As the digital attack on the Coincheck exchange attracts headlines, it points to a PR and trust battle that cryptocurrency continues to face…
In what’s already been a volatile start to the year in cryptocurrency news – with many mainstream outlets in particular noting the boom in the value of Bitcoin and its subsequent fall – the one that spiked earlier this week centred around a big digital currency theft.
BBC News was one of many outlets who led with the story. It centred on Coincheck, a Japanese digital currency exchange, that was targeted by hackers. Successfully, too, as hackers got away with a reported £380m in digital assets (NEM coins, in this instance). The full story can be found here.
Not unreasonably, the story has been reported with an emphasis on the more salacious edges of it. “If the theft is confirmed”, the BBC for one writes, “it will be the largest involving digital currency”. CNN, meanwhile, led with the headline ‘$530 million cryptocurrency heist may be biggest ever’.
But that’s not quite the full picture, and it homes in on an issue that’s building around cryptocurrencies in general. That the message as to what currencies are, and crucially the difference between exchanges and the currencies themselves, isn’t filtering well enough through into the mainstream. For cryptocurrencies to continue to grow, and become a viable alternative to traditional currency, there’s a perception problem that needs to be addressed. Traditional banks are targeted by hackers daily, and yet consumers on the whole still trust them. With cryptocurrencies, the mainstream fear of the unknown is shining a less favourable light on any potential threats.
Take the incident in question. Coincheck, crucially, isn’t digital currency. It’s a digital currency exchange. It’s one of a plethora of exchanges that allow for the faster trading of digital currency. Furthermore, for investors looking to quickly convert digital currency to cash – or vice versa – they’re increasingly prominent in the cryptocurrency world. They also handle the trading of one cryptocurrency for another. Thus, whilst the currencies themselves are secure, the exchanges have become an obvious target.
As a consequence, they also tend to be at the heart of most of the negative questions and bad news stories surrounding cryptocurrency, just as they’re at heart of many of the debates within the industry itself.
For an end user who simply wants to accrue Bitcoin for instance, and is happy to keep the currency in that form and spend it accordingly, an exchange isn’t necessary. But with over 1300 active cryptocurrencies – and therein lies one of the problems the industry faces – an exchange is an increasing necessity. And inevitably, as with banks, some are more reputable and trustworthy than others.
Go back to that BBC story. In credit to the corporation, it ran a follow up the day after, reporting the news that Coincheck had promised to delve into its own funds to cover the vast bulk of losses suffered by its customers (over a quarter of a million were affected in all). Furthermore, Coincheck has a digital trace of where the stolen money went. There are ramifications and security checks built in, too.
Also, Japanese authorities have been quick to act on the Coincheck theft. The country’s Financial Services Authority has demanded an improvement in standards, and pledged to look into all of the country’s cryptocurrency exchanges, in a sign of the growing interest from legislators in bringing formal regulation to the market.
Coincheck clearly isn’t faultless. It’s emerged it kept the currency concerned in a ‘hot wallet’, where it was gettable online, as opposed to an offline ‘cold wallet’ that would have ensured the theft couldn’t happen. It was an avoidable error, and the kind that the aforementioned authorities will be looking for assurances won’t be repeated. For consumer confidence in cryptocurrency, provable assurances would be useful too.
Fair or foul?
Is, then, the news bubble around Coincheck in particular fair, or is there an element of curiosity around the relatively unknown? Probably both, to a degree. Cryptocurrencies remain in relative infancy, and their recent burst of popularity suggests more and more are becoming interesting. What the industry thus begins to face is a PR battle as much as an educational one.
Chris Green is a technology analyst who’s covered cryptocurrency for the past decade, and he sees that a series of key obstacles are ahead.
“The biggest challenge is the lack of regulation and the seeming lack of international alignment over what regulation should look like”, he told us.
“There’s a fine line to walk. Between regulation that reinforces trust and elevates cryptocurrencies to the next level of safe, secure and investable assets, and regulation that fails to understand the point and nuance of the market, ultimately throttling crypto in its infancy. From there it’s a battle for hearts and minds – reassuring institutional investors and individuals alike that crypto is as safe protected as a fiat currency held in a licenced bank. The underlying technology provides unparalleled levels of audit trailing when currency is moved or taken without consent. Convincing the mass market of this will be a substantial hurdle.”
A pressing hurdle, too, given the reaction to the Coincheck story. Investors needs the confidence to support crypto, whilst end users arguably need more education as to what it actually is, and, crucially, isn’t. The Coincheck story will inevitably start to fizzle out. But those challenges will very much remain.