Digital Tokens: Experts Discuss the Risks Surrounding Ownership of Digital Assets and Tokens
This November, The Fintech Times is looking to broaden the understanding of digital currencies, ranging from blockchain’s use outside of crypto to CBDCs, in an attempt to replace the notion that digital currencies are a synonym for crypto.
Adoption of digital assets, such as cryptocurrencies and tokens has grown exponentially since the start of the pandemic and does not seem to be slowing down. But as they grow in popularity and become more than a niche commodity, the risk grows with them as they become a target for fraud.
“The two main risks are custody management and asset volatility,” said Vanessa Pestritto, Partner Programs Director at Agoric. “Newcomers to the crypto space still have to deal with these two risks when wanting to begin participating in crypto communities. Self custody runs risks of private key management and correctness in executing transactions. When using hosted custody solutions, there are associated fees for the provider and loss of control when accounts are locked.”
Digital Growth Means More Digital Risks
“Digital tokens carry many of the same risks as fiat currencies and tangible pieces of art. They derive value from being unique products incapable of being identically replaced, and just as with US Dollars, they are transferrable and capable of being stolen, misplaced or subject to fraud. As such, digital tokens (including cryptocurrencies and NFTs) are only as safe as the wallet or account they are kept in,” Explains Daniel Maland, a partner at Mark Migdal & Hayden.
The pandemic’s impact on cryptocurrency has skyrocketed the value of a variety of coins. This is as a result of the fact they can be traded from anywhere in the world, alleviating to some extent, potential liquidity constraints that arise should local governments restrict trading activities as part of a lockdown.
“Analysts have begun to show an appetite for digital tokens as a reliable store of value and as a safe haven during times of financial uncertainty. The risk for some of these tokens is a lack of tangible assets backing their value.” Said Cormac Kinney, founder and CEO of Diamond Standard. “For the first time, Diamond Standard has created a liquid market for diamonds as a commodity. This is an example of leveraging blockchain technology to support asset-backed tokens. Since the commodity is transacted with a token, we were able to extend this to a commodity currency called Bitcarbon, which is launching soon. This commodity currency can be used in the same capacity as Bitcoin but includes both a tangible asset (diamonds) and blockchain technology backing it.”
The Human Factor
Blockchain being used to process payments has some huge benefits for companies as it is immutable and can be used by anyone, cutting out a lot of waiting time for customers. However, as humans are the ones who interact with digital assets and tokens through the blockchain, there is always an element of human error that could take place.
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The idea of human error being the cause for the majority of fraud is further supported by Kevin Tai, CEO and Co-Founder at Linear Finance, as he says, “For all the times I have seen users being personally hacked or have lost funds, about 99% of the time it’s because their private keys are compromised. In this instance, it’s about storing your private keys safely and never putting them in the digital realm for hackers to find. In other instances, use safety measures such as 2FA on all your accounts or if you want to go the extra mile in security, put funds in a multi-signature account in Gnosis Safe. It’s free and one of the best custody solutions on-chain.”
Where human decision making is needed, there will always be room for error, especially if people are not careful and double-checking what they are doing. As seen by the DeversiFi case study, an innocent error can be costly and can have severe consequences. Ultimately, it is down to the user to ensure they do not put themselves at risk. Making a rash decision based on social media views, like the Squid Game scam, could save many users money and disappointment. Companies are developing new UX to ensure customers are clear in what they are doing, but the key is treating the digital asset like a physical one.
Daniel Maland from Mark Migdal & Hayden explains this idea by saying, “Just like misplacing a physical wallet or letting it sit in the wrong person’s hands, losing a password to a digital wallet or giving it to the wrong person can result in the loss of whatever was held in that wallet. Fortunately, many wallet platforms require complex passwords and some form of two-factor authentication which provides a beneficial level of added protection and security.”
