Although Bitcoin (BTC) has slowly gained mainstream attention over the past eight years, it has exploded into the spotlight over the past 12 months, together with the emergence of other blockchain-based cryptocurrencies. Accepted by retailers such as Expedia and Subway, Bitcoin as the leading cryptocurrency has drawn even more attention from private investors. At the time of this writing, Bitcoin’s current market capitalization exceeds more than $265 billion, while its value has appreciated by more than 1,439 percent in the last year alone.1 Behind this blistering success, a contentious debate among developers regarding whether to increase Bitcoin’s “block size” continues, carrying with it important ramifications for Bitcoin’s future.
Reed Smith Client Alerts
In May 2017, a group of Bitcoin (BTC) developers and industry leaders laid out a plan to increase Bitcoin’s block size from 1MB to 2MB with an update dubbed “SegWit2X.” The block size increase would have enabled Bitcoin’s network to cope with the cryptocurrency’s recent surge in activity. On its face, expanding Bitcoin’s capabilities seems beneficial for everyone involved, but SegWit2X was hotly contested. Proponents of a blocksize increase (known as “Big Blockers”) believe that enabling Bitcoin’s network to process more transactions is necessary for the cryptocurrency to function as a cash alternative and compete with traditional payment systems. On the other hand, SegWit2X’s opponents, known as “Decentralists,” worry that increasing Bitcoin’s block size will make the blockchain more cumbersome, centralizing mining power in a way that both compromises Bitcoin’s security and attracts unwanted regulation. Eventually, SegWit2X proved too controversial and its supporters postponed the update. Still, the block size debate is far from over, as evidenced by the recent hard fork resulting in the birth of Bitcoin Cash (BCH). This alert examines SegWit2X, the greater block size debate, and the important ramifications this debate has for Bitcoin’s future.
Reed Smith adds Alan J. Schwartz as a transactional tax partner in the Global Corporate Group
30 April 2019