Finding security in digital currencies

Digital currencies such as Bitcoin have been capturing the attention of the world’s financial and technology press for some time, both in a positive and negative manner. 

Digital currencies are here to stay, it’s inevitable, and these virtual currencies are at an inflection point and already playing an increasingly apparent role in the daily trading  landscape. They are growing dramatically in popularity and the daily headlines tell the tale, not always for the right reasons, but nonetheless stamping their authority on the global trading landscape of the future.

But some – Bitcoin in particular – have drawn criticism for their issues with security and compliance, and their propensity to be used by criminals for money-laundering and tax evasion. In November we saw the Bitcoin Foundation’s general counsel testify to Congress and be forced to tackle multiple questions regarding the currency’s link to purchasing and selling illegal drugs on the online black market site Silk Road.

Digital currencies are also increasingly attracting sophisticated fraudsters looking to steal from users. Just last week, for example, it was reported that a prominent Bitcoin wallet service, Inputs.io, was cleaned out by hackers, leaving investors 4100BTC out of pocket. (To note – this story broke when a single Bitcoin was worth $300, equating those losses to $1.2million.)

Those behind most digital currencies acknowledge that payment security is vital. They understand that the guarantee of a secure transaction is one of the main drivers for the adoption of their product by investors. Equally, speculators in the underlying value of the currency need the assurance that their transactions in the currency are secure. But digital currencies present security problems that are far more complex and sophisticated than those involving traditional currencies. The observed breaches and hacks that we have seen in the marketplace are a dreadful reminder of the consequences of reliance on security measures that are no longer appropriate for the electronic world we operate in.  The  deployment of traditional security methods to secure virtual currencies falls far short of what is actually needed and as long as the reliance on inappropriate security methods and processes we will continue to see the escalation of the intensity and impact of hacking and breaches in this domain

Awareness of the issues is taking root in the digital currency industry, and one can observe that various initiatives are already underway. Recently Bitcoin, Ven, Ripple and other leaders from the digital currency industry announced the formation of the Digital Asset Transfer Authority (DATA), an open, self-regulating organization (of which ValidSoft is an active member), which aims to play an important role in developing best practices and standards for the management of digital currency transfers worldwide.

DATA is hoping to bring together the industry to foster prudent, responsible development of new technologies at the forefront of digital currency transfer and its work will help to bring security up to adequate levels across the industry. But more needs to be done by the security industry as a whole to support their efforts in developing the most secure and intuitive systems that ensure the future of these emerging virtual currencies.  It’s time to stop flogging the dead horse and realize that the security needs of the future are a paradigm shift from the past and whilst we still use candles today, where would we be without the light bulb?