Regulators Are Making Crypto Investing Safer (But Not Foolproof)
By Jay Blaskey, BitIRA
For all the buzz that cryptocurrency has brought to the investing world in the past few years, one of the industry’s weakest points keeps making news: security problems. Headlines such as these are not uncommon:
“Cryptocurrency Exchange Hacking Jumps 250% YTD, Says Report”;
“Cryptocurrency Industry Security Issues Allow Criminals to Thrive”;
“54% of Cryptocurrency Exchanges Have Security Issues Exploitable by Hackers”.
All of those headlines appeared within just four days of each other in October 2018; a telling sign of just how rampant this issue still is. Given this, as the crypto world evolves to deal with these digital threats, investors must learn about how crypto security works in order to protect their own assets from being stolen.
Threats in Perspective
For all the fear that naysayers have cast over the crypto industry during its first decade of existence, no threat has ever been more real than the deceit perpetrated by fraudulent Initial Coin Offerings (ICOs). A June 2018 report by Satis Group revealed that a staggering 78% of ICOs proposed in 2017 were scams. This scale of fraud doesn’t just burn investors; it threatens to stagnate the entire industry.
The SEC has gone so far as to release its own fake ICO, HoweyCoin, to try and educate individuals on the warning signs of fraudulent ICOs. The website that the agency created in support of the ICO promises lavish rewards for investing, but those who try to make an investment are redirected to the SEC’s education tools. While many in the crypto industry feared intervention by government entities like the SEC and IRS, their regulatory presence is a necessary one to make the cryptocurrency environment stable and trustworthy.
Aside from ICOs, hacking continues to exist as a primary threat to investors. Unfortunately, this problem is not easily solved, as even the most confident claims about digital security can run aground when faced with the reality of resourceful hacking operations. In late July 2018, the CEO of Bitfi, in partnership with John McAfee, announced the “world’s first unhackable device” and told security experts a bounty of $100,000 awaited anyone who could break the code. That “unhackable” status lasted all of 19 days before a team of researchers did just that.
Even as some of the issues with fraudulent ICO investments and hacking remain, the prospects for the overall industry seem bright, especially for the underlying technology of blockchain. According to audit firm KPMG, there was more money invested in blockchain in the US in the first half of 2018 than there had been for all of 2017. And in many respects, cryptocurrency is proving many early misconceptions wrong. For instance, it’s very hard to make the case, as one heard in the past, that Bitcoin is primarily used for criminal transactions. In fact, a representative from the Drug Enforcement Administration in the US recently stated that the share of cryptocurrency transactions that are used for criminal purposes has fallen by 80% since 2013.
The drop in cryptocurrency crime overall has been the result of increased scrutiny and prosecutions by regulatory authorities. In the US, the directives have even come from the highest levels of government. On July 11, 2018, the President signed an executive order to create a task force focused on “digital currency fraud” to “provide guidance for the investigation and prosecution of cases involving fraud.”
This issue is now being increasingly addressed on an international level as well, since many crypto hacks occur across national borders. G20 countries met in March to discuss the regulation of cryptocurrency, with talks intensifying over the summer concerning ways to make crypto and blockchain less risky and more easily adopted by enterprise-grade entities.
At a more local level, blockchain is actually making things easier on law enforcement agents when it comes to monitoring criminal activity. Instead of spending time and resources following a complicated money trail across multiple banks, they can simply trace crypto transactions to find the source. With blockchain’s calling card of being tamper-proof, criminals have a much harder time covering their tracks.
What Investors Should Know
Regulators on all levels are reaching out to the public with the intent of educating them on some inherent security risks associated with cryptocurrency. In addition to resources provided by the SEC and IRS, the Commodity Futures Trading Commission (CFTC) has released an extensive set of warnings to consumers on how to use caution and research before investing in any sort of cryptocurrencies, including those hailing themselves as consumption coins or utility coins.
The main theme of this most recent CFTC warning is for potential crypto investors to avoid too-good-to-be-true situations and find out as much about a company as possible before investing a penny. The logic follows that the less information there is about a company, the higher the risk when investing. Similarly, the CFTC alert red-flags any sort of utility coins that make future promises of platform access or the ability to purchase exclusive goods or services.
As crypto grows in popularity, more and more resources become available to inform investors on how crypto theft occurs, how to sniff out fraudulent offers, and how crypto theft can be prevented on the individual level. An example of this is from cybersecurity pioneer, Kaspersky Labs, which has studied cryptocurrency-related crime in an effort to understand the identities, motivations, and tactics used by criminals.
With cryptocurrency still very much an evolving industry, it may be years before regulators, traditionally used to overseeing stocks and bonds, fine-tune their policies regarding digital currencies. However, that should not keep investors from taking proper precautions and performing their due diligence today in order to make the most of emerging opportunities.
Jay Blaskey is a digital currency specialist at BitIRA, a market leader in providing cryptocurrency options for retirement accounts. Born in England, Jay received his undergraduate degree in Computer Science from the University of Liverpool, graduating magna cum laude. After working for IBM in the United Kingdom as a technology consultant, he moved to California in order to earn his MBA at UCLA. Over the past decade, he has worked in alternative investments for retirement accounts and today he leads the team at BitIRA.