Published Jan 27, 2020
By Anthony Foy, CEO Qredo
The end of 2019 marked eleven years of cryptocurrency. In this time, the ecosystem has progressed from a few small blockchain networks to a complex alternative financial system.
And yet, cryptocurrency is still far from mainstream. Blockchain-based currencies have not yet become ubiquitous payment systems, and are still perceived by most as a speculative investment class.
As we move into 2020, we take a look back at the challenges faced by the cryptocurrency industry in 2019, and suggest how they might be overcome in the next decade.
The hacks aren't stopping
In total, twelve major cryptocurrency exchange security breaches occurred in 2019, compared with nine major hacks in 2018. Among these, a few landmark hacks have set new precedents.
Binance, which at the time was the largest cryptocurrency exchange by trading volume, was hacked through its hot wallet in May and reported $41 million stolen bitcoin, making a mockery of the exchange's "funds are safu" meme.
The hackers stuck to what has become a standard modus operandi—using phishing techniques to target exchange employees with malware-laden emails. These emails opened a virtual trapdoor for them to get inside the exchange network. From within, the hackers were able to familiarize themselves with internal operations of the exchange, and trace communications through the network to eventually find the machine of an employee with access to critical wallets.
Cryptopia was also hacked within the first two weeks of 2019, leaving exchange users collectively $16 million out of pocket. In the absence of an explanation from the exchange, Social media users started their own investigation, tracking funds through blockchain to reveal that funds were taken in the form of various small and obscure tokens.
What did we learn?
No exchange is too small or too big to be hacked: Both behemoth Binance, which boasts over $1 billion in daily trading volume, and tiny Cryptopia, which traded less than $1 million per day, were both considered lucrative targets.
The hacks show the need for both soft measures, like training staff in cyber literacy and creating organizational security solutions, along with hard security measures like better custody solutions.
Moving into 2020, we could expect both exchange customers and regulators to push for higher security standards.
This is likely to lead to the adoption of a new wave of crypto asset management solutions like Qredo, which offers additional technology that enhances security and transactional capabilities and resolve the vulnerabilities of existing storage methods like cold and hot wallets.
Regulators are closing in
2019 saw lawmakers around the world grapple with cryptocurrency—attempting to map existing financial regulations, and fit new governance structures, to the growing industry.
Spurred by the rapid development of China's digital yuan, international organizations including the Group of Seven (G7), International Monetary Fund (IMF), and Bank of International Settlements woke up to the potential of stablecoins, calling for the West to get "ahead of the curve" before it's too late.
But at the same time, the regulators have made clear that any centralized cryptocurrency projects representing a potential threat to financial stability won't be tolerated. This was made clear when Facebook's Libra—full of aspirations to change the world of crypto and finance— slammed into a global wall of regulators in October.
As regulators have strengthened their oversight, we have seen a gradual pivot towards compliance across the whole ecosystem. This has been encouraged by the Financial Action Task Force (FATF) through guidance which suggests that G7 countries should consider implementing a type of 'travel rule' for crypto assets. This would require all exchanges to demand personal information from the sender and receivers of funds, just like international bank wire and SWIFT transfers.
At the same time, enforcement agencies like the U.S. Securities and Exchange Commission (SEC) have stepped up guidance by enforcement, and have received reinforcement from forensic cryptocurrency firms making it more possible to fight bad actors on the blockchain.
ICOs, which have now largely been replaced by rise of STOs, faced the brunt of SEC enforcement in 2019. Action was taken against messaging apps Kik, with its KIN token, Telegram's GRAM, and against Block.one's EOS, which made an unprecedented $24 million settlement with the SEC.
What did we learn?
Regulatory compliance is more important than ever. As cryptocurrency has grown more intertwined with legacy finance, more guidance has been issued and enforcement stepped up, making it increasingly necessary for ecosystem participants to stay on the right side of the rule makers.
This was made crystal clear in an announcement from the SEC on January 7th which said the agency has labelled financial technologies including digital assets as major concerns in the coming fiscal year.
Scalability is still a roadblock
In an end of year blog post, Ethereum creator Vitalik Buterin admitted that despite the progress of the industry, scalability is still "one of the largest problems facing the cryptocurrency space today."
The trade-off between decentralization, scalability and security— known as the ‘scalability trilemma’ —is still problematic for blockchain developers, meaning settlement times, expensive fees, and congestion are still affecting cryptocurrency.
This was made clear in August when the Ethereum network became clogged with Tether transactions, leading users to complain of transactions taking hours to process.
What did we learn?
Despite the progress major blockchains made towards scaling in 2019—including greater adoption of Bitcoin's Lightning Network and several forks for Ethereum—we have yet to realize the results.
Until the long-term scaling objectives of the major cryptocurrencies are achieved, the blockchains will still need to rely on layer two solutions that use off-chain ‘payment channels’ sitting above the host blockchain to provide faster liquidity and cheaper transactions.
These can come not only in the form of public layer two solutions like Ethereum's Plasma and Bitcoin's Lightning Network, but also in the form of crypto asset management solutions like Qredo.
As the new decade gets under way, the future looks promising, but if we are to see a "roaring twenties" for cryptocurrency, the challenges of security, usability, and regulation will need to be overcome.