In a recent survey of decision makers at fintechs and financial services organizations, 95% said blockchain and/or cryptocurrencies will be a high or significant priority for their business in the coming year. This finding is just one of many signals that indicate massive and ongoing growth in adoption and investment among blockchain, cryptocurrencies and other digital assets. As interest in the space continues to expand from early adopters to the mainstream, there will be an increased need for education across these markets. For organizations to make strategic decisions about how their business will invest in or engage with blockchain and digital assets, they’ll need to clarify common misconceptions.
Myths about blockchain and digital assets run the gamut, but there are several that tend to be the most widely perpetuated and believed. Below are the top five misconceptions, along with insights to help support the development of a more knowledgeable and innovative business landscape around these fast-moving technologies.
Myth 1: Cryptocurrency is the currency of criminals.
While it’s true that many criminals have flocked to cryptocurrency for its seeming anonymity and availability outside of highly regulated financial ecosystems, digital assets are not fueling a rise in financial crime. Fraud, money laundering, bribery, dark markets, illicit financing and corruption have been a part of nearly every society for centuries, and fiat has been used extensively to these ends.
The key is to be prepared to prevent, investigate and remediate fraud, money-laundering and other crimes involving cryptocurrency, but not to presume ecosystems using digital assets are at a significantly higher risk than traditional financial systems.
Myth 2: Blockchain, cryptocurrency and digital assets are the same thing.
In the aforementioned survey of fintechs financial services institutions, more than 80% of respondents said they agree that people continue to struggle to distinguish between blockchain technology and cryptocurrency (and likely other terms in this arena). As this category becomes more mainstream, it’s important for those engaging with it to develop knowledge about the different terms, functions and use cases that may come into play. Several of the foundational nuanced terms include:
- Blockchain: A distributed ledger system that utilizes a sequence of blocks, or units of digital information, stored consecutively in a public format. Each block is connected to the next block using a cryptographic signature. The underlying basis for cryptocurrencies.
- Cryptocurrency: A form of digital currency protected by encryption algorithms, represented as a digital coin or token and transferred via a blockchain.
- Digital Assets: Any asset in digital form. In the world of blockchain technology and defi, the terminology is used broadly to refer to cryptocurrencies, stablecoins, altcoins, NFTs and crypto-assets. Digital assets can also be more broadly defined as anything stored digitally and uniquely identifiable that organizations can use to realize value, which may include non-crypto-specific assets, such as electronic documents and images.
- Smart Contracts: Computer-coded terms of an agreement executed autonomously once predefined conditions are satisfied.
Myth 3: Cryptocurrency transactions cannot be traced, investigated or recovered.
Contrary to popular opinion that cryptocurrency transactions are undetectable, digital forensics specialists who know where and how to look can often find, determine ownership and sometimes recover funds in the cryptocurrency ecosystem much easier than can be done for crimes committed using cash and wire transfers. Due in part to the ‘digital ledger’ implementation of blockchain technology, investigators may use software tools, along with information obtained via KYC (Know Your Customer) protocols and traditional forensic methods to search, review and analyze the origination and transaction activity of digital wallets and cryptocurrencies to determine facts around fraudulent behavior, conduct internal investigations, reclaim stolen funds and more.
Myth 4: Transactions using digital assets and digital wallets are less secure than traditional financial services.
When operating within an exchange or platform that follows best practice security and privacy guidelines, transactions using digital assets are just as secure as any other platform that follows the same practices. No ecosystem is immune to security vulnerabilities or breaches, but most mainstream cryptocurrency platforms utilize robust security controls, including but not limited to encryption of digital wallet keys and multi-factor authentication, to protect their customers’ accounts. There are also options to store digital assets offline in “cold storage,” which helps avoid compromise attempts, as an added security measure.
Another important aspect of security is preventing exploits caused by vulnerabilities in the codebase of smart contracts. Finding these exploits requires a deep understanding of the smart contract logic and functionality, and a thorough examination of the codebase to identify flaws. It’s always highly recommended to retain a qualified third party to assess and audit smart contracts prior to launch, and routinely thereafter to reduce the risk of exploits. Long term security driven by smart contracts requires regular software upgrades and patches and other mechanisms to uphold governance controls.
Myth 5: Digital assets cannot integrate with traditional financial ecosystems.
Leading payments platforms, banks and cryptocurrency exchanges have proven that digital assets can and do work within the traditional financial system. Many platforms have implemented KYC and anti-money laundering (AML) controls for cryptocurrency accounts and digital wallets and enabled cryptocurrency trading and transactions within the same ecosystems as fiat. Moreover, many organizations are beginning to recognize and tap into the benefits cryptocurrency and digital assets can provide in terms of bringing transparency, efficiency and cost savings to various banking and payments processes.
Steven S. McNew is a senior managing director within the Technology segment of FTI Consulting. In his role, Steve helps clients evaluate and implement blockchain solutions and builds cost-effective, defensible strategies to manage data for complex legal and regulatory matters. Steve is an expert in blockchain, information and data security, complex discovery and digital forensics. He completed studies in blockchain and cryptocurrency at MIT and has led engagements involving blockchain assessments, pilot projects and software selection and implementation. He has also led disputes involving issues related to blockchain and various forms of cryptocurrency.
Veeral Gosalia, a senior managing director within FTI Consulting’s Technology segment, has been with the firm for nearly 20 years, with roles in New York, London and Washington D.C. He specializes in assisting clients with cross-border corporate investigations, e-discovery projects and is a digital forensics expert. He is also FTI Technology’s regional leader for Asia Pacific, having founded the segment’s business there in 2012.
Antonio Rega, a managing director within FTI Consulting’s Technology segment, is a digital forensics, e-discovery and investigations specialist. Over more than 18 years, Antonio has provided consulting, advisory and subject matter expertise to law firms and global corporations in complex investigations and matters involving proactive and reactive discovery and analysis. He also supports clients in areas including data privacy and information governance.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.