By: Anindya Sengupta, Program Director, LTI

The latest 530 million crypto currency NEM hack at a Japanese exchange, has warranted revision of risk assessment of this promising blockchain technology. The contrast to traditional payment processing industry the crypto currencies brings, is P2P settlement, which does not require a third-party to confirm the payment, and thus, in-turn promises to reduce the time and fees involved in such settlements.

This also ensures all the nodes in a network ecosystem are participating directly or indirectly in each and every transaction. This is again a stark difference to the traditional settlement process, where only payer, payee and a handful of third-party institutions involves themselves to confirm the settlement. Though it is not possible to get the original data from the original hash value (using like SHA256), all the participating nodes will be aware of such hash of a particular transaction. Moreover, as spurious nodes take part in these settlements, it will be the target of possible hacking from inside the network.

Another advantage of the digital currency of fast settlement using P2P creates another risk: once the currency is out of your wallet, it is gone forever. There is no way like in traditional banking that you can claim back, as all the transactions are permanent or immutable in a blockchain. This gives rise to a unique threat, where just mistyping a target wallet address can cost you millions (if you have in your wallet). Also, as there is no intermediate third-party, where checks can be in place to prevent dirty money, and digital currencies have become the channel of choice for the drug dealers, terrorist or money launders.

From risk management perspective, these all pose a serious threat to the business involving digital coins. To mitigate these, the regulations need to catchup fast with this evolving technology and its growing popularity. At the same time, as all the transactions are recorded and it is technically feasible to go back in time to track particular transactions, these need to be employed to analyze questionable transactions and prosecute the perpetrators. As of today, different countries are already drafting regulations to handle the risks originating from crypto transactions, which raises hope for its wide acceptance across common population in the near future.