Close up of a smartphone with bitcoins showing security of cryptocurrencies
How Secure are Cryptocurrencies?

How Secure are Cryptocurrencies?

One of the most prominent arguments in favour of cryptocurrencies, as opposed to standard currencies, is that the former offers a more secure way of carrying out financial transactions in a digital world where cybercrime is rampant. The cryptocurrency market has become a more prominent place, making it important for it to be as secure as it can be. That is largely because of the decentralized nature of the information – or block –  chains detailing all cryptocurrency transactions. Therefore, this makes it impossible for a single individual to change them, while cryptocurrency transactions and trading using blockchain technology require far less sensitive data to be provided than those involving standard currencies.

There is no question that both of these things are true and that they have the potential to make cryptocurrency transactions more secure. All details of any transaction carried out using Bitcoin, Ethereum or one of the other big cryptocurrencies are stored in blocks of encrypted data known as blockchains. When evaluating the security of blockchain data, it is important to note that all the information on these blocks is timestamped and recorded in hash functions. Because of this it is virtually impossible for a cybercriminal to change or overwrite blockchain data, while the absence of a central server storing this data means there is no clear site for them to target. Any changes that take place due to new transactions are automatically sent to all authorized blockchain users, as further security. The safety of blockchains has made them appealing to sectors like banking as a way of authenticating identity and securing personal data.

Are cryptocurrencies really anonymous and secure?

Cryptocurrency transactions are often described as anonymous, because the participants are not required to provide their real names, bank account details and other information that cyber-criminals often seek to gain access to. That is certainly the case, and is a strong security argument, but it is not entirely true to describe all of these transactions as anonymous. Major cryptocurrencies such as Ethereum and Bitcoin still store transaction data permanently online that really sophisticated cybercrime gangs will be able to hack to trace the identities of those involved. There are exceptions to this, such as Monero, which deploys extremely complicated forms of encryption like Stealth addresses and Ring signatures, making it one of the genuinely anonymous crypto coins.

However, even the most anonymous of cryptocurrencies can still fall victim to exchange hack attacks like those at Mt. Gox and at the Hong Kong-based Bitfinex exchange during 2016. The latter resulted in the theft of around 120,000 Bitcoins and it is believed that a failure to maintain correct security protocols was the reason for it. This suggests cybercriminals have found a security weakness in the cryptocurrency process even if they cannot get at the user data through the blockchains and has led some to question whether cryptocurrency exchanges really are secure. The solution being mooted by experts in the crypto field such as Robert Schwenker is for these exchanges to be made subject to regulation by official bodies set up for that purpose. Whether this would be accepted given the freewheeling nature of the cryptocurrency world is the question.

While the blockchains used to record cryptocurrency transactions offer real security advantages, many believe these transactions to be more anonymous than they actually are. Furthermore, cryptocurrency exchanges have proven vulnerable to hackers, meaning that crypto does not offer security guarantees.

 

Staff Writer at CPO Magazine