If the industry doesn’t work together to protect consumers, crypto will never reach the mainstream
by Tristan Roozendaal CEO, Centralex
The rise of decentralised finance, or ‘DeFi’, saw cryptocurrency-related scams reach eye-watering highs of £7.7 billion GBP in 2021. This stems from complexity – even the smallest action in DeFi a complex series of hoops to jump through.
Take accessing crypto assets for example, this simple task requires a username and password, a private key, and a unique series of words. Unfortunately, this leaves investors vulnerable to the peril of scammers. And due to the siloes that currently exist between exchanges, bad actors can elicit funds from innocent investors before transferring them off one exchange onto another with no repercussions.
Scammers today are adapting with the times, taking advantage of the complexity associated with the vast security measures in-place. These measures, intended to keep investors safe, only leave them vulnerable to misplacing their information, having it stolen or even giving it away at the promise of riches.
What many fail to realise is that the opaque and siloed nature of the crypto space means that hacks and scams don’t just affect new or naïve investors but can also impact seasoned veterans and large organisations. Famously in 2014, the world’s largest Bitcoin exchange at the time, Mt. Gox, suspended all trading and the website went offline. It was later revealed more than $400 million USD had been stolen from various accounts, a failing on the exchanges part.
Juggling the complexity of multiple private keys, different ledgers, and seed phrases of 12-24 words can leave even the most knowledgeable out of pocket with one wrong step. This means that seasoned investors have fallen for the most common scams, posing as an exchange, eliciting their security information freely. Most new investors take to storing all their passwords, phrases, and information on their web-browser, where it is vulnerable to hacking.
Regulators are still catching up
Cryptocurrencies are innately traceable meaning transactions are visible to everyone at any time. The compliance tools nowadays are very advanced, and yet those that garner illicit funds are able to wander from one exchange to the next stealing billions. Centralised exchanges have at their disposal the technology to monitor transactions, tracing where stolen funds are distributed however, a lack of industry collaboration is leaving this as a utopian dream.
Regulatory bodies are racing to catchup, but consumers are still very much vulnerable. We are still some way off an agreed regulatory outlook and this is a historically slow-moving process – seatbelts have only been law since 1983 in the UK while the first car hit the roads in 1892. We can’t afford to wait for regulations to come in – the industry needs to work together to protect consumers as much as possible. Education has a huge role to play here. Industry players like exchanges need to provide proper instruction on how to identify a friend or foe, what the latest threat is, how a ‘rug pull’ works, and more.
If centralised exchanges came together with proper transaction monitoring and created a single database to track scams in real time, together we could monitor the addresses of bad actors, tracing them and seeing which exchange they obtained the funds through. Funds could then be taken from a scammer’s account and reported to the authorities, no matter which exchange it is located on.
Education, education, education
Alongside regulation, we must come together as an industry to educate, protect, and ensure these new opportunities to transact and invest are open to everyone, as crypto intended. Regulation is of course crucial, but while the industry fails to work together to protect consumers, crypto-related are only rising, diminishing mainstream adoption. Education should be part of the responsibility of exchanges, some are paving the way, but others need to follow. This must be the way if we are to see mainstream cryptocurrency adoption.
Retail investors need to know the real risks of investing and should apply the same attitude to crypto asset investing as they do to traditional investment, if it seems too good to be true, it usually is. Investors need a universal, easy-to-digest, readily available handbook of information to combat common threats.
Even the traditional financial system has its downfalls, some £2.3 billion was lost in the UK to scammers up 33% on the year before. As a result, in mainstream finance education is still an ongoing priority. To set up a traditional trading account you must first verify your knowledge of trading, practice accounts are offered, terminology is explained, and exchanges constantly remind users of the risks involved. Crypto investors must be protected in the same way, and this requires an industry standard across the board.
If this industry is to thrive, reach mainstream adoption and build on the promise that blockchain set out, that it can provide a better, more transparent, and interactive financial system for everyone, then key players need to work together to garner that adoption. Until industry participants like exchanges work together to protect and educate consumers, and hold bad actors accountable, we will never have the same reach and respect as legacy institutions.