3 Key Challenges of the Crypto industry in 2021
Do you see these 3 core inherent challenges of the crypto industry that’s preventing mass adoption?
1. Security Breaches — if logging in is so easy
Password fatigue has been an issue for years, but in the crypto world, the problem is compounded by complex private keys, seed phrases, and non-custodial wallets that put 100% of the responsibility for remembering those phrases on the user. While this takes control from banks and puts it in the hands of users, the downside is the loss of funds.
It is estimated that approximately 20% of Bitcoin, or approximately $140 billion, is inaccessible due to the loss of cryptographic keys by users.
Privacy and control are some of the main advantages of using cryptocurrency, so people don’t want to use centralized exchanges or custodial wallets. But even non-custodial wallets are susceptible to attacks such as reverse proxy phishing, crypto-jacking, dusting, and clipping. As cryptocurrency gains momentum, the need for user-friendly and highly secure authentication methods is growing. Blockchain wallets are poorly protected. Metamask, the most common Ethereum wallet in DeFi, uses a simple password login and is vulnerable to a variety of attacks.
Cybercrime accounted for more than $3 billion in losses in the crypto market, with the most lucrative target being cryptocurrency wallets, with an average of $112 million per wallet hacking event compared to about $10 million per attack on Ethereum apps or exchanges. With the amount of money at stake growing rapidly, making wallets safe is a huge priority for the industry.
Passwords have long been a security risk and inconvenience. For increased security and better user experience, the industry is moving to biometrically-powered authentication. Gartner predicts that by 2022, 60% of large and global enterprises and 90% of midsize enterprises will implement biometrically-powered methods in more than 50% of use cases.
2. Over-collateralisation
DeFi lending has been one of the exciting applications of blockchain technology. The ability to take out middlemen such as bankers has provided opportunities for borrowers and lenders alike. However, using cryptocurrency to collateralize these loans exposes the lenders to the risk associated with cryptocurrency volatility. As a result, lenders require additional collateralization. For example, MakerDAO requires 150% collateralization and Compound also requires extra collateralization. In many platforms, if the collateral loses value too quickly, the loan can automatically be called by the smart contract.
Overcollateralization creates inefficiency, with cryptocurrency being tied up in these loans when it could be invested elsewhere. One of the potential solutions would be to create some kind of credit score for the participants in DeFi vehicles. However, investors who prefer anonymity or use pseudonymous cryptographic addresses simply have no way to build up a credit score or reputation as reliable traders. Traditional credit ratings don’t have direct applications in the crypto and blockchain world, and there are yet to be any established standards or best practices for crypto assets.
3. Regulations
In an attempt to limit the pervasiveness of cryptocurrency use to launder money, the Financial Action Task Force (FATF) extended its definition of the Travel Rule to cover Virtual Asset Service Providers (VASPs), which include cryptocurrency exchanges and other financial crypto asset service providers.
The Travel Rule is a product of FinCEN, the U.S. regulatory agency responsible for enforcing the Bank Secrecy Act. It was created in 1995 and requires that financial institutions transmit certain information on certain funds transfers and transmittals to other institutions. In 2019, FATF, a global money laundering and terrorist financing watchdog, extended the mandate to cover cryptocurrency transactions — the implications of which have yet to be fully understood. It is possible that platforms that were thought to be previously exempt are now being recognized as potential violators of this rule, including decentralized exchanges (DEXs) and DeFi projects.
Because of the way such protocols and programs interact with individuals, they are unable to record the information necessary to fulfill the requirements of the Travel Rule. Without substantial changes to the way they do business, they may find themselves operating in violation of international laws. Thus, a wallet solution that can help solve this issue could have added significant value and pave the way for decentralized financial service providers to continue to operate in compliance with international money laundering laws.
References:
- 20% of All Bitcoin Is Lost, Unrecoverable, Study Shows, Nathan Reiff, Investopedia, June 2019. Cryptocurrency
- Attacks to Be Aware of in 2021, Photon Research Team, digital shadows.
- 6 Ways a Site Can Attack Your Metamask, Shannon Wu, Bloom, February 2018.
- Cryptocurrency Hackers Steal $3.8 Billion in 2020, Will Neal, Organized Crime and Corruption Reporting Project, January 2021.
- Embrace a Passwordless Approach to Improve Security, Gloria Omale, Gartner Group, January 2019.
