VP – Sales, Infinova, MEIA (SAARC)
It’s fair to say that 2020 has been an exciting year for crypto. From Bitcoin’s peak in December 20 at £14,450 to new contenders such as Ethereum, Ripple and Bitcoin Cash entering the running, Cryptocurrencies have been the darling of investors and speculators everywhere. One of our Berlin-based meetups was focused on Blockchain recently and you can watch the replay of the livestream at (https://www.youtube.com/watch?v=Pt1ihk_7J6c&feature=youtu.be).
But it may not be all sunshine and rainbows ahead. Navigating the cryptocurrency realm requires skill and an understanding of the subtleties of the market as it also comes with significant risk. From government regulations to security, within this article, we’ll look at some of the big problems facing cryptocurrencies.
Let’s begin…
Government regulation is inevitable
Government reactions to cryptocurrencies have ranged from aggressive to indifference, with investors and speculators cautiously monitoring international developments. Just recently, the Head of the International Monetary Fund, Christine Lagarde, stated that regulatory action from the international community on cryptocurrencies is ‘inevitable.’
Christine also said, “We are actively engaging in anti-money laundering and countering the financing of terrorism; and that reinforces our determination to work on those two directions.”
According to a report by CoinDesk, in late January 2021, world leaders gathered for the Davos World Economic Forum, with several sharing the same sentiment, including the French President, UK Prime Minister, and the secretary of the U.S. Treasury Department. South Korea is reported to have recently banned the trade of bitcoin and other digital currencies anonymously but says it does not intend to ban cryptocurrency exchanges.
The next subject is often overlooked…
There’s an issue of inheritance
The unregulated nature of bitcoin means that without the keys needed to view a relative’s digital wallet, there’s no way of accessing their funds if they are to pass away. For example, five years ago, Matthew Moody died during an observational flight, and at the time he had been mining bitcoin. His father, Michael Moody, has spent the last three years trying to find out how many bitcoins his son has and how to find them. However, without knowing every single address, he is unable to locate every piece of currency. Moody has since called for better education about how to ensure investments are secured properly for those individuals mining bitcoin.
I’m sure you’d already know the next one…
There’s a security risk
Bitcoin exchanges are digital and therefore vulnerable to hackers, operational glitches and malware. By targeting and hacking a cryptocurrency exchange, hackers can gain access to thousands of accounts and digital wallets where the cryptocurrencies are stored. One infamous example was the COX hacking incident in 2014, which saw the Japanese exchange closing down after millions of dollars in bitcoin were stolen.
And the one everyone is talking about…
There’s a market risk
As with any investment, the value of cryptocurrencies can fluctuate, this should be no surprise. Within their short time, they’ve seen fierce swings in value and an extreme sensitivity to headlines, due to the high number of informal and amateur investors. If there’s continued resistance to the adoption of bitcoin and other cryptocurrencies, they may lose value.
Experts, investors and budding traders will continue to speculate as to the future of cryptocurrencies. All we can know for sure is that it’s going to be an interesting journey.
BLOCKCHAIN
Blockchain is often touted as a world-changing technology and in many ways, it is. However, it isn’t necessarily the cure-all panacea for the world’s problems that many evangelists would have you believe.
Here’s a breakdown of some of the issues with blockchain that anyone thinking of using it should understand.
Starting with perhaps is the biggest…
1. Blockchain has an environmental cost
At least, the way it is being used today, it does. Blockchain relies on encryption to provide its security as well as establish consensus over a distributed network. This essentially means that, in order to ‘prove’ that a user has permission to write to the chain, complex algorithms must be run, which in turn require large amounts of computing power. Of course, this comes at a cost. Taking the most widely known and used blockchain as an example – Bitcoin – last year it was claimed that the computing power required to keep the network running consumes as much energy as was used by 159 of the world’s nations.
Yes, Bitcoin’s blockchain is a hugely valuable network – with a current market capacity at the time of writing of over $170 billion – and so sophisticated and computationally intense security is essential. Smaller scale blockchains – such as those that an organisation may deploy internally to securely monitor and record business activity – would consume a fraction of that. Nevertheless, it’s an important consideration, and the environmental implications as well as the energy costs can’t be ignored.
2. Lack of regulation creates a risky environment
Again, this is largely a problem with Bitcoin or other value-based blockchain networks. But the fact is, as many investing in Bitcoin or other cryptocurrencies for the first time in the last few months have found to their cost, it’s a very volatile environment. Due to the lack of regulatory oversight, scams and market manipulation are commonplace. Among the high profile cases is Oncecoin – recently revealed as a ponzi scheme which is believed to have robbed millions from investors who believed they were getting it early on what would become the ‘next Bitcoin.’ As with many areas of tech in recent years, legislators have largely failed to keep pace with innovators (or scammers), leading to rich pickings for those seeking to exploit ‘FOMO’ – the ‘fear of missing out.’
Even if as a speculative investor in cryptocurrencies, you would choose to stick to the relatively established coins such as Bitcoin, Litecoin, or Ether. There is always a chance that the exchange or online wallet where you keep your coins will be hacked, shut down by governments due to shady practices, or simply abscond with your coins. Again, this is a consequence of the lack of regulatory oversight across the sector.
3. Its complexity means end users find it hard to appreciate the benefits
Although its potentially revolutionary applications are apparent once one has made the effort to understand the principles of encryption and distributed ledgering behind blockchain, it takes a while, and a good bit of reading, before the ‘man on the street’ can see what makes blockchains potentially so useful. Tech pundits talk about replacing the middle-man facilities traditionally provided by the financial services industry – such as clearing payments and fraud prevention. But as far as many are concerned, banks provide this service adequately well, at an apparently low cost to the end user.
It’s no coincidence that the first blockchain – Bitcoin – entered public consciousness immediately following the financial crisis of 2008, when media and public opinion reflected a widespread dissatisfaction and growing distrust with established financial institutions and instruments. Ten years later and with no apparent danger of immediate repeat, is there still an appetite for wholesale tearing down of financial services and rebuilding it from scratch? Of course, the previous crisis was largely unexpected, and who knows what is around the corner. Global events could reignite the appetite for change, but until they do, blockchain could remain a hard sell for many.
4. Blockchains can be slow and cumbersome
Once again due to their complexity and their encrypted and distributed nature, blockchain transactions can take a while to process, certainly compared to ‘traditional’ payment systems such as cash or debit cards. Bitcoin transactions can take several hours to finalise, which means there are inherent problems in the idea that you will be able to use them to pay for a cup of coffee in your lunch hour, unless the vendor is willing to take on an element of risk. And wasn’t that something which the ‘trustless’ nature of blockchains was expected to remove from the equation?
In theory the principle extends to blockchain networks which are used for something other than as a store of value, for example logging transactions or interactions in and IoT environment. These chains – really just computer files, after all – have the potential to become slow and unwieldy as they grow in size, and the number of computers accessing and writing to the network grows. Hopefully this is a problem which will be solved with advances in engineering and processing speeds, but at this point in time it remains a problem, nonetheless.
5. The ‘Establishment’ has a vested interest in blockchain failing
Let’s be honest – despite the huge interest in adopting blockchain technology from the established financial industry, the subtext behind much of what is said about it is “it would probably be better if it just quietly disappeared.”
Banks make huge amounts of profit from playing the middle-man role, and because the cost is distributed among their millions of customers, end users usually pay very little individually.
Back in 2015 one former boss at Barclays described the interest and apparent enthusiasm of his sector as ‘cynical’ – stating that it stems from a desire to exert control or even block the usefulness of the emerging technology.
Banks carry huge lobbying power with governments and legislators. It’s conceivable that should they decide it is in their interests, the established financial services industry could, if not kill blockchain, dramatically reduce its usefulness and restrict its availability.
In my opinion, however, although these five issues could pose significant hurdles, it is likely that blockchain technology will evolve over the coming years. After all, technological advancement, much like nature, has a way of finding its way around artificially constructed barriers.
