In our last article we talked about the pros of using Cryptocurrency in today’s ever changing world. But what about the downside of using Cryptocurrency? Read below to find out the pitfalls of Cryptocurrency.
Business Risk
Loss of confidence in digital currencies: the nascent nature of the currencies is subject to a high degree of uncertainty. Online platforms have generated a large trading activity by speculators seeking to profit from the short-term or long-term holding of digital currencies. Cryptocurrencies are not backed by a central bank, a national or international organization, or assets or other credit, and their value is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value.
Cyber/Fraud Risk
Since Cryptocurrency is essentially a cash currency it has attracted a large set of the criminal community; these criminals can break into crypto exchanges, drain crypto wallets and infect individual computers with malware that steals cryptocurrency. As transactions are conducted on the internet, the hackers target the people, the service handling and storage areas, through means such as spoofing/phishing and malware. Investors must rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect purchased cryptocurrencies from theft.
Moreover, cryptocurrency is highly reliant upon unregulated companies, including some that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions. Furthermore, the software needs to be regularly updated and maybe suspect at times.
Sourcing the blockchain technology to vendors may result in significant third-party risk exposure.There is very little in the way of recovery, If the keys are stolen to a user’s wallet, the thief can fully impersonate the original owner of the account and has the same access to the monies in the wallet that the original owner has. Once the Bitcoins are transferred out of the account and that transaction has been committed to the block chain, those monies are lost forever to the original owner.
Operational Risk
With a centralized clearinghouse guaranteeing the validity of a transaction comes the ability to reverse a monetary transaction in a coordinated way; no such ability is possible with a cryptocurrency. This lack of permeance is further demonstrated as Bitcoin accounts are cryptographically secured, access to monies contained in an account almost certainly cannot be restored if the “keys” to an account are lost or stolen, and subsequently deleted from the owner.
Regulatory/Compliance Risk
Some countries may prevent the use of the currency or may state that transactions break anti money laundering regulations, notwithstanding the global implications. Due to the complexity and decentralized nature of the Bitcoin and the significant number of participants — senders, receivers (possibly launderers), processors (mining and trading platforms), currency exchanges, a single AML approach does not exist.
