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Cryptocurrencies Can’t Clown Around on Security

Cryptocurrencies Can’t Clown Around on Security

Cryptocurrencies inspire a lot of jokes these days, and it doesn’t help when Dennis Rodman shows up to the North Korean summit in a “Potcoin” t-shirt. But it’s fair to say that a class of serious investors aren’t kidding around about cryptocurrencies. In January, the total market capitalization of all cryptocurrencies reached roughly $800 billion, according to Coinmarketcap.com.

Cryptocurrencies apparently aren’t a laughing matter to the regulatory authorities in Washington, either. The U.S. Securities and Exchange Commission (SEC) announced on June 4 that Valerie A. Szczepanik, a 20-year veteran of Wall Street’s watchdog, had been appointed to a newly created senior advisory position focused on “emerging digital asset technologies and innovations, including Initial Coin Offerings and cryptocurrencies.” They’re calling her the “Crypto Czar”. (We actually prefer Crypto Szczar, but okay.)

The comments of SEC chief Jay Clayton in announcing Szczepanik’s hire indicate the feds are still trying to come to grips with the implications of cryptocurrencies for the global marketplace. “With her demonstrated skill, experience, and keen awareness of the importance of fostering innovation while ensuring investor protection, [Szczepanik] is the right person to coordinate our efforts in this dynamic area that has both promise and risk,” Clayton said.

Lately, the emphasis has been on the risk. South Korea’s Coinrail revealed this month that hackers stole an estimated $40 million of the exchange’s digital currency. Earlier in 2018, hackers boosted roughly $500 million from Coincheck Inc., a Japanese exchange. Crypto Aware estimates that a total of about $2.3 billion has been lost to cryptocurrency hacks and scams since 2011.

As Bloomberg’s Tim Culpan points out, the hacks reflect a classic moral-hazard situation. Banks and credit card companies vigilantly protect their customers’ funds against theft, because they have agreed to make customers whole for that kind of loss. Cryptocurrencies and cyptocurrency exchanges, by contrast, make no such promises. Consumers, blinded by the prospect of outsized returns, pile into cryptocurrencies despite the fact that losses from heists will come directly out of their pockets. With consumers bearing the brunt of those expenses, there’s little reason for the industry to invest in improving security.

To be fair, the recent hacks have impacted the crypto market as a whole. In the immediate aftermath of Coinrail’s announcement on June 10, the market value of cryptocurrencies fell more than $40 billion. The short-term selloff exacerbated a tailspin that saw cryptocurrencies’ total market cap slashed to about $300 billion, according to Coinmarketcap.com. Such a response indicates that the market may eventually reward crypto exchanges that provide enhanced security, which could motivate others to fall in line. For now though, the best hope for improved security in cryptocurrencies may be the “Crypto Czar”.

Szczepanik will assuredly be considering appropriate security standards for cryptocurrencies and how her agency might implement them in the near future. Because if the crypto industry wants to remain viable in the long run, investors and users will need to be convinced that its security isn’t a joke.

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