Of the many noteworthy developments in the growing Bitcoin-inspired ecosystem in 2021, I have selected four that take top spots for their significance. The China ban, adoption of Bitcoin by El Salvador as legal tender, NFTs, and the persistent threat of cyber criminals rank at the top of my list of takeaways for 2021.
Gaining unauthorized access to financial accounts and withdrawing funds is an insidious attack that plays out repeatedly on deposit accounts at financial institutions, but what happens when the account is stored in the account-holder’s brain and the funds on the blockchain? Enter the world of Bitcoin brain wallets. Successful account takeovers are commonly link to social engineering, identity theft, the use of malicious code, and breach of familial trust. However, regardless of the method employed, in each case a digital credential-holding platform is exploited. Bitcoin enables users to create a variety of wallets for storing credentials that secure digital currency in a blockchain. The most secure wallets are not connected to the internet where they are vulnerable to attack. Bitcoin wallets store credentials, not bitcoin, and the host comes in several forms: (1) cloud wallets, (2) mobile wallets, (3) USB cold storage wallets, (4) paper wallets, and (5) brain wallets. All of these wallets use random data to create unique private encryption keys that are required to access funds stored in the blockchain. For example, a private encryption key that is impractical to recreate by brute force attack can easily be generated by applying a strong encryption algorithm to twelve randomly selected dictionary words. Perhaps the least known Bitcoin wallet is the brain wallet. With the brain as its host, the brain wallet enables the Bitcoin user to exercise global mobility without concern of losing their encryption key through the loss, destruction or confiscation of a computing device or a piece of paper. The brain wallet also protects against loss arising from fraud committed by unscrupulous exchange operators who provide wallet custody services on their cloud platforms. At this point, you are likely wondering how brain wallets are created, so we will take a look at this next. Whereas wallet
Bitcoin reveals everything. When one party hands a $5 bill to another, the fungible quality of the note creates a firewall separating the transaction from the personal finances of the transacting parties. Transferring $5 in bitcoin, on the other hand, unlocks the vault doors of both parties – allowing each to peer deep into the personal financial history of the other. Imagine sharing a restaurant bill with a friend; she pays the total amount on her credit card, and you hand her $25 in cash for your share of the lunch bill. The transaction to split the bill raises no privacy concerns because the cash transferred from one friend to the other reveals nothing about the transacting parties private finances. Cash is fungible; there are no distinguishing characteristics about a $20 bill held by a person that links the note to the person or their financial history. The bill is an independent instrument that is interchangeable with any other $20 note. There is no such thing as a Jane Doe $20 bill or a John Doe $5 bill. However, when bitcoin is transferred from one party to another, not only does the sender expose her entire financial history to the recipient – the recipient also does the same. Bitcoin is not fungible; every bitcoin or fraction thereof that is transacted, is permanently linked to the bitcoin addresses that it interacts with – from the moment that the bitcoin was mined into existence. Bitcoin’s architecture is based on a transparent public ledger by design. This approach works well for applications where it is desirable to maintain a transparent accounting of transactions that can be accessed by any person with a computing device. However, I am going to go out on a limb and wager that most people would not be in
Stablecoins are on the rise, and they are filling a void for the burgeoning tokenized economy. A void created by unintended consequences of the cryptocurrency success story; they incentivize trading and investing at the expense of use as a medium of exchange. A common conundrum faced by crypto owners who believe that a price surge is around the corner is – do I hold, or do I spend? The crypto movement has created an active community of holders. As the community feverishly works to resolve the scaling problem and bring transaction volume closer to par with Visa, we are still left with tokens that some are reluctant to use as a medium of exchange. While this may be temporary – as decentralized cryptocurrencies evolve, it certainly poses a challenge for projects that rely upon a stable value token to facilitate transactions today. Stablecoins offer a solution that promises to enable some projects in the tokenized economy to gain traction. These centralized solutions, however, are not without quirks that may render them undesirable under certain circumstances. A stablecoin is essentially a token, such as bitcoin, on a blockchain – but one that is pegged to a state-issued currency such as the U.S. Dollar, where one token equals one dollar. This stable value token can be purchased with fiat currency or cryptocurrency. It can be redeemed at any time for the underlying currency on which it is based. You can think of stablecoin as the tokenization of fiat currency, a digital proxy for cash, or a cash-collateralized token. Tokens offer several benefits over the underlying currency. To name a few: as a proxy for fiat currency – they can be as reliable as the dollar, they are not vulnerable to counterfeit like paper money, they can be used in smart contracts to transfer value without
Sextortion, ransomware, money laundering, tax evasion, terrorism, fraud; just a few crimes getting a boost from cryptocurrency. Is your organization affected? Are you ready to fight blockchain crime? Yesterday’s toolkit is not going to cut it in the cryptoverse; it’s time to consider what your needs are and tool up. According to the Association of Certified Fraud Examiners 2018 Report To The Nations, fraud can take 5 to 24 months to be detected. When we factor in vectors that are not being monitored – such as blockchain – the exposure can persist for much longer periods. It may take a while before some organizations realize that they have been affected by blockchain crime. When criminals commit offences related to blockchains, they appropriate tokens of value stored in the blockchain by stealth, by force, or in collusion – to their benefit, and to the detriment of their victims. In my previous post “Following The Money In The Age Of Blockchain“, I explained how – through blockchain forks – a victim could remain oblivious to being victimized through sheer ignorance. Other transactions involve the movement of value tokens from one party to another to facilitate illicit transactions. The emerging threat of blockchain crime warrants attention. Perceived anonymity has emboldened criminals to demand money in bitcoin to unlock computer files, or destroy purported webcam videos of victims in compromising states (fabricated threats given an air of legitimacy by providing the victim with a compromised password used by the victim and sold on the dark web). These are the obvious attacks, and they should be reported to law enforcement. The reports should include the bitcoin address to which the criminal requested to have funds sent. Even if your local law enforcement is not equipped today to do anything with these addresses, it is worth
Yesterday, the suggestion that it might be possible to slash the cost of home ownership by 90%, while creating trillions of dollars in global wealth-building opportunities, and inviting millions of unbanked in developing nations to participate – might have been received as a lofty altruistic figment with no chance of materializing. But that was yesterday. Peer through the lens of tomorrow, and observe how tokenization stands to drastically alter the landscape, and pave roads to new possibilities. Tokenization is the process of assigning a digital proxy for real-world assets. For example, 700 Million digital tokens can be generated to represent fractional ownership of the $700 Million Mona Lisa painting. At $1 per token, just about anyone would be able to invest in a fraction of the Mona Lisa smile. I believe that this burgeoning innovation has enormous potential. Let us consider its application on real estate, in a thought experiment using the city of Toronto. Jack owned a two bedroom bungalow in Toronto which was last appraised at $1 Million. The land – at $900,000 – was substantially more valuable than the $100,000 dwelling building. Jack decided to tokenize his property, which had an outstanding loan of $400,000. In this thought experiment, we make the assumptions that land and building ownership can be separated, and that legal and regulatory frameworks exists for the tokenization of real estate. Jack engaged a security token and custody service to convert the title of his land (excluding the building) into 900,000 digital security tokens – all of which were assigned to Jack. The 900,000 security tokens, which represented 100% of the land, were initially valued at $900,000 or $1 per token. These tokens were stored securely with the custodial service. To unlock the value in his land, Jack logged into his account with the custodial service –
“If you control the keys, it’s your bitcoin. If you don’t control the keys it’s not your bitcoin. Your keys – your bitcoin. Not your keys – not your bitcoin.” Tech entrepreneur and Bitcoin advocate Andreas Antonopoulos uttered these words to impress upon bitcoin users the serious consequences of a poor encryption key management plan. There are a growing number of services within the Bitcoin ecospace which offer – by default – online wallets that allow users to conveniently store their bitcoins and access the funds from anywhere at any time. Millions of individual investors around the globe store bitcoin online, in wallets provided by their cryptocurrency exchange, for example. Institutional investors are being wooed with offerings of custodial services that promise to ease the burden of holding bitcoin, and making it more attractive to use the cryptocurrency. Some crypto users may find the price of these conveniences to be more than they are willing to pay – given that the tradeoff is complete surrender of the encryption keys that control the bitcoin. On the Bitcoin network, ownership of bitcoin is conferred to the person who controls the key. Who owns your bitcoin? Since a significant amount of control is relinquished to the custodian of your key, any decision to hand over such control should be given consideration that reflects the gravity of the arrangement. While Bitcoin provides the ability for owners of the cryptocurrency to maintain complete control over their digital currency, there are times when handing the keys over to a trusted third party may be practical. An institutional investor may feel that they do not have the expertise or infrastructure for managing large amounts of bitcoin. An individual investor, may feel that the amount of their investment is negligible – or that they need to secure their bitcoin
Bitcoin is up over 60% on the year, and positive signals continue to pour in. This big experiment appears to be moving in one direction, and one direction only; mainstream adoption – but it will not happen overnight. Here are some developments that speak to the advance of Bitcoin. But first, please excuse me while I escort a big elephant out of the room, as its presence has a way of obfuscating real progress. The price of bitcoin has tumbled from its $20,000 high, to the $5,700 level recently. How can we possibly celebrate this as a success? Simple – we step back and see it for what it was, an expected bubble fueled by exuberant speculation that was bound to burst. The price of bitcoin was due to decouple from fantasy, and the bubble may still be deflating. Let’s not forget that Bitcoin is an experiment. What we are witnessing is market forces gradually anchoring the price of bitcoin to fundamental indicators of perceived value. Bitcoin simply will not die, because – if necessary – support will swing in and pull it from the brink to ensure that it remains viable to deliver on its unique utility value. Bitcoin is worth saving because the opportunity cost is too high. Marginal Cost Support One such indicator is the cost at which infrastructure supporters (miners) will consider the rewards of mining bitcoin too low to continue their investments in support of the network. Most recently, Coinshare published a whitepaper investigating the marginal cost of creating bitcoin, and concluded that as of May 2018, the cost was $6,400. At the time of this writing, Coinmarketcap was listing bitcoin at $6,521. As new more efficient mining equipment and renewable energy continue to drive the marginal cost even lower, and some miners opt to take
Loss of investment and reputational harm are high costs at stake when investments flow without due diligence into publicly traded cryptocurrency entities. The ecosystem has incubated a rash of innovative ideas, many of which have evolved into substantial revenue streams for their operators. However, the global impetus by governments and regulators to reign in harmful practices should draw our attention to the means by which some of those gains were procured; the industry has its fair share of unscrupulous actors – some amassing incredible wealth through unfair practices, deceit, or outright fraud. As massive amounts of funds migrate from crypto startups to the public sector for loftier projects, investors should be asking themselves – who am I investing my money with, and what are the implications of handing this custodian the key to more data, control, and power? All rising stars in the crypto industry are not worthy of the awesome social responsibility bestowed upon the world’s most respected enterprises. Even those that may be, should be subject to critical review. Money generated from private cryptocurrency operations is flowing into publicly traded companies through a variety of means: reverse IPOs, IPOs, and investments in or partnerships with publicly listed companies. It does not take much searching to find connections between publicly traded entities, and highly questionable private crypto operators. This commentary is a call for all potential investors to scrutinize crypto operators who move their operations into the public realm – whether directly or indirectly – and to demand high ethical standards. CoinDesk has reported that Bitmain – a dominant manufacturer of bitcoin mining hardware, and leading cryptocurrency miner – has filed for an initial public offering (IPO). At an estimated $18 Billion, the IPO would eclipse that of Facebook, and without doubt attract speculators chasing riches in the next