Cyber threats, questionable business practices and hype are eroding trust in crypto. If the trend continues it could destroy exchanges and mean that distributed ledger technologies don’t live up to their potential.
Let’s go back to basics and restore trust.
Cryptocurrency exchanges and other financial services firms specializing in digital assets can lead the way.
One of the main attractions of cryptocurrencies and blockchain is that you have a permanent record of a transaction, held by all parties involved. You trust the transactions because they can’t be challenged or rejected.
That’s one reason why double-entry bookkeeping (whereby every financial transaction, debit or credit, has an equal and opposite) has been universally used in business since it was invented in the late fifteenth century by a Franciscan friar and mathematician.
The system’s simplicity and openness also created a sort of morality, although, of course, double-entry book-keeping has hardly been immune to fraud. Public faith in financial services was shaken to the core by the 2008 global financial crisis. That trust has not been fully recovered.
The blockchain and tech communities want to reinstate morality in finance through technology. We should start with our own (digital) back yard. Tweet this
Hackers have found ever more ingenious ways to pickpocket digital wallets containing financial assets and get hold of the private keys to control these wallets to steal the underlying assets.
Worries about trust and security, largely explain why despite the boom in cryptocurrencies − and a growing number of investment banks investing in blockchain teams and trading platforms − the technology is not widely used in mainstream financial services.
The crypto industry’s reputation has also not been helped by flaws in how many digital financial assets are stored.
To date, we've offered only two ways to secure digital assets. Figuratively, one method is equivalent to keeping cash under your mattress. The "not your keys, not your money" mantra laid down by the industry forces individuals to buy personal HSMs as the tried and tested method of keeping funds under personal control.
Worse is "cold storage" - the literal equivalent of turning your checkbook over to a stranger.
The practicalities of “cold storage” (typically, when digital assets are stored on a hard drive not connected to the Internet), have been called into question by recent cases including when the founder of a cryptocurrency company, Quadriga, died.
Unfortunately, he didn't leave the encrypted access keys account holders need to recover about C$190 million ($143 million) of cryptocurrencies held by the exchange in offline storage. Said offline storage being his personal laptop.
These are the real scaling issues in our industry.
We want to help create a new type of crypto exchange. One which will attract the most significant institutional investors and financial services companies, while remaining true to the principles of bitcoin and blockchain ‒ namely, decentralized, open, fair and straightforward.
Decentralization ‒ or how digital assets are exchanged, verified and stored ‒ is key to our crypto manifesto. Currently, much of the crypto industry, including exchanges, is trying to sell a decentralized alternative to traditional finance even though its storage solution is often centralized, analog and inefficient.
It’s time to ditch the “cold storage” and “hot wallets” and move to a decentralized storage custody network that guarantees security, account segregation and proof of reserves. Tweet this
That will provide a solid foundation for the crypto industry to rebuild trust and recapture its techno idealism.