The fad around ‘Crypto’ is very quickly becoming a reality for everyone and at an astonishing pace. Many critics of Bitcoin and Ethereum seem to have changed their tune and are joining the crypto club. The banking giants of JP Morgan and Goldman Sach each offer their own digital asset management service with each developing their own digital coin and wallets. It is then no wonder the Chancellor, Rishi Sunak, announced UK’s plan to become a global hub for digital currency.
For anyone needing a bit of a recap on how Crypto works, it basically involves buying and selling a digital coin through “Crypto exchanges”. These exchanges work like traditional money exchanges, setting prices for various currencies and taking a small fee to let users trade one. The difference between these exchanges and traditional ones is the cool blockchain technology used in crypto to trade.
Blockchain technology allows for the ledger in a transaction to be distributed among the community of the blockchain. This means everyone in the blockchain has a stake in the transaction. In an ideal world, this should allow for equal equity in the trade, where everyone in the blockchain receives their share of the trade. As everyone in the blockchain has a stake in the trade and no single person has authority in the transaction.
For the Chancellor, to make the UK a hub of digital currency is a bold statement, especially when you begin to understand the rampant fraud and hacking that is going on. Just to make clear, I don't believe Blockchain technology is the problem here, but when you have exchanges that build their businesses from scratch, sometimes from their bedroom, very often with a few college buddies as staff, shortcuts and mistakes are bound to be made. This can sometimes or accidentally leave a system exposed to hackers, who can then get a foothold.
“Dozens of other hacks against cryptocurrency platforms have seen at least £1.6bn stolen by hackers since 2014.”
source: BBC website
This isn’t just a UK problem, but a global one. With many hacks leading to hundreds of millions being stolen.
BitGrail: $146m was hacked from the Italian exchange in 2018.
KuCoin: $281m was stolen by suspected North Korean hackers from this attack on the Seychelles-based exchange in 2020.
MtGox: $450m of mainly Bitcoin was hacked in 2014 which collapsed the Japanese exchange.
Coincheck: $534m was stolen in 2018 from the Japanese exchange.
Poly Network: $610m was hacked from the Chinese platform earlier this month in various coins.
With no regulations in place for crypto trading, the biggest loser in all this is the consumer. Many consumers who had their money taken have seen limited compensation for their loss. Even with regulations, the challenge of proving the fraud or identifying the hacker behind the crime will probably be a bigger challenge. These hackers are sophisticated in the way they penetrate the system, normally with hidden identities that cannot be traced.
The solution to any sustainable future for Crypto exchanges to survive requires a lot of things to happen together on a single front. I believe these can be categorised into two areas, the first being technology and the second being regulatory and legal.
I will discuss the technology part in my next blog so keep an eye out for it, as I will set out how I believe three key technological areas can save the crypto exchange and build a safer future for the market and the financial services industry.