Blockchain is reinventing financial services, with digital assets and “programmable money” innovations that offer real utility and new approaches for reducing systemic risks. But customers have lost billions of dollars due to cyber hacking, scams and unregulated products – and if we can’t trust it, we won’t scale it. It’s time to hard-wire security into this emerging system.
As Congress explores legislation to pave the way for stablecoins and cryptocurrencies, we have an opportunity to design a future that lets us reap the benefits of blockchain while minimizing the risks. The transparency, security and verified identity enabled by blockchain offers a more effective model for protection against bad actors than centralized legacy anti-money laundering (AML) and “know your customer” (KYC) compliance approaches employed by banks and regulators. That said, we will only build trust if we remove pain points and obstacles to making digital assets more secure, scalable, and useful.
The crypto market today is an archipelago of blockchains, coins and tokens traversed by a flotilla of centralized exchanges, digital wallets and bridges between different blockchains. And it’s easy to get lost at sea, because let’s face it, user experience is subpar, and the industry has been stymied by security lapses and weak customer protections.
Even the most popular cryptocurrencies are hampered by silos that hackers exploit to steal customer assets. Bitcoin and Ethereum, for example, don’t really talk to each other: Ethereum’s innovation of smart contracts is not compatible with Bitcoin’s system, and the most prevalent solutions for bringing them together are clunky and risky. Cross-chain bridges for moving coins and tokens around are the Achilles heel of blockchain, with $2 billion stolen from customers through cyber-attacks this year alone.
The demise of crypto lender Celsius, TerraLuna’s algorithmic “stablecoin” and other multi-billion dollar failures, is the beginning of the end of poorly managed, unregulated crypto platforms. The lack of transparency around Tether’s reserves and questions about the ability of its USDT stablecoin to maintain a fixed dollar value at all times represents a stark example of the need for consumer protection. Imagine a money market mutual fund with no regulatory constraints on what assets it invests in to maintain its value. Its volatility would be dramatic, and that’s what we’ve seen with unregulated stablecoins.
Compliance isn’t the only obstacle for blockchains to gain acceptance. Some have exorbitant “gas fees” for using their networks and also produce major carbon footprints. This is why Ethereum engineered a long and difficult “Merge” to build a future of money that is more environmentally sustainable.
To create a safe space for digital assets, one that is trusted by banks, businesses, consumers and regulators, we will need more than legislation with clear rules and guardrails. Here are three technologies we can use to strengthen the system now or in the near future:
A trusted checkmark that verifies you are who you say you are. Innovations in decentralized identity pave the way for engaging with crypto and regulated financial activities without having to share personal data with the entire world. A checkmark that verifies your identity is a simple, effective solution for regulatory compliance that could also help expand access to economic opportunities for millions of people lacking other forms of ID (a problem both in the U.S. and around the world).
Un-hackable bridges to protect consumers and the environment. The ability of criminals to steal assets and of foreign governments to create havoc should be cause for concern. Un-hackable bridges using new modes of IntraBlockchain communication enable popular cryptocurrencies to talk to each other securely. They could also serve to migrate Bitcoin, Dogecoin and other energy-intensive cryptocurrencies onto environmentally friendly blockchains much faster and more efficiently than the Ethereum “Merge.”
An end to unwieldy passwords and fears of losing your crypto. Customers have lost billions of dollars’ worth of crypto assets because they lost the keys to their accounts. Signing up for a fintech platform should be as simple as FaceID. Biometric recovery will also eliminate the fear of losing your crypto, and increase institutional and public trust in consumer protections for holders of cryptocurrencies.
Creating a better and safer system is paramount as banks, payment platforms and digital assets become intertwined and crypto and Web3 meet regulated financial institutions. The solutions are at hand to build a financial system everyone can depend on – and a future of crypto that is secure and compliant.
Marshall Hayner is co-founder of Metallicus, a San Francisco-based digital assets and blockchain technology firm @WeAreMetallicus.
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