attendees were required to sign prior to entering the theater.  Much of it is standard for a movie screening where filming will take place if they may use the footage for behind the scenes featurettes.  But the item that jumped out to me is the item IN BOLD ALL CAPS.  Because, you know, that’s what bold all caps is supposed to do.

That text reads

I agree that to the extent I make any statements about the content including via social media or other public forums (e.g. Facebook, Twitter, Blogs, etc.) that such statements (“Statements”)…IF THE STATEMENT IS MADE ON SOCIAL MEDIA OR ANOTHER PUBLIC ON-LINE FORUM, I WILL DISCLOSE NEXT TO MY STATEMENT(S) THE MATERIAL CONNECTION BETWEEN MYSELF AND FOCUS FEATURES (I.E. I SAW THE PICTURE FOR FREE AT AN ADVANCE SCREENING

This statement is for participants to comply with the FTC Endorsement Guidelines.  They’re even explicitly called out in the next sentence of the release but they aren’t IN BOLD ALL CAPS so you might have missed it.

That’s a great call-out for such a long release form.  It may be the only sentence you actually read if you’re handed this page and given a minute to sign before getting out of the hot Texas sun into the air conditioned theater.  Although I may quibble with some technicalities (I paid for the tickets via Kickstarter so it wasn’t free, and I paid Zach Braff’s group not Focus) I’m a professional quibbler so I’m willing to focus on the positive.  A good call-out for a venture they know will get mentioned on social media.

photo 22. The consent sign

This sign was posted inside the theater before you could get to the orchestra seating and visible from the stairs leading to the balcony.  While I understand the need for something like this, heck I’ve drafted a few in my career, I also think this sign goes a bit overboard.  First, the release was already in the signed form that everyone had to fill out before they got inside so this is duplicative at best–but as a lawyer I can appreciate having multiple points where consent was gained just in case a lawsuit comes up (especially after DVDs have been produced).

I take less issue with the repetition than I do with the scope–while the signed form seems more targeted in the consent, this poster goes a bit overboard.  Sure, it’s easier to print a sign with less language like YOU GIVE ME ALL THE RIGHTS! RAWR! it also goes beyond the scope of the event.  According to this sign, Focus Features can now use my photograph to publicize an entirely different movie or event and that doesn’t help anyone.

I don’t think Focus would use my photo to publicize a different movie, mostly because I thoroughly enjoyed Reign of Fire and therefore have horrible taste in movies, but also because this is more likely just a defensive consent.  If someone were to sue for being on the DVD then the company has a signed release form and this poster to use in their defense.

Still, even though I may be the only person who read this sign (and definitely the only one to take a picture of it), I have to wonder what would happen if someone took issue with the consent.  I paid for the tickets to the premiere–that’s what the Kickstarter event promised me.  There is some general language in the Kickstarter campaign that if a reward conflicts with laws they’ll work to give you a substitute, but it isn’t a conflict of law for me to attend without giving consent to filming.  Just a small thought–perhaps they had a special area reserved for non-consenting audience members or they figured the odds were so low of this being an issue it wasn’t worth developing a plan.  I just find that kind of thing interesting.

3. The backlash

During the Q&A session after the film, one man asked Mr. Braff if he experienced any backlash over the funding.  The response was along the lines of “Where have you been?  Did you contribute and then go off-line for a year?  Did you just land from the space station and thought, ‘Hey, I can still make the premiere!'”  It was funny and the audience’s reaction showed they were all aware of the backlash as well.

The answer was interesting as well.  Mr. Braff explained how his world is all about getting films financed and when something is your world you unrealistically expect that other people will know something about that world.  So when the backlash started rolling in about the Kickstarter project he suddenly realized that people didn’t really understand how films are financed and why Kickstarter could help him.  So that was a lesson learned, but ultimately something he wasn’t concerned about since his fans and other interested parties did back him and that mattered more.

Mr. Braff did express some concern over the backlash regarding Kickstarter itself–specifically that people attacked him for taking money away from other Kickstarter projects that could use the money more.  He said that Kickstarter was quiet at first but later spoke up saying that high publicity projects like this do draw attention to the platform and ultimately bring in new users who end up funding more projects–the net being more money shared with more projects.  I can’t find a link to Kickstarter’s statement but that makes sense and is also probably a lesson learned for future high publicity projects.

4. Reflecting on the social world

At the end of the Q&A session, Mr. Braff and Mr. Faison sang “Guy Love” as a special treat to the audience.  They said it had been a while since they performed it and don’t get a lot of opportunities to sing it together so everyone should record it.  And so they did.  This was my view of the song:

photo

Working in social media I often take for granted the world of information and connections we have at our fingertips.  But every once in a while it strikes home.  When I looked at the event before my eyes I wasn’t watching the stage, I was looking at all those phones.  Yes, in my head I realized everyone probably has one, but it takes events like these for that to sink in sometime.  Seeing everyone recording the event, having their own perspective and building their own memories and being able to share it with all of their friends as well.

That’s awesome.  That’s social media.

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Filed under Celebrities, Copyright, Crowdfunding, FTC Endorsement Guidelines, Social Investment, Social Platforms, Terms and Conditions

Here’s Why Killing Net Neutrality Makes You Pay Twice

This matters. A lot.

I’m not going to recap the wealth of discussion and debate over Net Neutrality.  You know how to use Google, so use that to find more information.  Or for the most basic of primers check out this great video from the New York Times on How Net Neutrality Works.  It explains the concept well and has some great points from David Carr (who, according to this video, has a head so huge I’m afraid it might snap his neck any second) about controlling content as well as access.

But even if the debate over Internet innovation doesn’t motivate you to take action then perhaps this will.  Killing Net Neutrality will make you pay more money not once but twice.  Here’s how.

First, for the large bandwidth services like Netflix and Hulu and Amazon Instant Video, paying for access will be an absolute must.  Take a look at Netflix’ blog post about why Net Neutrality is important, specifically the second chart which shows what happened when Netflix started paying Comcast for priority access:

Netflix was forced to do this because average Netflix access speed was decreasing to unacceptable levels for Comcast customers.  (This was not happening to customers on other carriers…isn’t that an odd coincidence?)  If they hadn’t paid then customers would be upset.

But where do you think this extra money is going to come from?  Netflix customers, that’s who.  It will either come from their customers in the form of increased monthly rates over time or it will come in the form of less content that Netflix now develops because part of that money is routed to paying ISP tolls.  Either way, this is the first time you’ll pay without Net Neutrality as all the major bandwidth services are forced to incur this expense.

The second way you’ll pay is in the form of reduced access to everyone who isn’t willing to pay.  Maybe the site isn’t large enough to pay the tolls but you really enjoy it–be prepared to have their access de-prioritized in exchange for all the major players.  Or maybe the site simply can’t afford the tolls even if lots of people use it.  Think Wikipedia.

This problem gets worse the more high-bandwidth content is forced to pay for tolls and get priority access.  Of the big three streaming services, you may subscribe to one or none of them–but that won’t stop their content from delaying everything else heading your way.

So you’ll have the privilege of paying a second time for no Net Neutrality.  Maybe you’ll pay to try and get more bandwidth to your house, a method which may not work if the major networks are still crammed with the high-bandwidth priority content.  Or maybe you’ll just pay with your time, waiting longer periods for content that used to be treated equally.  And yes, to paraphrase, time is a form of payment.

If you honestly don’t have an opinion on Net Neutrality, maybe that will connect with you.  Paying twice for a rule change is a pretty bad option compared to everyone participating equally in a single network and everyone having a vested interest in making the entire network run better.  The proposed rules by the FCC kill net neutrality–they hide behind this nomenclature of Open Internet but that is not a Neutral Internet.

All the major technology, content, and social media companies support Net Neutrality.  The big companies like Netflix and Facebook know that a neutral Internet let them become the giants they now are.  The smaller companies know that a neutral Internet is the only way they can compete against their larger competitors.  And technology innovators everywhere know that having equal access is the best way to develop new platforms and software.

Do you know who supports killing Net Neutrality?  The carriers.  That’s it.

If you feel compelled to take action, here’s a great article on how you can submit comments to the FCC while they are still considering their proposed rule changes.

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Filed under Net Neutrality

Social Media Law Final (You Know You’re Curious)

Because triumph.

While I enjoy many aspects of being a social media lawyer one of my absolute favorites is teaching a class I developed at the University of Texas School of Law.  This spring I taught the class for a second time to an even larger class and had many entertaining classes and conversations throughout the year.  We even had to deal with actual ice cancellations and fake ice cancellations and held one class virtually over Adobe Connect.  All in all, a fun semester.

Since my class covers a variety of legal subjects impacted by social media, the final also covers a number of different topics.  And just like last year when I posted the first law school exam I gave, below is an embed of this year’s final.  Now you can play along and imagine what you would respond if you had to take this final.  I omitted the first page which was just directions–just know it was open book and students had three hours to take the exam.  Each question was weighed equally.

Oh, and there’s a social media easter egg hidden in the final.  Let me know if you find it.

Update: Jason Ross found the easter egg first, so congrats to him!  Yes, I rickrolled my students, they just didn’t realize it.  Read the first letter of each line of the final.

 

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Filed under Celebrities, Consumer Protection, CopyFUD, Copyright, Employment, Fair Use, FTC Endorsement Guidelines, Identity, Instagram, Privacy, Social Content, Social Marketing, Social Media and the Law, Social Media Lawyers, Social Media Policies, Social Media Risks, Social Platforms, Terms and Conditions

Learning From Social Media Mistakes

 

Wait. I did that?

A few weeks ago USAirways tweeted out an offensive image in response to a customer.  I’m not going to link it.  You either know the story already or you don’t need to see the image (and it’s easy enough to google it yourself).  Mistakes will always happen on the job and sometimes they happen in a public venue like a Twitter account.

I thought the response issued by the internal US Airways newsletter (which is available publicly) was so outstanding that I’m just pasting a picture of their newsletter article.  I wish they hadn’t buried it at the end of the newsletter but I applaud how it was handled and addressed.  Other companies could learn a lot by how this embarrassing mistake was handled.

USAirways

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Filed under Informal Tone, Quick Updates, Social Content, Social Media Risks, Twitter

Everything You Wanted To Know About Bitcoin But Were Too Afraid To Ask, Part 3: Bitcoin Risks, Chuck Norris, and Pork Loin

Now that we’ve learned the basics of money in part 1 of this primer and how bitcoins and Bitcoin work in part 2 it’s finally time to talk about the problems and legal risks facing bitcoin adoption.

Which are significantly more serious than issues surrounding Cabbage Patch Kids adoption.

The Downside Of Bitcoin As Currency

There are plenty of potential downsides to using bitcoins as a virtual currency and these could be insurmountable obstacles in terms of its future.  Here are some of the big ones.

Fluctuating Value

While speculators may love the idea of buying bitcoins today and reaping a huge profit tomorrow, that isn’t the kind of thing you look for in currency.  For example, this primer took a while to write (longer than it’s taken you to read this far and man, hasn’t that felt like forever?).  When I wrote the section about bitcoins being worth around $515 that was true when I was writing it (March 28, 2014).  Today, as I write this section (March 31) the value is around $460.  That kind of huge fluctuation isn’t what people look for in terms of a currency–they may look for huge swings for other types of investments but that won’t make bitcoins succeed as a currency.  You don’t want both sides of a transaction trying to figure out how much the money will be worth by the time the transaction is done–then it turns into a complicated bartering system.

To some extent, this is a hurdle that any new currency will face.  As long as the currency doesn’t have widespread adoption then it will be valued mostly by its conversion to other forms of currency.  But without some kind of longer-term stability, it will be difficult for a true bitcoin economy to emerge as the amounts charged for goods and services will fluctuate too wildly.

The 51% Attack

One of the greatest strengths of the Bitcoin network is also its greatest weakness.  Bitcoin was created to replace those trusted, proprietary third parties that verify transactions.  To do so, the Bitcoin network was created with a complicated transaction ledger (the Block Chain we discussed in part 2) and mining system.  For those transactions to be verified, the majority of Bitcoin miners have to agree that the latest batch of verified transactions are correct–this process not only verifies the Block Chain but also sets to reward the miner that first solved the mathematical problem.

Verifying the solution requires agreement by at least 51% of Bitcoin miners.  That distribution built into the Bitcoin network is designed to make it so that no single party is taking over verification and leading to them increasing transaction costs (leading them to increase transaction costs closer to the 2.9% being charged by most third parties today).  But that distribution comes with a significant disadvantage: at any time someone can come up with enough hardware to make themselves 51% of the Bitcoin mining network and suddenly they can rewrite all the rules.  They could move bitcoins to their own accounts or issue all remaining bitcoins to themselves.  It’s possible that these changes could be undone, but that could be difficult.

It’s also an attack unique to Bitcoin–51% of the world’s nations could decide the US dollar is worthless and that wouldn’t impact our ability to use the dollar here in the US.  The 51% attack on Bitcoin could completely destroy the system.

Like this almost killed Superman.

While the deeds that could be accomplished by someone in the 51% position are hypothetical, the actual ability is not.  In January of 2014, one network of Bitcoin miners accounted for more than 42% of the network.  A deliberate push by that network could have easily tipped it over the 51% number–fear of that takeover made many miners leave the network but it does reveal an actual, serious threat.

Current Third Party Protections

We discussed earlier how US retailers could save $11.7 billion a year if they moved to bitcoins given the reduced transaction fees.  But one thing that should be considered is how credit card companies and others provide valuable services in exchange for those higher transaction costs.  In addition to your losses being capped for fraudulent charges with credit cards, most third parties will also have reward programs and dispute resolution processes that could make the extra transaction fees worthwhile.

Forget all the bonus miles and extra hotel nights for now–those dispute resolution processes are very important.  If you have a fraudulent charge on your credit card today you can contact the credit card and dispute it.  They will have their own process for deciding the issue but you have a good chance of getting the issue correctly resolved.  (I’ve had to do this maybe a dozen times over the past decade, every one resolved in my favor.  That’s not to brag but to highlight an actual need.)

Bitcoin has no dispute resolution process.  A completed bitcoin transaction, once verified into the Block Chain, cannot be undone.  A reverse transaction could be completed if both parties agree to transfer the money back, but that is a new transaction and not removing an earlier one and is completely subject to the whims of the new bitcoin owner.

Private Keys Lost

Earlier we learned that having money in the Bitcoin network really means you have two things: the public address of that money (which anyone could have) and the private key that allows you to control where that money can be moved.  If you lose that private key then you have lost the money.

This is true for currency as well.  If you stand at the top of a mountain and wave a $20 bill around and the wind rips the bill out of your hand, you don’t have that $20.  If someone walks up to you with a gun and demands the $20, same thing.

Unless you’re Chuck Norris. Chuck Norris makes money when he gets mugged.

The concern here is that private keys are not designed to be remembered by human brains.  So you need some kind of storage method to intervene.  Wallet programs or websites are the easiest place to store them, both for their ability to remember long strings of numbers and because they can be utilized to complete bitcoin transactions in the future.  But programs and websites can be hacked.  Or a virus on your hard drive can detect wallet programs, deduce that you have bitcoins, encrypt all of your files, and demand a bitcoin ransom or it will delete the key and you lose everything.  That’s not a hypothetical risk, that’s a real virus.

As an additional method of security, some people place private keys in what is called cold storage. This means the files are removed from an Internet-connected device. They may be printed to paper and deleted from online records or they are placed on a USB drive that is placed in a secure location like a bank safety deposit box. This certainly makes the keys less susceptible to an online attack but they are still subject to the same limitations as physical currency (loss, theft, damage). If you wanted to have a physical stockpile of currency, there are easier ways. But security around private keys is vitally important since if you lose the keys you lose your money.

The problems with losing a private key, losing your money, are not unique to the bitcoin economy. The same thing could happen to your bank accounts if they were hacked.  But there are a lot more safeguards in place and laws to help you in that event.  The bitcoin economy has not matured enough to address these risks, giving you virtually no recourse if you lose your keys.

Other Technical Issues

The 51% attack is the easiest technical issue to understand but there are several other that can impact bitcoin transactions.  One which has gained some attention is called transaction malleability (very technical article on how it works can be found here).  Understanding this attack is a bit difficult–just know that an attacker can modify transactions before they are entered into the Block Chain.  The modified transaction is seemingly innocent–it doesn’t change where the bitcoins were transferred.  But it does modify the final verification hash and since there is no standard way for wallet programs to operate, some wallet programs would see the modified hash as proof that the first transaction failed and the wallet needed to send bitcoins again.  The result is that a nefarious seller could trick a wallet into spending twice as many bitcoins as it should–and like we discussed before, there’s no recourse.

When one of the larger bitcoin exchanges, Mt Gox, announced it had lost several hundred thousand bitcoins it claimed this was due to transaction malleability.  While that cause has been questioned, it is also true that in the days following Mt Gox’ announcement this attack was found to be responsible for double charging over 300,000 BTC’s worth of transactions.

Plus we were really, really sure we knew the Ace was in the middle.

There are several other potential weaknesses and attacks with the Bitcoin network and to some extent that should be expected with a new technology.  It’s also true that our current third party verification systems have also been subject to attacks and data breaches.  We just have a lot more experience dealing with the technology that has been around for decades.

Bitcoin Legal Issues

Beyond facing technical issues and obstacles to having bitcoins adopted as officially recognize currency, the Bitcoin network and bitcoin transactions also face significant legal challenges in the near future.  Here are some of the most important.

Currency Or Commodity?

The IRS recently issued guidance that bitcoins will be treated as commodities rather than currency under US law.  Brazil has just done the same and other countries will determine their own treatment.  This triggers certain legal treatments that differ from currency–if someone pays you in bitcoins then it is like you were paid with gold bars rather than Euros.  This not only requires you to figure the amount you were paid in terms of how much those bitcoins were worth when you received them, but if the value of those bitcoins change by the time you use them then you also need to record that amount.  And if the new amount is higher than you can be taxed under capital gains.

Tax treatment depends on your overall income situation and I’m not a tax expert, so take this all with a grain of salt.  But short-term capital gains (for commodities or investments held for under a year) you will be taxed 35% of the gain.  If you held that commodity for over a year then that falls to 15%.  Let’s see that in action.

Say I agree to pay you $25 in bitcoins (BTC, if you recall) if you hold my place in line at Franklin BBQ on one dreary day in January.  Leave aside the ethics and propriety of such a transaction.  In June, Franklin BBQ adds pork loin to the menu.  You are eager to try the latest BBQ awesomeness, especially because Franklin is now taking BTC as payment.  Pork loin is being sold for $12.50 a pound, quite a deal, and you decide to order 4 pounds.

This shall now be called your bitcoin pork loin.

Lucky for you, BTCs have doubled in their US dollar conversion since January so you are able to use the exact amount of bitcoins I paid you to purchase your $50 of sweet, smoky BBQ.  Because you received $25 in a commodity (BTC) and were able to turn it in for $50 in goods you have now realized a gain of $25.  Since this was based on something you held for under a year you now owe 35% of the gain, or $8.75.  If you had been able to hold on until January, and assuming BTCs are still worth double compared to when you received them, then you would only pay 15% of the gain, or $3.75.  But, really, who can wait that long?

The good news is that technically you still made out pretty well–you were able to get $50 in goods for the equivalent of $33.75.  But the bad news is that you have to keep track of all your transactions, when you got BTC, how much they were worth, how much you got for them when you exchanged them for something else, or else the IRS may take issue with your filings.  And that’s never a good thing.

It’s also bad news when you compare to a standard currency exchange.  People make investments in foreign currency just like they can buy stocks and bonds or gold or collectible Elvis plates.

Fact: the Fat Elvis plate can hold six full-size pork loins.

When you make money off a currency investment you are typically taxed 23% of the gain (they use a 60/40 rule to determine the amount, 60% taxed at long term 15% rate, 40% taxed as short term at the 35% rate).  Just the fact that the IRS is treating BTC like stocks or other commodities puts it into a category different from, and less advantageous than, other forms of foreign currency.

Legally Used?

Although the US has determined that BTC can be used for transactions and just has a specific way of dealing with the tax implications, other countries have declared bitcoin transactions to be illegal or placed restrictions on their use.  Bitcoins cannot be used in Iceland and their use has also been restricted in Taiwan, India, Japan, and China, among others.  This is still an emerging technology so it would be in your best interest to look into bitcoins’ legal standing in a country before you embark on transactions with them.

Anonymity And Money Laundering

Anonymity and Bitcoin is a fascinating issue.  On the one hand you have people claiming that bitcoin transactions are completely anonymous and this makes it attractive to criminal elements.  On the other hand you have people claiming that bitcoin transactions are publicly trackable and that you can follow every bitcoin from person to person which is something you can’t do with cash currency today, making it even more secure than cash.

Who’s right?  They both are.

Although every bitcoin transaction is public knowledge, what is known is the amount that was transferred and the address to which the amount was transferred.  If you can determine who owns or controls that bitcoin address then you know how much they received.  But there is nothing that compels bitcoin addresses to be identified, unlike many countries which have laws that require bank accounts to be registered in people’s/companies’ names.

If a bitcoin is ever stolen (through a technical attack or someone stealing the password) then you can absolutely know where the bitcoins were transferred–but that may not help you.  Especially if the destination was some large bitcoin transaction site that you then lose in the shuffle.  Perhaps the thief takes 5,000 BTC from your account and then start sending out batches of 100 BTC now and then.  It would be impossible to say that those were your BTC and not someone else’s.

The identification of bitcoin transactions doesn’t necessarily make it more secure, but it also could make it easier to follow.  Like a double-edged sword, it cuts both ways.

Double edged swords: as awesome to look at as they are to use in analogies.

Another way bitcoin transactions are like a double-edged sword is that the person handling it may face the most risk.  We’ve already seen one example of an entrepreneur arrested on money laundering charges for providing a service to convert bitcoins to cash faster than the Bitcoin network allows and we could see more actions like this in the future.  Even though bitcoins are treated as commodities, money has its own set of regulations and new companies rising to meet the gaps in the Bitcoin economy could run up against this highly regulated space.

The Future Of Bitcoin(s)

Where does this leave bitcoins and Bitcoin moving forward?  While there are significant challenges to bitcoins being adopted as an actual currency there is a degree of interest in the technology that could keep it alive long enough to be accepted.  This could change in an instant if the Bitcoin network is compromised or a few large countries declare it completely illegal, but for now it has a chance to be adopted if it can deliver on the promise of reduced transaction fees.

Of far more interest, I think, is the Bitcoin network itself and the idea that you can securely transfer unique codes from person to person.  If the Bitcoin network becomes more refined and then modified to use more than bitcoins, it’s entirely possible that other, actual forms of currency could be exchanged on the network.  That could be an interesting application of the technology and its promise of cheap, efficient transfers without the downside of a new, unregulated (by a traditional authority) currency.

Whatever happens with bitcoins and Bitcoin, hopefully by reading this primer you’ll understand what’s at issue.  But if you do have suggestions for refining the primer, please contact me and let me know.

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