It’s been 10 years since the world was introduced to bitcoin and its underlying blockchain technology. Now a household name, bitcoin has spawned hundreds of other crypto-assets, while blockchain technology offers the potential to create new paradigms in virtually every industry, from financial services to health care and beyond.
Yet 2018 was a volatile, sometimes brutal, year for these linked innovations.
Both suffered from the scrutiny that comes from high—and in some cases unrealistic—expectations. The price of bitcoin slumped more than 70 percent amid continued regulatory uncertainties and attention-grabbing headlines of crypto-thefts and infrastructure challenges. Meanwhile, the actual use of blockchain technology in the market remains limited, with critics arguing that most of its applications can be accomplished more simply with a traditional database.
This week at the World Economic Forum in Davos, Marsh & McLennan, FireEye, and Circle identified three key challenges that must be overcome if the promise of these emerging technologies is to be achieved.
Can a Credible Institutional Market Infrastructure Be Created for Crypto-Assets?
Remarkable progress has been made in legitimizing bitcoin as a digital currency since its inception 10 years ago. But to attract institutional investors, assure regulatory authorities, and fully achieve the promise of these innovations, a credible institutional market infrastructure is necessary. There is no small irony in the fact that bitcoin, conceived in an era of distrust about financial institutions and governments, now arguably needs traditional structures to cement its status and realize its potential.
To be sure, crypto-assets will likely endure without the involvement of large financial institutions. Sufficient demand exists among dedicated user groups around the world, and the underlying technology has proven to be resilient without large financial players. But the support and capabilities of existing financial systems will likely be necessary to convert crypto-assets into a viable, alternative asset class—and blockchain into one of the principal platforms for transferring value across the Internet.
Can Governments Agree on a Common Regulatory Framework for This New Asset Class?
It’s not an easy time for crypto-asset regulators. The market is dynamic and cross-border. The technology is novel and rapidly evolving. The potential for fraud is all too real. Globally, regulators are struggling to address the fact that crypto-assets cross the traditional boundaries of currencies, commodities, and securities. Within the U.S., the approaches taken by the two principal federal regulators—the Commodity Futures Trading Commission and the Securities and Exchange Commission—in regulating crypto-assets have been markedly different. If the messages sometimes seem confusing within the U.S., it gets even more complicated internationally.
The rapid development of blockchain technology suggests that the next digital evolution of financial marketplaces is starting to take shape.
While some new rules may be needed for crypto-assets, regulators should flex existing regulations and regulate by function, instead of treating crypto-assets as a single category. Rather than enforcing territorial rules in a largely borderless market, regulators should pursue multi-jurisdictional consensus around a set of best practices.
For their part, industry participants should engage regulators to help them understand the underlying technology and to dispel myths. Industry must also rigorously ensure compliance with know-your-customer and anti-money laundering protections and adhere to the financing of terrorism rules that apply to traditional financial institutions.
Can Blockchain Technology Demonstrate that It Is a Secure Network for the Exchange of Value At Scale?
Security remains one of the most widely misunderstood aspects of crypto-asset risks and blockchain technology. The confusion occurs because blockchain is a protocol that seeks to elevate the security and assurance of data, but multiple users have lost their crypto-assets from breaches and intrusions. To date, most blockchain cyberattacks have not breached the underlying technology. Rather, the high-profile breaches have occurred in large part due to poor operational controls relating to the storage of private keys.
While blockchain technology offers the promise of enhanced security, it presents its own challenges.
Greater responsibility for security is put into the hands of users to properly secure and store their keys, particularly if they are holding assets on behalf of others. Maintaining the confidentiality, integrity, and availability of private keys requires fairly robust controls. For blockchain technology to expand to multiple uses and secure the transmission of value at scale, users must practice sound cyber-risk management.
The Next Evolution
The rapid development of crypto-assets and blockchain technology and successful use cases in financial services suggest that the building blocks for the next digital evolution of financial marketplaces are starting to take shape. With a credible market infrastructure, rational regulatory framework, and enhanced security, the bold promise of these innovations may well be achieved.