Cryptocurrency exchanges: should we prioritise anonymity or security?

The Fintech Forecast is a series of guest articles published each month from thought leaders at ACI Worldwide. 

Author: Elise Thrale

Following the huge crypto price crash, the liquidation of crypto lending company Celsius, tens of billions lost through the TERRA LUNA network and, a possible incoming $3 billion worth of bitcoin from Mt. Gox Exchange flooding the market, the discussion around the stability of cryptocurrency exchanges couldn’t be more timely.

In the last couple of years, cryptocurrency exchanges have been booming. Due to uncertainties such as pandemic-induced lockdowns, the looming recession, and mass redundancies, consumers moved in droves towards cryptos to make large gains and anonymously store their savings away from the eyes of authorities, seeking profits.

Lauded for its anonymity, the cryptocurrency market sky-rocketed 881% in the first six months of 2021. Much of this increase occurred in emerging economies in Asia and Africa, while in countries like the U.S. cryptocurrency trading stagnated.

As with the emergence of fiat currencies, cryptocurrencies need a good mixture of time, standardization, and trust to adapt and penetrate the world of traditional consumers, beyond the tech-minded crypto-enthusiasts. This mixture provides the stability that we see in fiat currency, or investments in stocks and shares. I spoke with ACI’s crypto expert, Francis Souza, to understand the steps needed to make it stable and secure.

Finding the balance between security and anonymity

Anonymity is one of the main appeals when trading crypto. Thanks to the decentralised nature of cryptocurrency exchanges – consumers can trade in the knowledge that while the transaction is transparent the individual or business behind it remains anonymous.

As restrictions caused by the pandemic began to ease, the trend of transacting and making huge crypto profits began. Yet this was just the tip of the iceberg, crypto whales began conducting massive crypto movements that led to huge price movements causing exchanges to plummet   in value overnight – compromising their integrity and stability. This, combined with hacker activity and certain networks being labelled as Ponzi schemes, caused significant consumer losses.

With rising losses and the security of consumer funds being questioned, the traditional centralized financial system proved to be more, robust, resilient, and safer than crypto exchanges and networks.

Nevertheless, Decentralized Finance (DeFi) and anonymity in financial transactions is still desirable among consumers. However, like any innovation, there are questions around whether the new is better than the status quo.

Where are we now?

The world’s major economies have yet to decide on, design, or implement a regulatory framework for cryptocurrencies, although some countries have taken the first steps in this direction. For example, Dubai created the Virtual Assets Regulatory Authority (VARA). VARA will work with federal agencies such as the UAE Central Bank, the Ministry of Finance, and others to regulate, supervise, issue, and mandate processes for virtual assets and NFTs, including cryptos. Meanwhile, El Salvador has adopted Bitcoin as legal tender, showing steps towards nationwide acceptance of cryptocurrencies. These changes will undoubtedly make it safer for consumers – but  there is still a way to go towards adapting to crypto, globally.

Three key considerations

Anonymity around crypto-based exchanges is not necessarily synonymous with consumer safety. When trading crypto or storing cryptos in an exchange wallet, it is important that it is safe from hackers, that transaction data is private, and that payments go to the correct address, as all completed crypto transactions are immutable. The security lies in the crypto exchange and keeping the unique digital fingerprint safe from hackers and the consumers ensuring that their private keys to their crypto wallets are safe too.

While crypto exchanges do their best to stay ahead of hackers by applying the best security practices, there are always gaps that remain due to the high cost of implementing security and the lack of adherence to compliance – leading to hacks. With InfoSec regulations in place, those mandates that are followed by banks today will also have to be implemented by crypto exchanges to ensure security for traders.

The future looks bright

There is no denying that cryptocurrencies still have a long way to go i.e., regulatory framework definition at a global and a local level and a lot of security infrastructure to implement to protect their consumers.

A regulatory framework based on decentralisation is a must as it will ensure safety for consumers, mandates for the crypto exchanges, protection for anonymity and privacy in crypto transactions which will always remain key and speed-up faster adoption of crypto payments. With the growing popularity of cryptocurrencies, and the potential benefits brought through innovation, many countries are considering regulating cryptocurrencies, to mitigate security risks. As more traders adapt from the status quo, crypto exchanges, once regulated, are here to stay and will revolutionise the payment market as we know it. We just have to find the balance between security and anonymity to get there.