One of the biggest juxtapositions of the blockchain and its related cryptocurrency ecosystem is that the technology itself is heralded as un-hackable, safe, immutable and a paradigm of transparency and security. The surrounding cryptocurrency ecosystem, that is a significant part of the entire industry, however is still referred to as the ‘Wild West’ with its numerous hacks, scams and dodgy dealings.
There are many reasons for this. Chief among them being that regulation was lacking when cryptocurrencies started to gain mainstream adoption, which in turn brought in vulnerable investors and users of Bitcoin. The system was decentralised and open source, which also mean there were no safeguards or protections.
Additionally, how the technology operates at its theoretical level, and how it is utilized, through third-party actors such as wallet builders and cryptocurrency exchanges, are very different.
The rush to enter the crypto-space and the hype associated with it created a monstrosity of an industry that was predicated around getting rich quick. Because of that there was a lot of room for hackers and scammers to get entrenched and take their cut in a fragile-built ecosystem. Wallets, exchanges and other offerings have not been able to cash in on the security the base technology offers.
It is, of course, getting better, and active steps are being taken to clear the ‘Wild West’ reputation, but there is still a long way to go. Mainstream adoption has undoubtedly hit a ceiling, and part of it must be down to the fear of getting burnt, broken or even robbed for one’s crypto assets.
Regulators have stepped in, third-party offerings – such as exchanges and wallets – are becoming more accountable, and there are even services being offered to try and lessen the blow should something terrible occur to crypto investors.
Fear in the Wild West
Ever since even before the days of Mt. Gox, there has been a significant risk with entering the cryptocurrency space. Again, it is not the fear of using a digital asset on the blockchain, as that is un-hackable where funds won’t just go missing, the concern is instead in the exchanges and wallets that offer access to the blockchain.
Still, even after Mt.Gox; where people effectively saw a bank collapse despite Bitcoin being called the fail-safe against such things following the 2008 financial crisis; investors rushed back to cryptoucrrencies when its price started rallying.
Then came more hacks – maybe not as big, but certainly more frequently as there were easy pickings for nefarious types to stalk and take advantage of. These new investors flooded in, and as the ecosystem expanded rapidly with very little knowledge or understanding of the space – scammers took full advantage.
Daniel Tanner, CEO of Platon Finance, a cryptocurrency ecosystem that is looking to provide insurance within the cryptocurrency space, explains how things were, and how they have started to change.
“The situation currently is better than a year or two ago when a mass of ordinary people from every corner of the world joined and Bitcoin mania began. For a majority, the crypto environment was new, and people were generally unsure because they didn’t know what to expect. During this new wave of adoption billions of dollars were stolen from exchanges and markets, and because crypto was so popular the media splashed it across the news a lot. This led to huge panic and probably a bursting of a bubble,” said Tanner.
“Now, I think the situation is better. People starting to study and explore more about cryptocurrencies and the associated security which is an important aspect in this environment. People are more educated and discerning enough to pay more for better quality services.”
One prime example of how a bad actor has prompted a more significant response in terms of security and service-providing is the Coincheck hack. This hack, also in Tokyo, Japan, was dubbed the second biggest after Mt. Gox and led the Japanese government to step in.
The Japanese government started issuing what it called ‘Business improvement orders’ to a number of the exchanges operating out of Japan. The orders were strict and firm, demanding that businesses that were offering a cryptocurrency service make sure they hit specific safety and security targets to continue their operations.
This evidence of regulators stepping in and demanding the ecosystem be made better and safer for users is an essential step for the dilution of this ‘Wild West’ reputation. Regulators were late to the party in terms of controlling the crypto boom, but with a firm hand there comes some protection and fail-safes for investors – as well as a much higher standard of operation.
The move in Japan caused many exchanges to close down – those that could not meet the standards – which is a scary thought for the general investor. It proves that there are a lot of third-party service providers that are not out there to offer an excellent service, instead there to make a quick buck.
A major part of the Japanese orders included accountability from the service providers, and that has become more and more prevalent from exchanges across the globe. Following a number of hacks in recent time, there has been tremendous pressure for the exchanges to be accountable for hacks and loss of funds.
This pressure has seen many victims, even of the infamous Mt.Gox hack, to get some of their investments back. But more recently, even the Coincheck exchange has said it will be repaying its customers for their stolen funds – and this was before the improvement orders. It has become highly expected that a hack that preys on a vulnerability in the exchange will mean recuperation of funds.
That being said, the highly publicized loss of funds in Canadian Exchange, Quadriga has caused much alarm and consternation as the head of the company died allegedly with the keys to the proverbial safe. As it stands, there is nothing that is being done about the users’ funds that are seemingly lost forever and this is hugely negative for a space that is trying to clean up its act..
As Tanner made mention, there indeed is an improvement in the understanding of risk in the cryptocurrency space, but that is mostly from those who have battled it out in a primarily unregulated arena. To this end, there are some blockchain services that are looking to offer assurance that if things go wrong, it will not be the end of it all.
“Well, for example, we offer €500,000 insurance should anything go wrong in terms of a hack, so a person can store the top four cryptocurrencies in their wallet and know those digital assets are protected. We are hoping that this kind of insurance can bring more people to crypto,” explains Tanner
“The hope is that insurance is the first step for all generations to trust the crypto space and get rid of the ‘Wild West’ label. I believe that insurance is just one piece of the puzzle of future technologies around the space. I think that insured and well-secured wallets can be part of the future of digital money storage, not only for the individual but for companies, exchanges or stock markets.”
Symptoms treatment rather than cures
Of course, what is evident from all of these solutions thus far that try and stop hackers and scammers is that they are reactionary. They are aimed at making reparations when bad things happen in the cryptocurrency ecosystem.
It is good to have insurances when things go wrong, and while that is an positive first step, the ultimate goal should be for the ecosystem around cryptocurrencies and blockchain be as safe and secure as the underlying technology; bringing them closer aligned to one another.