30 August 2014

Mark Courtney

Mark Courtney - GBGroup

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Will the penny drop? Lack of security inhibiting Bitcoin

13 March 2014  |  2741 views  |  0

New York’s financial regulator has today called on companies to submit proposals to regulate Bitcoin and other digital currencies. This follows news that the EU has recently issued warnings on the safety of Bitcoin and the Chinese government recently announced a ban on payment companies clearing the digital currency. While the news out of New York shows a positive step towards a more stable infrastructure, procedures are still needed to reassure Bitcoin users, traders and the wider market of the currency’s reliability.

The first step in bettering the reputation of Bitcoin as the leading digital currency is to form an industry body. Some form of global regulation is a necessity as the industry currently does not do enough to safeguard against money laundering. However, if they can beat the external regulators to it, forward-thinking Bitcoin companies can lead the way in drafting up guidelines to shape and secure their own industry instead of having these dictated by separate bodies.

The next step is to prevent fraudsters from misusing the service. When Bitcoin users engage with one another online there is currently no way for them to verify the identity of the individual with whom they are doing business. While this feature of “cryptocurrency” is a core attraction for many users, this needs to adapt if Bitcoin is to achieve widespread, commercial acceptance. The perceived anonymity that attracts many users is already being picked apart. In fact, every single Bitcoin transaction is publicly recorded on the network, meaning public metadata is freely available. It is a start, but it isn't enough.

Reliable identity information is a fundamental requirement of infrastructures, used to manage the exchange of currency, goods and services. Bitcoin trading floors need to adopt online ID verification to enable companies to authenticate their potential customers in real-time, while also offering the scalability and efficiency required for a global company.

But being verified doesn’t mean users need to lose their anonymity. Once verified internally upon registration, users could still adopt any pseudonym they choose. This allows people to be held to account, while enabling their privacy to be protected online.

Digital currencies are still finding their feet and part of their appeal has been their existence outside the authority of traditional banking institutions. By forming a robust and reliable industry body, Bitcoin will also set an important perception, with regulators and consumers alike, that it is an industry to be taken seriously. 

Without a safe infrastructure to support it, a digital currency will never achieve widespread adoption by a mainstream audience. Bitcoin’s initial success illustrates that there is appetite for a form of digital currency, but without safe-guarding the service, more governments will follow China’s lead and reject it. 

As public awareness of bitcoins grow and stimulate a higher demand, there is a need for the currency to establish its own standards and acknowledge the importance of ID verification when making online financial transactions. Only then will this promising and disruptive technology reach its full potential.

 

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