Cryptocurrency values have risen and fallen in spectacular fashion over the last year and while financial watchdogs are looking to tighten the regulatory grip on how cryptocurrency trading operates, some traders have already profited from the volatility in the new currencies – and they’re not the only ones. Below Martin Voorzanger, EclecticIQ, explains for Finance Monthly how criminals are making the most of the current crypto sphere.

Another group making profits from the turbulent cryptocurrency market is cybercriminals. In fact, last year there was a marked increase in cryptomalware reports and breaches of crypto exchanges and it’s clear that 2018 will be no different. After all, where there is money, there is crime.

The future ‘bank job’

In some cases, criminals are adapting tried and tested cybercrime techniques – such as hacking email accounts, social engineering and spoofing emails – to prise digital coins out of the hands of those that own them.

For example, in late 2017, criminals pulled off the classic bank heist – with a twist. Making off with approximately 4,700 Bitcoins (valued at the time as $70m) in a raid on digital currency exchange, NiceHash, hackers gained access to the company’s payment services through an employee’s PC. The organisation described the attack as “sophisticated social engineering”.

Hackers found a similar route into Bithumb – South Korea’s biggest cryptocurrency exchange – earlier in 2017. Again, the weak link was an employee – and this time it was their home computer which was compromised. While, in this case, no currency was stolen, a vast amount of personal computer data was. Despite Bithumb suffering no real, initial monetary loss, the theft of sensitive personal data can actually be even more damaging to a business. In this instance, Bithumb stated that no passwords were stolen, but customers reported receiving calls and emails that scammed them out of funds, ultimately resulting in financial loss for Bithumb and potentially an irreversibly damaged reputation.

While, bitcoin and other cryptocurrencies may have been designed with security in mind through the blockchain platform, to keep their crypto assets and data safe, organisations can’t rely on this alone. Yes, blockchain is notoriously difficult to tamper with, however opportunist criminals have found something much easier to compromise – the computers and employees within exchanges.

It is for this reason that organisations must exercise more caution and ensure all security technology and practices are fit for purpose. Good security hygiene should always be front of mind in finance matters – whether it’s around cryptocurrency or not.

A new kind of ‘botnet’

Potentially more worrying than these older, but still successful, cybercrime tactics, is when criminals start to adapt new techniques specifically with the intention of defrauding holders of crypto assets. One of the methods that is becoming popular with criminals in a bid to exploit digital currencies is cryptojacking – where cybercriminals take over employees’ computers to secretly mine cryptocurrency. While the method itself has been around for some time, the surge in the value of cryptocurrencies means mining coins has become an incredibly enticing prospect for criminals. And although each infected device can only mine a small amount of value, criminals are collecting enough machines to create data-mining ‘botnets’ which collectively, can deliver a large profit.

While cryptojacking in itself may not carry the destructive payload of ransomware or other malware, it still represents a device compromise and one which, at best, affects the performance and longevity of devices and, at worst, provides an open doorway for more destructive threats, such as ransomware.

Furthermore, it’s not just the cryptocurrencies themselves that are under threat of attack. Worryingly, earlier this year, security firm Radiflow reported that a European water provider had been compromised. This attack represented the first public discovery of cryptocurrency mining malware in the systems of a critical national infrastructure organisation proving that criminals are no longer just after currency – they want power.

The threat to cryptocurrencies is real and growing - whether the end game of the criminals is financial gain or to disrupt critical infrastructures. Indeed, Microsoft warned earlier this year that it has seen a surge in currency-mining malware infecting Windows PCs in enterprises around the world. The company believes this could be the work of external criminals or, equally, insiders with access to company systems.

Ultimately, while cryptocurrencies themselves are secure, the exchanges and the systems that surround them are not. Humans remain the weakest link – whether intentionally or not – criminals continue to use the same tried and tested vectors of attack and humans are still just as vulnerable to being conned or manipulated by social engineering.

One thing is for certain though – cybercrime activities in this area will not decrease anytime soon. Organisations need to make sure they have the correct security measures in place, including ensuring that employees understand the threats associated with social engineering, to best protect against this new kind of threat.

Almost a decade in the making since the inception of Bitcoin and with a current market-cap hovering around half a trillion dollars USD, Bitcoin, cryptocurrency and blockchain have become common to the tech savvy, but face several challenges in becoming mainstream processes in the payments sphere. Below Alex Mihaljcic, VP of Product Development for Eterbank.com, talks Finance Monthly through the challenges and solutions ahead.

While most people don’t understand how they work, Bitcoin and cryptocurrency are not only hot topic buzzwords, but they’ve created thousands of multi-millionaires. Even so, the vast majority of people in the mainstream have no interest or intent to embrace Bitcoin and, as such, it still has veritably no bearing on everyday life as one still can’t even pay for a cup of coffee with any cryptocurrency.

In the last year alone, the cryptocurrency market cap has grown over ten-fold, and even taking into consideration “bubble-effects” of hype speculation, the fact remains that, since the inception of Bitcoin, the cryptocurrency market cap is following an exponential growth curve. Today this amounts today to over $150Bn, and various expert opinions estimate its future growth in the next 5-10 years to be in the trillions of dollars. With these kinds of numbers, it begs the question: With over $150 billon of cryptocurrency already in circulation, why can’t we yet pay for coffee or a slice pizza with crypto?

Not only this, but why is cryptocurrency languishing in a tech world of its own, far removed from adoption by the regular consumer or average business? And why does it exist only in a digital space, largely accessible only to the tech-wise cryptocurrency investors? Perhaps the most fundamental question that everyone is asking—from economic pundits to families around the kitchen table—is will crypto will ever become common currency to be used by the average person to pay for their groceries, bills or the hair dresser? Or are Bitcoin and Altcoins just a fad, doomed to remain ensconced in a cult-like tech realm?

While it’s clear that the only way for cryptocurrency to avoid falling into oblivion is by enabling its widespread adoption and acceptance as a “real” payment method, the reality is that the infrastructure and protocols have not been in place to foster this. In fact, there have been seemingly insurmountable obstacles faced by merchants across the board preventing them from accepting cryptocurrency as a viable form of payment.

Four of those key reasons include the following:

1. High volatility promotes fiscal vulnerability
Businesses are not cryptocurrency investors and, as such, they cannot be expected to accept risky payments that may lead to serious financial losses. Every business operates with supply costs, margins, etc. Therefore it would make little business sense to take on a risk of such magnitude by accepting crypto as payment for their goods and services.  What if the local mechanic accepted Bitcoin for several large jobs and then Bitcoin value dropped 20%? This leaves these sort of business owners, whom have fixed overhead costs, in a vulnerable space where they take payments that fluctuate.

2. Technical know-how
Generally speaking, retail operators and cashiers cannot be expected to possess the technical expertise needed in order to safely process a cryptocurrency transaction. This is clearly one of the largest problems preventing mainstream adoption, since dealing with cryptocurrency transactions does require a determined level of technical expertise for which it would be absurd to expect a critical mass of front-line service staff to possess. The fact is that any new person coming across even a simple Bitcoin address can be overwhelmed by its perceived complexity.

3. Brand Confusion
The very word “crypto” suggests cryptic. Mix that in with all of the other various terms that are used including virtual currency, digital currency, alt coins, and Bitcoin, and it all creates confusion. It will be paramount for industry insiders to adopt consistent language to be consistently utilized in the mass market.

4. Uncertain regulatory environment
Regulations regarding cryptocurrencies are still not even close to being set in stone. As concerning, these same regulations actually discourage the use of such currencies in a B2C environment, regarding them as an “unnecessary risk” that may lead to legal problems for any business down the road.

Collectively, these four points above paint an ominous picture for the future of cryptocurrency. Not only relating to its progress and adoption, but also for its very survival in a very real scenario where an innovative payment technology fails to fulfil its potential. In fact, this isn’t the first technology to be introduced with the aim of creating a major cultural shift. Twenty-five years ago, fax communication was far more common and even preferred over email messages.

The Innovation Life Cycle Must Ensue
In all forms of innovation, there is always a lag between the advent of the actual innovation and the time that the average intended user starts to adopt and employ the technology. As the “technology adoption life cycle” has well established, in order for people to adopt and use a new innovation, technological abstraction layers are needed to hide all of the complexity of the core product and make it unequivocally user friendly. Of course, this takes time and innovation of its own until all the layers have been developed and refined around the core product, which is the main reason why there is always a lag between innovation and mass adoption.

The Game Changer: Crypto-to-Fiat Point-of Sale Solution
The tremendous amount of complexity associated with using Bitcoin and other cryptocurrencies in the real world financial marketplace, as exemplified by the four problems detailed above, has ushered in a new breed of leading-edge technology aimed at wholly solving the glut of mass market limitations. Emerging Point-of-Sale (POS) applications are finally permitting cryptocurrencies to be transacted as easy as a credit card payment, allowing small and large businesses alike to accept and instantly translate crypto into U.S. dollars, thus eradicating any risk and uncertainty. With this advancement, technical or crypto-specific know-how on the part of the consumer or the merchant is rendered unnecessary and businesses can readily convert crypto to real cash. Not only will this Point-of-Sale development quickly shift brand perceptions, but the regulatory environment will also eventually temper given the reduced volatility this POS technology proffers.

Once this business-friendly solution is adopted as a viable transaction method, enabling consumers to very easily spend their crypto currency and retailers to charge and settle crypto payments in the business’ preferred currency—whether dollars, euros or other, technical proficiency will no longer be barrier and volatility will subside since businesses will continue to deal strictly in Fiat currency (government-issued legal tender), resolving any possible crypto-specific regulatory issues that are rendered a non-concern.

Given its extrapolated impact, a POS innovation of this nature would be poised to unlock the full potential of the cryptocurrency industry and its utility in the real-world. A Crypto-to-Fiat business tailored POS solution will effectively allow for cryptocurrencies to penetrate the consumer market and truly disrupt day-to-day payments as we know them. The first business with a minimum viable product (MVP) will be to cryptocurrency transactions what AOL was to email.

Retailers today are accustomed to using Point-of-Sale terminals for processing credit card payments, and are increasingly adopting new solutions in the space such as Square’s retail POS smartphone app, replacing bulky hardware with Android and iOS devices. In order for merchants to accept and adopt a Crypto-to-Fiat POS solution, it must be tailored in a manner that seamlessly accommodates the retailers current understanding and knowledge base, with a near zero effort or learning curve required to adopt the new solution. At the same time, the innovation must demonstrate its ability to drive new value, new customers and, ultimately, new profits by expanding its ability to process transactions—and at a fraction of standard costs.

Such an end-to-end solution can truly catalyze cryptocurrency adoption, finally bringing Bitcoins and Altcoins to “Main Street” and crossing that crucial milestone for blockchain technology—and technology as a whole—to usher cryptocurrency into the modern world is a genuine, viable and enduring way.

More and more institutional investors are starting to invest in cryptocurrencies. As they do, the issue of crypto custody and how it fits within their existing workflows and regulatory requirements becomes a bigger and bigger issue. While a range of approaches are currently being used, everyone wants a better solution. Below David Wills, Co-Founder and COO of Caspian , reveals more.

Since the beginning of last year, cryptocurrencies have surged in popularity, usability, and, most importantly, value. While crypto markets have historically been dominated by individual investors, institutional investors have only recently joined the fray. However, with two Chicago-based commodity exchanges, Cboe and CME, launching the first regulated Bitcoin futures contracts at the end of last year, this new wave of involvement is growing.

As it does, the issue of crypto custody, which is essentially how an investor’s digital assets are stored and ‘kept safe’, gains more attention. In traditional markets, years of regulation have meant that organisations and mature systems, such as the broker/dealer relationship or future commission merchants, have developed for this purpose. In the world of cryptocurrencies, such institutions are only just being imagined or established and they are doing so against the grey area of crypto regulation.

Which begs the question, what solutions are institutional investors using now and are any of them good enough to survive for the long term?

Crypto custody as it exists today

While specific solutions for institutional investors are appearing with greater frequency by the day, they are normally a combination of established crypto storage practices. After all, much of the risk associated with holding and trading cryptocurrencies come from the fact that they are digital assets, which are as vulnerable as an individual’s personal online security measures.

This means that individual institutions are dealing with the same issues of hot storage on exchanges, which enables speed of trading, and cold storage offline, which means increased security of the digital assets held. One option that combines the benefits of both approaches for institutional investors is vault storage. In this scenario, the risk of hot storage is reduced because an exchange creates a private key offline, making it easy to send purchased cryptocurrency to the public address but much less easy to move it from the account using the private key.

Such solutions are being utilised in order to find the right combination of security and efficiency that institutional investors need. For the most part, they are using a diversified combination of hot and cold storage in combination with multi signature wallets and monitored concentration limits to mitigate risk.

As one can imagine though, this is still not the ideal solution for experienced investors used to a mature toolkit that has been optimised to make regulatory compliant trading as quick and easy as possible within a regulated fiat environment.

Solutions for the future

Innovation and consolidation in the area of crypto custody are occurring in parallel, signalling what the future direction of the solution might look like.

As mentioned, crypto funds are already providing a variety of custody solutions for institutional investors, including insurance, and this consultative approach will continue.

In addition, established crypto players are developing their own custody offers to attract the more security conscious players entering the market, either through internal innovation or acquisition. BitGo’s recent acquisition of digital asset custodian Kingdom Trust, which holds more than $12 billion in assets, is a recent example of the latter and it would not be surprising to see crypto exchanges making similar purchases to boost their offer.

On the technological side, recent innovations like the Glacier Protocol suggest that the development of blockchain-focused solutions will also play their part. Although designed for personal, long-term storage itself, the development of similar protocols to solve the problems of institutional investors would not be a surprise.

FInally, the role of the regulator cannot be ignored here. Institutional investors utilise custody solutions in the traditional fiat world that have been designed around the frameworks laid out by regulators. We already know that the SEC has kicked off a consultation with over 100 crypto funds, during which custodianship will undoubtedly be covered.

While a single solution has not yet revealed itself, as more and more regulated institutions enter the crypto space, more regulatory frameworks will be established, more solutions to fit this need will appear and the picture will become much clearer.

Diversifying any investment assets sounds like a likely success in the long term, but what are the risks when it comes to cryptocurrencies? Levi Meade, Investment Analyst at Columbus Capital, provides some insight for Finance Monthly.

Diversification and its benefits is an area that has been covered many times in prominent financial literature and is something that is both well understood and commonly practiced amongst the traditional investment committee. Therefore I will not seek to reiterate the theoretical advantages of a diversified investment strategy.

However, investing into crypto-assets, as an asset class up till now purely based on speculative value of experimental technology, is a discipline that can prove to be extremely dangerous over the long term without diversification; diversification as a risk reduction strategy is imperative when risk is so high that success of an individual asset is improbable.

Experimental Technology

Crypto-assets are early stage start-ups offering a product completely as open-source software utilising techniques, security models and incentive structures that are largely unproven and at best no more than ten years on the market. This provides two major sources of risk.

Firstly, start-ups mostly fail due to a number of reasons. In general at such an early stage there are an enormous amount of barriers that a founding team need to get past in order to remain in business which are usually disproportionately harder to overcome than problems at later stages of a businesses life cycle. For instance, gaining traction amongst a large enough customer base for survival, in a situation where customers may be reasonably satisfied with existing solutions, can be difficult when human nature tends to be resistant to change. A start-up has to contend with this friction, which is embedded into human behaviour with a significantly superior solution.

Secondly, crypto-assets are pieces of open-source software that harness a variety of concepts from different disciplines which at their intersection requires highly trained experts to build and understand the technology. This creates a much larger probability of there being unknown unknowns regarding the inherent risks of a piece of a technology and on its limitations.

Risk to Reward of a Diversified Crypto Strategy

How does creating a diversified portfolio across the asset class as opposed to a more concentrated portfolio affect the overall risk reward? What is of particular importance is that with such high risk investments come the potential for massively outsized returns. For example, since its inception on the market, Bitcoin has returned over 100,000%. When creating a diversified crypto portfolio, like a venture capitalist, the aim of the game is to increase the likelihood that you are exposed to such outsized gains experienced by the winners. Even in a landscape where the majority of assets experience unfavourable returns over the long term and perhaps go to zero, the outsized gains experienced by a good investment can still lead to above average investment returns.

Also, with regards to the technical risk and the ability for us as investors to assess this technical risk, diversification works as a financial engineering tool to mitigate the affects of unknown unknowns, which may be specific to individual assets. By taking smaller positions in a greater amount of assets you can limit your exposure to such technical risks, which may be difficult to identify or predict.

Why Diversification in Crypto Could Fail

Diversification however does not help to protect against technical risks that affect the entire asset class. Another aspect of investing into experimental technology are the potential risks regarding the foundation of the new technology which could directly affect the entire asset class. One particular risk, which the space is aware of, is the incoming threat of quantum computing. The majority of crypto-assets are secured by some cryptographic problems, which would require an insane amount of computing power to break, which is simply not economically viable given the current technological constraints. However breakthroughs in quantum computing could make it possible to break such cryptographic problems, and in the process rendering Bitcoin and other similar blockchains useless at that point unless they had developed quantum resistance before such an attack occurs. Diversification therefore change the risk profile of the portfolio such that investors are more exposed to broader investment themes or even the some key risks affecting the assets class as a whole in comparison to more asset specific risks.

The Financial Conduct Authority (FCA) cryptocurrency review will be one of the most impactful regulatory reviews in modern times and will shape the burgeoning crypto market for years to come. The UK regulator’s proactive and cautious approach must be welcomed.

This observation from Nigel Green, founder and chief executive of deVere Group, comes as the UK’s financial services and markets regulator has confirmed it will publish its review of cryptocurrencies in the third quarter this year.

Mr Green, whose firm launched deVere Crypto, a cryptocurrency exchange app earlier this year, comments: “The highly anticipated FCA cryptocurrency review is set to be one of the most impactful and far-reaching regulatory reviews in modern times for two key reasons.

“First, because of the sheer numbers of people it will directly affect.  There’s been incredible growth of the cryptocurrency market in recent years. This growth can be expected to soar further and quicker over the next decade as more and more investors pile into the likes of Bitcoin, Ethereum, Ripple, Litecoin and Dash, and as adoption by businesses and organisations further increases.

“And second, because the FCA is one of the world’s most influential and respected financial regulators.  As such, it can be expected to help shape and define the thinking and policies of regulators globally, the majority of which in the major economies are now also carefully looking at the crypto space.”

He continues: “In our increasingly tech-driven, digital age, cryptocurrencies are here to stay; they simply can no longer be ignored.

“Therefore, the FCA’s proactive approach towards the crypto market must be welcomed as it will help protect investors and tackle illicit activity and unscrupulous firms.

“I expect the regulator to issue warnings and this caution should also be championed as these digital assets remain highly speculative and the market relatively new.”

In its business plan for the financial year ahead, the FCA said the review was part of a taskforce with the Treasury and The Bank of England.

The watchdog noted that cryptocurrencies themselves do not fall within its regulatory remit, but "some models of use or packaging cryptocurrencies bring them within our perimeter, making the landscape complex".

The deVere CEO concludes: “The FCA cryptocurrency review will fundamentally shape this market that now, thanks to its exponential growth, needs a robust regulatory framework.

“It is right that firms operating within the crypto sector should comply with applicable FCA rules and expect to come under the regulator’s scrutiny.”

(Source: deVere Group)

Six out of 10 people with currently no exposure to cryptocurrencies would consider including cryptocurrencies like Bitcoin into their investment portfolios, reveals a new global poll.

Meanwhile, seven out of 10 people who do hold cryptocurrencies are planning to increase their exposure in the next 12 months.

In the survey carried out by deVere Group, 62% of those who do not have any cryptocurrency said ‘yes’, 26% ‘no’, and 12% ‘do not know’ when asked: “Would you consider, or are you considering, including at least one cryptocurrency into your investment portfolio?”

71% of investors who do currently have cryptocurrencies as part of their portfolio said that they are looking to increase this exposure over the next year, 25% said that they would not, and 4% cited that they did not know.

The 800-plus respondents of this poll are deVere clients who currently reside in the US, the UK, Australia, the UAE, Qatar, Switzerland, Hong Kong, Spain, France, Germany and South Africa.

Of the survey, deVere Group’s founder and CEO, Nigel Green, comments: “The fact that more than 60% of people with currently no exposure to cryptocurrencies would consider including them into their investment portfolios is striking.

“It underscores how, despite what many financial traditionalists have opined, that a majority of investors are now open to consider the opportunities that the likes of Bitcoin, Ethereum and Ripple could present.

“An increasing general awareness of cryptocurrencies and how they work, plus a growing sense that cryptocurrency regulation is now inevitable, are perhaps the main reasons why such a high percentage of people are now open to looking at the possibilities of crypto for their portfolios.”

He continues: “The survey also highlights that the majority of those who do currently hold some cryptocurrency as part of their investment portfolio believe that despite ongoing volatility, the potential rewards will outweigh the potential risks.

“It suggests that these investors expect good returns in 2018 from cryptocurrencies, view them as a good longer-term investment, and that the market will eventually stabilise.”

The deVere CEO concludes: “Cryptocurrencies remain a gamble – they are very much ‘unchartered waters’ assets and caution must be exercised.  However, that said, I do believe that in today’s digital world, there is a need for digital currencies.  One or two of the existing ones will succeed, whether it’s Bitcoin, Ethereum, Ripple, Litecoin, Dash, or any of the others, or not, of course remains to be seen.”

(Source: deVere Group)