CRYPTOCURRENCY

GUEST COLUMN: From crypto mania to crypto mayhem

MARKETS-BITCOIN/SOUTHKOREA [File] Representative image | Reuters

Crypto mania seems to be turning into a full blown crypto crisis. Government crackdown on crypto exchanges, bloodbath in Bitcoin trade and other virtual currencies, and bust of two crypto exchanges as well as recurring instances of hacking and stealing bitcoins, have wreaked havoc in the digital currency ecosystem.

Regulatory warnings from China and India during last year have now transformed into regulatory activism and will soon become a compliance blizzard. People's Bank of China is said to have stopped payment to crypto investors. Leading Indian bankers like HDFC have suspended account of top Indian bitcoin exchanges and have also capped their cash withdrawal. Promoters of few exchanges were forced to pledge their personal property as bankers ask for more collateral due to sinking Bitcoin values. According to media reports, banks have demanded 1:1 collateral since last one month.

Meanwhile the Income Tax department served approximately 5 lakh notices to high net worth crypto investors. Once data is shared between various inter-governmental agencies like Economic Offences Wing and Directorate General of Revenue Intelligence, probe may be initiated for possible violation of Foreign Exchange Management Act (FEMA) and Prevention of Money Laundering Act (PMLA). International agency like Internal Revenue Service of US and Foreign Account Tax Compliance Act (FATCA) authorities may also get involved in the later stage, said an expert in international markets.

Governments calling the shots: Fight between old school and new school to reach climax

Governments worldwide were alermed when the market capitalisation of cryptocurrencies shot up to $6 trillion and the ongoing cryptocurrency crackdown seems to be a concerted move. Bitcoin, which was launched as an experiment, gradually became the parking centre of speculative and hot money, effectively diluting western government's cash hunt and also denting effectiveness of monitory policy.

Bitcoin is said to have become a settlement currency for drugs, arms trade and ransom money for cyber criminals. Moreover, it is becoming a systemic risk and a threat for legal fiat tender issued by governments. Dominance of digital currencies surged when Bitcoin value rose nearly 1900 per cent in 2017. But last week witnessed a nasty price correction of bitcoins, after a price collapse of nearly 50 per cent. The price volatility necessarily indicates that there is intense war going on between old school and new school.

A tug of war: Private capital versus public control

In the tug of war between bulls and bears there are many invisible forces, ultra rich and invincible investors like investment banks, who are fighting for big stakes. In a sense, it is also a war between private capital and public (government) control.

Private capital have been fleeing into cryptocurrencies to stay out of government reach in the recent times. With governments worldwide hunting down for cash (read taxes), 25 per cent of global GDP is yielding negative returns, or around 11 trillion bonds in EU are offering negative rates (read custodial charges), the private capital seeked refuge in alternative assets. Massive balance sheet expansion and the Quantitative Easing policy also weakened confidence in government issued fiat currencies.

The shift towards cryptocurrency was initially propelled by Chinese investors following the Chinese government's crackdown on bribery, stock market manipulation and shadow banking. The move prompted fear among the Chinese neo rich resulting in huge capital outflow in the form of global asset acquisition and cryptocurrency investment. The capital exodus resulted in a plunge of Chinese forex reserve and the government compelled to impose capital control to check capital flight.

But the old school gurus like JP Morgan CEO Jamie Dimon and billionaire investor Warren Buffet says it is a bubble, fraud and will end in tears. Supporters of digital assets believe that eventually electronic currency would survive. Government cannot eternally enjoy the power to print fiat, they say. Bitcoin investor Winklevoss recently said that Bitcoin value could rise 10-20 times from here and called it “gold 2.0”. However, the recent bloodbath indicates that bitcoin bubble is badly punctured and it would be a difficult task to bring back its glitter.

A goodly apple rotten at the heart: Bitconnect goes bust

In a bid to encash crypto mania, many flyby night operators and fraudsters have set up cryptocurrency exchanges and are running ponzy schemes. Bitconnect, a popular lending and exchange platform, which entered crypto market in December 2016, boasted a market cap of $2.11 billion at its peak on December 17, 2017. It was running a ponzy scheme, posting fraudulent claims of monthly returns of 20 per cent to 60 per cent. The exchange went bust. Almost $1.5 billion was wiped out and now many small exchanges may also follow the line very soon. In the wake of such incidents, government crackdown is expected to intensify. The next G20 meeting in Argentina may come out with some stringent regulation of cryptocurrencies.

Digital currencies and the softwares developed to track them have become easy targets for cybercriminals while also creating a lucrative new market for cyber-security firms. In less than a decade, hackers have stolen $1.2 billion worth of Bitcoins and its rival currency Ethereum.

Experts say that the crypto hacking industry has an annual revenue of $200 million. Hackers have compromised more than 14 per cent of the Bitcoin and Ethereum supply. A hacker group known as Lazarus – said to have connection with North Korea – is tipped to be involved in the recent cryptocurrency hacking.

Blockchains: Infallible, not super secure

Block chain, the fundemental technology of digital currencies, is being promoted as the future of business. However, the recent incidents of hacking have debunk the myth of super safety of black chains. This technology does have many advantages like transparency and low transaction costs, but it is not flawless.

Blockchain records are shared, making them hard to alter, so some users see them as super-secure. But in many ways they are no safer than any other software, according to cyber experts. Since the market is immature, blockchains may even be more vulnerable than other softwares. There are thousands of them, each with its own bugs. Until the field is winnowed to a few favourites, as happened with web browsers, securing all of them will be a challenge.

Blockchains can track information on identity, property records and even digital car keys and not just cryptocurrency. So even if hacking a blockchain may be harder than breaking into a retailer’s database, the booty is big. You will have access to much more information!!

Taiwanese security researchers have pointed out that, many blockchains started as forks – a situation in which a blockchain splits into two separate chains temporarily or permanently – with every fork giving hackers a new way to try to falsify data, making it more vulnerable to replay attacks – a form of network attack in which a valid data transmission is maliciously or fraudulently repeated or delayed.

Data: Risk of sensitivity and sanctity

In a December 25 paper, researchers at the Institute of Electrical and Electronics Engineers, outlined the ways in which hackers can spend the same Bitcoins twice, the very thing blockchains are meant to prevent.

“We have no evidence that such attacks have already been performed on Bitcoin,” the IEEE researchers said. “However, we believe that some of the important characteristics of Bitcoin make these attacks practical and potentially highly disruptive,” they added.

A researcher from Cisco Talos, a security group, found vulnerabilities in Ethereum clients, including a bug that “can lead to the leak of sensitive data about existing accounts.” A security hole in the Parity wallet, which is advertised as – the fastest and most secure way of interacting with the Ethereum blockchain – resulted in losing $155 million in November.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily represent the views of the publication.

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