Crypto-currencies rule the roost in the trading world, especially Bitcoins are a popular medium of exchange. Given the increase in the usage of Fin-tech in payment gateways, Bitcoins are preferred over traditional currencies.
Any new technology will have its fair share of detractors doing their best to limit its potential,thus making it difficult for Bitcoins to be a trusted form of legal currency.
Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the digital currency in an attempt to control its use. We are still early on in the game, and many legal authorities are still struggling to understand the technology used by crypto-currency, let alone make laws around it.
Government agencies are increasingly worried about the implications of bitcoin, as it has the ability to be used anonymously, and is therefore a potential instrument for money laundering. In particular, law enforcers seem to be concerned about the decentralized nature of the currency : one of the advantages.
Eg: The concerns arise as Bitcoin was the only form of currency accepted on Silk road an anonymous marketplace that was only accessible over the TOR anonymous browsing network,which was closed by the FBI in October 2013. Silk Road was commonly used to sell goods that are illegal in many countries, including narcotics.
Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a kind of virtual bank account that allows users to invest or receive bitcoins, pay for goods or save their money in the form of Bitcoins. Unlike bank accounts, bitcoin wallets are not insured by the FDIC Federal Deposit Insurance Corporation. This further increases the risk associated with the legality of using crypto-currency, as the loss faced by customers in the case of Silk road incident; the money was not reimbursed. This is a clear drawback in comparison with traditional savings account.
The second issue with digital wallets are that they are more vulnerable to attacks and thus need to be encrypted . Existing backup facilities allows the user to retrieve old wallet files and contents. The coin history is traceable that leads to link the user identity with the Bitcoin address. Distributed denials of service (DDoS) attacks are potential threats for the online wallet application, used by Bitcoins.
The issue of ’>50%’ attack is one of the major threats for the Bitcoin network that targets the mining process. This is when any colluding user or group of users acquires more than 50% of the computing power in mining process. This user or group can then be able to exclude, modify, and self-reverse transactions and prevent some or all ‘mining’ of valid blocks for their benefit. Recent researches have shown that even with about 40% of computational resources, the attackers can overcome to deep confirmed transaction and that to with the 50% success probability . One possible solution to reduce the harmful effect is to establish checkpoints so that the blocks before checkpoints cannot be altered. However, if this attack is successful, the attacker can launch other attacks as well.
The chaos created in network by such an attack is difficult to handle and some changes done by the attacker might become permanent. A recent research at Cornell University shows that ‘>50%’ attack is feasible since single mining pools in network sometimes control 25%-33% of mining power.
The double spending attack is a serious threat for Bitcoin transactions in which the attacker successfully makes more than one transaction using single coin resulting in the invalidation of the ‘honest’ transaction. This attack is most likely to occur with ‘Fast payment’ mode. In this attack, an attacker with coin A makes a transaction to the receiver and at the same time the transaction with the same coin is made to another address that might be in the control of attacker or it may be another receiving node. By varying the timestamp, the fraud transaction can be made as a real one. Since Bitcoin peers will not accept multiple transactions with same input, they will validate the transaction that reaches them first and will invalidate all other transactions. Thus the original receiver will not be able to confirm its transaction. One possible solution for this attack is to insert ‘observers’ in the network.
Regulations are a main worry for a potential investor and they vary for every country . One can expect to see national financial regulators interested in the potential of virtual currencies. Countries like China, India, Singapore, E.U member countries, United states are not welcoming the idea of virtual currency practices .International regulations as part of bitcoin trading would make customers feel more safe in investing in bitcoin trading.
There is a lot of misleading information available to potential investors and hackers likewise on the internet, which is a limiting factor to govern the wide network that crypto-currencies enjoy.
Do you think right steps are being taken to make this network more secure, given the increasing popularity ?
Put your thinking caps on…
Picture courtesy: Visual capitalist