Dr Neeraj Oak explains the first of the three themes of the new book: “Virtual Currencies- From Secrecy to Safety”. In this post, he covers the ideas of secrecy and safety, and considers why they may not be able to coexist.

It’s often said by proponents of cryptocurrencies that the design of such systems makes them safe to use. Is this really true?

It’s easy to confuse the idea of a secure system with that of a safe one. In reality, these terms mean very different things. A secure system is one that is locally resilient to errors or malicious attack. A safe system is a much more all-encompassing idea, describing an environment in which users can make payments with confidence, knowing that their money and personal information cannot be stolen, leaked or lost.

To illustrate the difference between security and safety, I like to use the example of putting a padlock on a live bomb. A padlock is a security device; it stops people from tampering with whatever object it is attached to, protecting it from potential attackers. But does it make the bomb any safer? Perhaps a little, since someone trying to set off the bomb may have a little more trouble doing so. However, the bomb still remains as dangerous as it was before; if it were to go off, it would cause no less damage.

How does this analogy fit with the cryptocurrencies on today’s markets? I’d agree that the security features are impressive, indeed many of the methods they use are ahead of their time. But safety has still eluded many cryptocurrencies, as several incidents ([1],[2],[3]) in the past years have shown. The problem is that while the security provided by cryptography and the blockchain is strong, attackers find it easy to bypass these by targeting individual users.

Attacks on users include phishing, communications exploits, keylogging and mining clipboards and computer data. These types of attack predate cryptocurrencies and are often used against services like online banking. The difference is that centralised organisations banks will often take responsibility for flaws in their security systems and go to a great deal of effort to ensure customers are kept safe. This could include providing memorable information, tying online banking to email or telephone banking to force attackers to break two levels of security or using physical devices such as card readers to verify transactions. In a decentralised system like Bitcoin, there is currently no provision of such features, nor is there likely to be one in the near future.

Beyond the means of attacking users, the consequences of attacks are also reduced in cryptocurrencies. Anonymity means that attackers find it easier to hide their true identity, giving them safe havens to store stolen funds. Further, transactions cannot be reversed without the explicit consent of both parties, so once a user has lost money to a thief or scammer, there really is no way of getting it back. In the case of online banking, there may be some means of halting transactions or compensating users. This is not the case in many of today’s generation of decentralised virtual currencies.

While there is certainly a vulnerability in the safety aspect of virtual currencies at the moment, this need not always be the case. Allowing anonymity or secrecy is a choice that many of these virtual currencies make, and is not intrinsic to their operation. Anonymity has been one of the most attractive features to the early adopters of cryptocurrencies such as Bitcoin, but it is not the only reason to use such technologies. Decentralised cryptocurrencies could potentially be faster, cheaper, more accessible and more convenient than centralised payment services. Abandoning anonymity could be a drastic step in the eyes of many current users of cryptocurrencies, but if it has a positive effect on the safety of the system, then it is a step that both current and future cryptocurrencies should consider.

Join me for the next post, in which I look at the consequences of trading secrecy for safety and the importance of attracting mainstream users to cryptocurrencies, which are still considered by many to be a fringe movement.

Virtual currencies have been grabbing headlines since the release of Bitcoin in 2008/9, and not always for the right reasons. Like any new technology, virtual currencies offer an equal share of promise and danger, creating opportunities for those locked out of today’s financial services and threatening to bypass incumbents.

In my role as Chief Analyst at UK-based consultancy Shift Thought, I have often been faced with questions from our clients about virtual currencies, such as: “How do they work?”, “What do they mean for my business?” and “How will they change the economy of my country?”, “Should I be worried”, “Where are virtual currencies headed” and “What are the regulatory implications”.

As a mathematician, scientist and engineer, I have come to depend on the availability of reliable books as a means of quickly getting a grasp of a new field. However, in the field of virtual currencies, I struggled to find reliable resources and this led to our efforts into building such a resource ourselves. There is a lot of raw information out there, but it is often hidden away in white papers and government studies. Some of the information also seems biased. Virtual currencies seem to have a way of encouraging fanatical loyalty or extreme loathing. Considering the disruptive potential of virtual currencies, it is critical to have some form of unbiased, comprehensive guide in order to rapidly understand the opportunities and challenges they represent.

At Shift Thought we research how people pay in each part of the world, and how this is changing. Utilising the architectures and proprietary technologies created by our founder Dr. Raju Oak, we have been able to create a constantly updated picture to inform the Digital Money Game described in the first book in the Digital Money Series.

In this second book, we wanted to create a guide for readers who are interested in understanding the multiple facets of virtual currencies, and a vision of where the virtual currency market is going, and how best to profit from its trajectory. If you work in financial services, telecoms or retail, this book will help to inform strategy with respect to virtual currencies. If you are a merchant or consumer, we hope that you will discover any potential advantages virtual currencies now offer. More importantly you should be able to understand the How and Why and also see potential risks from dealing with them.

We address questions from a wide cross-section of interest groups and perspectives. Dealing with the opportunities and challenges that virtual currencies represent will be crucial to the world economy. Providing a clear picture to those outside the virtual currencies community is vital in informing balanced decisions in the years to come. We wanted to create an easily accessible resource for young entrepreneurs and innovators around the world to explore this exciting space.

Our book Virtual Currencies - From Secrecy to Safety is available at Amazon sites across the world. You do not need to buy a kindle device as Amazon provides a free Kindle app for the PC as well as tablets and mobile devices. Do register at our Shift Thought portal to get access to more content and join us in The Digital Money Group on LinkedIn.

Join me for the next three posts, where I plan to cover some of the major themes of our book: The move from secrecy to safety, the importance of the mainstream user and the implications of decentralisation.