Along with an entirely new way to conduct transactions, Bitcoin, and the other cryptocurrencies have brought with them a whole new language. To become comfortable in this new transaction environment, it’s important to familiarize yourself with these terms. One of these particular names is “hard fork,” which sounds more like something you would eat than to conduct a bitcoin transaction. In reality, though, the concept of a hard fork has become central to a heated debate among cryptocurrency companies, developers, and regulators.

 Defining Hard Fork

The Bitcoin Wiki defines a hard fork as a “change to the bitcoin protocol that makes previously invalid blocks/transactions valid, and, therefore, requires all users to upgrade.” The Bitcoin organization further explains this term, which is also known as a hard-forking change, as “a permanent divergence in the block chain” that happens when “non-upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus rules.” To those not intimately involved in the cryptocurrency industry, the hard fork doesn’t sound like it would cause any controversy but it has been the subject of recent debate.

Legal Risks on Horizon for Bitcoin from Upcoming Hard Fork

The appears of the hard fork has created some critical decisions that the community is now struggling to make, especially regarding getting industry consensus on how to handle expanding blockchain’s block size so that Bitcoin can further scale itself. While some suggest a hard fork of Bitcoin to solve the issue, others contend that this is an illegal move, creates new questions about liability and could risk an end to this cryptocurrency.

Any implementation of a hard fork would mean that exchanges that handled this currency would need to differentiate between Bitcoin Classic or Bitcoin XT as customers of the exchange could select whatever they want as part of Bitcoin’s push to scale up in size. The hard fork that would result from these incompatible versions of Bitcoin software could pose numerous legal issues that need to be addressed.

The main problem is that the miners that process Bitcoin transactions have yet to agree to the switching from the old to the new version of Bitcoin, so the existence of both versions is not considered to be legal and creates liability for the software developers working on either version. These software developers have been publicly names, so they are at risk of prosecution and imprisonment if they do not register with the U.S. Treasury’s Financial Crimes Enforcement Network as a Money Service Business.

This requirement to register under current law also could put the Bitcoin users who enjoy anonymity with their transactions in the spotlight. This is because registering as a Money Service Business requires extensive records and programs designed to call out any money laundering or other suspicious activities. Although Bitcoin exchanges are already supposed to know who their users are, this hard fork means these Bitcoin developers must keep a record of this information, which significantly deviates from Bitcoin protocol.

Beyond that, the fact that there will be two different kinds of Bitcoins means that those that have the older type must upgrade to its replacement as part of the hard fork. The exchanges will not be able to mix these two different kinds up. The other issue is that the market price is different between each coin, leaving investors and users concerned with any potential losses they may face when forced to upgrade during the hard fork. Others point to the result where it could be seen as fraud for selling fake coins because one type is no longer recognized as valid.

The result is criminal and civil liability for Bitcoin exchanges although many within the Bitcoin community don’t agree that these legal implications are accurate of what will happen shortly. Many noted that updated digital wallets that hold cryptocurrency will be able to differentiate between the two versions of Bitcoin.

Solutions Remain in Question

The challenge remains on how to handle the block size problem that hard forks were trying to solve while Bitcoin was also attempting the same while opening up new growth opportunities for the company. Right now, developers can register as Money Service Businesses to avoid this personal liability that has come to light.

The situation between old and new Bitcoin as well as administrative positions related to cryptocurrency also still need some solution if this new way to conduct transactions is going to be adopted on a massive scale. With the hard fork expected in July 2017, developers will have to remain focused on these issues to find a solution that everyone tied to the cryptocurrency industry can agree upon. Recent meetings suggest some ideas are at work. These thoughts include raising blockchain transaction block capability to accommodate those digital coins like Bitcoin that want to scale up.

However, a December 2015 conference in Hong Kong for Bitcoin industry developers illustrates just how far apart those working within it are about how to improve transaction processing capacity. One developer even suggested a proposal known as a segregated witness that would scale Bitcoin blockchain without the use of a hard fork, hoping that this would address all the concerns above.

Despite the enthusiasm, other developers put forth the belief a hard fork is necessary but that the other risks could be minimized. The thought process was that using a hard fork would illustrate a willingness to change and to implement some transparency in these transactions while creating a larger framework that would standardize and provide room for regulating it. On the current trajectory of leaving the network unchanged, the possibility of splitting the blockchain would create much larger problems and hold the industry back from wider adoption.

It would seem that both groups of developers have ideas with some merit that are pushing the needle forward. Miners and developers also continue to meet to discuss the possibilities and impact of future changes that involve hard fork or an alternative solution. Despite the outcome still in question, more aspects of cryptocurrency are now being discussed and shared with a wider audience, helping to promote the promise of this alternative transaction platform.

I'm Chalmers and I'm the Co-Founder and CTO of Due.com.

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