In our previous article, “What is Cryptocurrency and How Does It Work?”, we reviewed the basics of cryptocurrency and its history. Here we will discuss the potential challenges of cryptocurrency and the steps retailers can take to reduce the risks for themselves and their customers.
What Are the Potential Challenges?
As of 2019, the total dollar-denominated value of Bitcoin, the largest cryptocurrency in circulation, is $64.3 billion, with the total market value of all traded cryptocurrencies reaching nearly $134 billion.
Approximately $1.1 billion in cryptocurrency was stolen in the first half of 2018, about a year after Bitcoin’s value started to peak. Last year, a group of hackers stole $530 million from Coincheck, a centralized cryptocurrency exchange in Tokyo, which shows what threats cryptocurrency faces and just how custody solutions need to evolve.
Because it is a peer-to-peer, decentralized alternative currency, cryptocurrency does not have systemic safeguards like those built into traditional, or fiat, currency financial systems. There are no guarantees of security or government regulations to protect the financial system from fraud or theft. So if coin is lost or stolen then it may not be recoverable.
The fundamental risk in cryptocurrency is that a huge amount of digital money can be stored in virtual reality (online) or on devices (offline), which means that anyone who has access to the storage can easily move any amount of money.
Online storage is referred to a hot wallet or hot storage while a cold wallet or cold storage is not connected to the internet. Access to a hot wallet is controlled with an encrypted private key, which means that the inherent risk of hot storage is that if the private key is stolen, then someone else can access the money. Online threats include hacking, phishing attacks, social engineering, and insider fraud. The Tokyo-based cryptocurrency exchange mentioned earlier had stored coin in a hot wallet, which was one of the vulnerabilities that allowed the hackers to access the currency.
Cold storage means that both the currency stored offline and the private key are vulnerable, although someone still could not access the coin without also having the private key. The threats against cold storage are more familiar to those in the cash security industry: forcible robbery, break and enter, loss of physical possession, and adequate controls.
Another less direct risk is cryptojacking, where hackers use another person’s computer (without their knowledge) to mine cryptocurrency coins, which often requires a lot of electricity. The coins are then delivered to the hackers’ accounts with no cost to them. Hackers will target any devices, from personal computers to large data centers and cloud services providers, even internet-enabled devices such as cameras and household appliances.
How Retailers Can Address Potential Challenges
Cryptocurrency exchanges, such as the one mentioned earlier, can reduce these challenges by requiring multiple signatures for the movement of currency, which makes it harder for thieves to steal cryptocurrency with just the private key. However, the widespread adoption of cryptocurrency as an alternative form of currency rests on whether mainstream retailers accept cryptocurrency. Today, only a few major retailers, such as Microsoft, Overstock.com, Reeds Jewelers, and Dish, accept bitcoin as payment. This makes it difficult for the general public to use bitcoin to buy everyday goods and services.
Two of the biggest risks of cryptocurrency are its volatility and liquidity issues. The value of cryptocurrency has dropped as much as 15 percent and gone up as much as over 20 percent, all in two years. In comparison, the S&P 500 and the price of gold has stayed within much smaller margin of change. Because cryptocurrencies are still very new, it will take time for the markets to stabilize and reduce this level of volatility.
Cryptocurrency is also difficult to liquidate, since there are only a few cryptocurrency exchanges and none with a commercial branch that can handle the high volume of transactions from a traditional retailer. Cryptocurrency exchanges often have slow processing times and changing transaction fees, which makes it even less desirable to retailers.
One possible solution is for traditional banks who have commercial branches to establish cryptocurrency exchanges, so retailers have a trustworthy way of managing their cryptocurrency transactions. However, this depends on if yet another industry can change to help cryptocurrency become a mainstream payment method.
A more direct solution would be for retailers to take the matters into their own hands. Individual retailers can get a cryptocurrency receiving address, either by becoming a member of a digital wallet service or by managing their own wallet. The difference is that when you manage your own wallet, you have control of your private keys, which can be more secure. Retailers can then share their QR code, either online or in stores, to inform customers that they accept cryptocurrency.
Although this is not a systemic way of addressing the obstacles for retailers to adopt cryptocurrency, if enough retailers accept and promote cryptocurrency as a viable payment method, eventually financial institutions, such as banks with commercial branches, will see the value in working with cryptocurrency.
Cryptocurrency is a fast-moving market and it seems like change needs to happen quickly for it to matter at all, but it is important to remember that most cryptocurrencies are only a couple of years old, so it will take time for traditional industries like retail to weigh the benefits and challenges of cryptocurrency. In the end, if retailers want to win over the 7.1 million active Bitcoin users, they will have to take steps on their own to accommodate these consumers.
EDITOR’S NOTE: To read the other articles in this series, go to the links below.