The Current State of Cryptocurrencies

The Current State of Cryptocurrencies

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We are now a decade on from the publishing of Satoshi Nakamoto’s Bitcoin White Paper, where they/ he/ she envisioned a revolutionary mass uptake of cryptocurrencies, representing a paradigm shift for the entire financial sector.

The global crypto market is now worth £166 billion in total, a figure which could be seen as indicative of its present strength. This, along with increased mainstream interest from media, institutions and individuals alike, has led many to reclassify cryptos from a niche pastime, to an increasingly integral part of the global financial system.

However, this has not been enough to silence some crypto critics, with the likes of Warren Buffet and Bill Gates expressing doubts over the technology. Further, market crashes, along with continued media reports of theft and fraud have only served to inflame the derisive attitudes of critics.

The current state of cryptocurrencies is, understandably, difficult to define and there are a range of issues the sector is still facing. The ultimate question is what will we see in the future?

Regulation

With the cryptocurrency sphere continuing to develop at a frenetic pace, regulatory bodies are now increasing their involvement. Over the last year we have seen the British Treasury Select Committee, European Securities and Markets Authority and American Securities and Exchange Commission (SEC) release statements related to crypto regulation.

The UK has adopted a ‘wait and see’ approach, with the Government having so far resisted calls to extend the Financial Conduct Authority’s (FCA’s) remit to cryptocurrency regulation. However, this is unlikely to remain the case, with the Bank of England Governor Mark Carney indicating that crypto specific legislation is forthcoming.

By comparison, the US’s regulatory environment is incredibly fragmented. Laws regarding cryptos not only vary greatly by jurisdiction, but also on the federal level – with the Financial Crimes Enforcement Network (FinCEN), Inland Revenue Service (IRS), SEC and Commodities Future Trading Commission (CFTC) all adopting separate approaches.

Future regulation is likely to be streamlined, as the Justice Department announced that it is collaborating with the SEC and CFTC to ensure effectual consumer protection and increased simplification from future regulatory efforts.

The topic of regulation still brings fear among many in the crypto space. Many are worried that constrictive legislation may prohibit the innovation which has powered Bitcoin’s growth thus far. Despite these somewhat rational fears, it is important for the crypto community to maintain a positive attitude towards comprehensive regulation as it will encourage investment from larger financial institutions, vastly expanding the global user base.

Security & Crime

An estimated $1.2 billion in cryptocurrency was stolen from exchanges between January 2017 and May 2018. Of this number, only twenty per cent has ever been recovered. More recently, crypto exchanges Coinrail and Zaif were successfully attacked, losing tokens amounting to $40 million and $60 million respectively.

While the difficulties experienced by law enforcement with recovery might be telling of the newness of the crime, the consistency with which exchanges are successfully attacked on a large scale highlights a systemic issue; a lackadaisical attitude towards security.

The recent Zaif hack was attributed to using a hot wallet (a cryptocurrency wallet which is connected to the internet) which leaves a user greatly exposed to an attack when compared to a cold wallet (where the wallet is stored in a platform not connected to the internet). This is as the funds stored in a hot wallet are commonly secured with a single private key, which if stolen will allow for a user’s account to be drained completely.

Shockingly, this same vulnerability was also exploited in both the Bithumb and Coincheck hacks – indicating that the sector is in dire need of bringing in greater security.

A lax attitude comprises a major threat to the future of cryptocurrencies, as regular hacks will continue to weaken trust in the sector overall. If providers want to establish trust within their user base, they need to ensure they are investing significant capital into protecting against these hacks. It is also essential that proper security standards and processes are established, as this will reduce the likelihood of future hacks.

Uptake

The global cryptocurrency user base has enjoyed steady growth in recent times. We are even beginning to see increased institutional involvement – with the trading volume from institutional clients exceeding that of retail traders for the first time on Coinbase earlier this year.

However, the process of acquiring crypto remains difficult and as such uptake has been limited to a very tech savvy subset of the population; a statement reflected by statistics showing that around a thousand users own approximately 40 per cent of all Bitcoins currently in circulation.

Further, the usage value of cryptocurrencies remains low, with their being few businesses willing to accept it as a form of payment. For crypto’s to see ‘true’ mainstream adoption, it is vital that they become simpler to acquire. This, along with an increased acceptance as a form of payment, will see interest skyrocket.

Few could have foreseen the exponential growth of cryptocurrencies over the last few years; which in turn makes it incredibly difficult to predict where the sector will go from this point. Undoubtedly, it is evident that the development of cryptos has taken the sector to an incredibly exciting place. However, whether the engineers and developers associated with the sector can deal with the above issues will determine whether their revolutionary potential continues to be realised.

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