I think we can all agree that 2017 was the year of cryptocurrency.
A few years ago, cryptocurrency was a niche topic among crypto nerds (yes, we here at Unbound are all crypto nerds), but now the term is dominating headlines all over the world.
With a market cap of over 500 billion dollars, it’s no wonder that cryptocurrencies are becoming a matter of interest for banks and governments alike, globally.
Indeed, Goldman Sachs announced a few weeks ago that it is setting up a trading desk to make markets in digital currencies—the first Wall Street firm to do. Likewise, in mid-December, Barclay’s CEO, Ashok Vaswani revealed that the bank has been in talks with the Financial Conduct Authority (UK financial regulatory body) on how they “could bring cryptocurrencies into play”.
In May 2017, the third annual Ethereal Summit, was attended by the likes of Bloomberg, Capital One, Equifax, Microsoft, and Nasdaq. The event was held by Consensus Systems, one of the companies promoting the development and usage of Ethereum, generally considered the second-most successful cryptocurrency after bitcoin. The presence of major financial and technology enterprises at the event demonstrate how cryptocurrency is becoming mainstream.
Across Europe and Asia, banks have said they were looking into establishing digital-only currencies in addition to traditional denominations. Japan has officially recognized bitcoin as a legitimate currency, and countries like South Korea have introduced regulations to assuage the concerns of those who insist it’s just a glorified scam.
At the World Economic Forum in Davos last week, U.S. Treasury Secretary Steve Mnuchin said the United States is most concerned with keeping the assets from being used for illicit activities.“[I]n the United States, our regulation [says that] if you’re a Bitcoin wallet, you’re subject to the same regulation as a bank,” he said. “We want to make sure that the rest of the world…has the same regulations. We encourage fintech, we encourage innovation, but we want to make sure that all of our financial markets are safe.” The SEC itself will soon establish new regulations, and this makes an ETF bid much more likely to be approved in 2018.
The Dangers & Perils of the Crypto World
And while cryptocurrency has been gaining major traction from banks, enterprises and governments—cryptocurrency is no stranger to hacks, volatility and a possible means of funding illegal activities such as drugs and terrorism.
Just this past weekend, in the largest cryptocurrency heist in history, thieves were able to steal nearly $550 million in digital tokens. Someone was able to hack into the digital wallet of the Japanese cryptocurrency exchange Coincheck Inc.
The problem lays with not with the cryptocurrency in and of itself, but rather the exchanges and wallets in which it is traded and stored. In the case of the Coincheck heist, it’s a story of bad digital hygiene. Customer assets were stored in a “hot” wallet which is connected to the internet, thus making it accessible to hackers. Furthermore, it lacked multi-signature, a security measure requiring multiple sign-offs before funds can be moved.
The theft has two immediate effects: (1) authorities calling for more regulation over centralized exchanges (2) promotion of decentralized exchange platforms. Which herein lays the irony…
The Inherent Decentralized Nature of Cryptocurrency
Harold Stark of Forbes Magazine writes the following:
“There’s a number of reasons why cryptocurrencies are so inherently popular. They are safe, anonymous and utterly decentralized. Unlike conventional currency, they are not controlled or regulated by some singular authority, their flow is determined entirely by market demand. They are also nigh impossible to counterfeit, thanks to the paranoidly complicated code system that encrypts each and every transfer, ensuring complete anonymity and utter safety to each and every user. They even make for a genuinely rewarding, if risky, investment endeavor, despite the fact that any financial advisor in their right mind will caution you against them…therefore, despite the admittedly high stakes that this sort of dealing entails, not to mention the lack of any government agency to lend credence to them, cryptocurrencies can only thrive and multiply.”
The main tenant of cryptocurrency is a “democratization” of the monetary system as we know it. This is due to the power of blockchain technology, such that the code behind every currency and every transaction is fully transparent.
Thus, cryptocurrency’s inherent nature is to be decentralized—so that a third party is not required to store your funds, and you are directly in control of your coins, and you conduct transactions directly with whomever wants to buy or sell your coins. When a third party is involved, as in the case with centralized platforms, not only are they vulnerable to hackers, but they are also subject to governmental regulations (for example the Chinese government has shut down centralized trading platforms in its country).
On the other hand, centralized exchanges are not all bad. The New York Stock Exchange for example, is a centralized trading exchange such that all orders are taking place in specific location, and they are all routed through the same place. The same principle applies for centralized cryptocurrency exchanges—they incorporate the traditional financial world into cryptocurrencies where both individuals and institutions can buy and sell cryptocurrency. Furthermore, they are easy to access and use, and provide trading tools and functionalities such as margin trading, stop loss and lending.
So the question is, with cryptocurrency becoming mainstream,why can cryptocurrency retain its inherent “decentralized” nature while at the same time be regulated in order to gain legitimacy? It will be interesting to see how this plays out in the months to come.
To learn more about how to secure cryptocurrency wallets & exchanges, register for our webinar happening on Wednesday, February 14th at 11 AM ET.