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Bitcoin Security Risks, Transaction Delays on the Rise

September 6, 2016

Bitcoin emblem

When Bitcoin was first released in 2009, the public was excited at the prospects it could offer. Bitcoin uses encryption techniques to verify the transfer of funds and to regulate how the units of currency are generated. The system operates through a decentralized ledger called a “blockchain” and is independent of any central bank, making it unlike government-issued currency.

Since the system is peer-to-peer, transactions could take place directly between users, without the need for an intermediary. Thus, the possibility of faster transactions and lower fees than those associated with other online payment mechanisms intrigued traders and buyers.

However, Bitcoin has recently begun experiencing challenges and shortcomings which, if continued, could spell the end of the fascinating decentralized, digital currency. In the midst of these challenges, several alternative technologies are seeking to fill the void being created by the Bitcoin failures.

Bitcoin May Present Some Serious Financial Stability Risks

Financial regulators are concluding that Bitcoin may present some significant financial stability risks as of late. Many of these are alarming and include:

  • Dramatic increases in trade delays; the average transaction has been clocking at around 43 minutes to process
  • Some transactions experiencing complete failure (i.e., the transaction remaining unverified indefinitely)
  • Concerns about Bitcoin becoming currency for terrorists and cyber-criminals, which could lead to governments shutting Bitcoin down
  • Concerns with distributed ledger systems which may currently be unregulated by financial regulators; for instance, some systems might be vulnerable to fraud perpetrated through collusion amongst system participants

Lastly, Bitcoin has also experienced its first securities fraud case, in which Texas man Trendon Shavers has been sentenced to nearly three years in prison. Shavers had basically used his Bitcoin business to perpetrate a classic Ponzi scheme, promising investors spectacular returns and personal guarantees. However, investors ended up losing more than $1.2 million in the long run.

So all in all, Bitcoin appears to be spiralling downward towards its demise, with the potential for fraud, hacking, and losses becoming an increasingly present danger.

Big Banks Plan to Coin New Digital Currency

In particular, the issue with the trade delays is worrisome enough that some businesses have given up on Bitcoin entirely. In response to these challenges and shortcomings associated with Bitcoin transactions, some big banks are planning to coin new forms of digital currency.

A contender in the race for a new blockchain-enabled trading platform is the “utility settlement coin” being pioneered by the Swiss bank UBS. The digital coins would address many of the shortcomings currently associated with Bitcoin procedures. For instance, the utility settlement coins would aim to:

  • Allow financial institutions to purchase securities such as bonds and equities without having to wait for traditional money transfers to be completed
  • Reduce or eliminate holds and delays
  • Free up capital that would otherwise be held up in traditional transfer processes

The digital coins would be convertible into various currencies and stored in the blockchain (“distributed ledger technology”). This would allow them to be promptly exchanged for the securities being traded. The technology will likely be available in 4-5 years’ time.

Other groups and institutions are currently working on their own versions of Bitcoin replacements. For instance Citigroup is developing a “Citicoin,” while Goldman-Sachs is in the process of creating their “SETLcoin.”

With all of these technologies, the lessons learned from Bitcoin’s failures need to be at the forefront of the development process. Safeguards such as cybersecurity measures and fraud prevention need to be firmly in place in order to protect such systems from attack and abuses.

Digital currency technologies offer some promising potential for streamlining the trading process and creating more efficient transactions. However, they are definitely in their incipient stages and, as such, can be associated with serious risks and legal issues. If you have any questions or concerns involving financial issues like securities fraud litigation, fiduciary litigation or other similar subjects, contact us today at Kessler Topaz. Our litigation team is dedicated to staying on the forefront of emerging risks and potential threats when it comes to financial security.