By: Tiana Laurence, Co-founder & CMO of Factom, Inc.
How do you protect your money? In the old days when cash was king, most of your savings were located in a high-security bank. Anything you kept at home was based on protecting your paper money — in a wallet, in a home safe, etc. All of this meant any unscrupulous person had to physically access your money: by breaking into your home, stealing your wallet, or breaking into a bank. Common sense and sheer logistics made this a challenging and rare endeavor.
In the digital world, security is a much different game. Someone on the other side of the world may be able to retrieve your information without you ever knowing. Cyber security is a very real threat these days, and as the world becomes more and more connected, every device is a point of entry. Digital information is the value we are trying to protect and it’s locked behind virtual vault doors, and unlike before, there are many ways for people to break in. Digital currencies have up the ante even more by creating direct online transactions that don’t use third-party merchants (PayPal, credit card companies, banks, etc.) and allow for borderless transfer-of-ownership.
If you invest in digital currency, cybersecurity should be at the top of your concerns:
Stolen Keys: In the pre-digital world, if someone took your keys, then they’d be able to break into your home or drive away in your car. With digital currency, keys work the same way, but they provide direct access to your digital cash. Your private keys are the equivalent to physical keys to your vault, and one of the trickiest aspects of owning digital currency is managing those. The person that controls the keys controls the money. If that’s on your own device, then a hacked or stolen device means losing access to your money (while someone else potentially gains access). If that’s through a third party, then if they are compromised, all keys held by them become potentially vulnerable.
Protect yourself by: Using strong encryption with any method of storing your keys and push the assets to offline storage after each transaction.
Bitcoin and other digital currencies can be used for general retail purchases in addition to person-to-person transactions. Services like iPayYou and other intermediary platforms connect your digital currency to real-world accounts, and if these accounts are compromised in any way — hacked via phishing, a stolen or lost a device, etc. — then your digital currency is exposed and vulnerable.
Protect yourself by: Following strong password and smart security protocols (i.e. two-factor authentication) for any platform that connects to your digital currency.
A Compromised Exchange
Bitcoin and other digital currencies are purchased through digital money exchanges. (For the uninitiated, this is the digital version of going to a physical bank and exchanging American dollars for, say, euros.) For example, Bitcoin itself cannot be hacked — that would be like saying the dollar has been hacked — but an exchange can be hacked (the digital version of a bank robbery); in fact, more than 30 documented hacks of exchanges have occurred.
Protect yourself by: Researching the security protocols behind an exchange before entrusting your funds to them.
A Dead Platform
Platforms come and go all the time, regardless of media or industry. Digital currency is no different. In the cycle of the digital world, companies go under and often take their customers and investors with them. As the user of a digital currency, you fall under their customer base — and if the platform goes under, then your money goes with it.
Protect yourself by: Researching the stability of a company before purchasing its digital currency.
A Hard Fork
In technology terms, a “hard fork” is a systemic upgrade where previous data is incompatible. While this isn’t necessarily a direct security risk, it will impact the value of digital cash. If the impact is severe enough, it could threaten a company’s viability, and that is a definite concern.
Protect yourself by: Examining the architecture, technology, and engineers behind a platform, then decide if now is a good time to buy in.
Why Use Digital Currency?
With all of those potential security problems, you may wonder why people use digital currency. In addition to things like better fraud protection and lower fees, the biggest benefit of digital currency is inherent in its existence — while there are cybersecurity concerns, the value is not tied to the political or economic climate of one nation. In that way, digital currency allows disenfranchised groups to store and exchange value. Governments are also getting on board with this idea too and are looking to issue their own cryptocurrencies, represents the new money of the future. Globalization and blockchain technology are taking us into an interconnected world and a future that is borderless — and digital currency is the economic means of that future.