Is the digital darling finally ready for its close-up? Hear what experts at RSAC had to say.
Imagine you’re holding a crisp dollar bill in one hand and a hundred-dollar bill in the other. In examining the two bills, could you find a meaningful reason why one is valued at $1 while the other is $100? Ultimately, they’re both just pieces of paper.
In fact, the reason store owners aren’t demanding hundred-dollar bills dipped in gold is that money isn’t intrinsically worth, well, anything. At RSAC 2021, top speaker Dr. Kenneth Geers, External Communications Analyst for Very Good Security, told attendees, “Money is a human construct based on economic consensus. It’s a social convention.”
If regular currency is only a belief system, the same can be said for cryptocurrency, which as of this writing, was valued at over $30,000 USD per Bitcoin. Since cryptocurrency’s inception in 2009, leaders in finance and technology have held their breath for the day its revolutionary potential would finally be realized.
But before that happens, crypto will have to overcome many obstacles—especially if it wants to dethrone the US dollar as the world’s reserve currency. Read on for an explanation of how cryptocurrency and cryptomining work, as well as what experts at RSAC think are the hurdles crypto will need to clear for world domination.
Cryptocurrency and blockchain 101
To understand cryptocurrency’s challenges, it’s important first to have a grasp on how it works. In its simplest form, cryptocurrency is digital money. Specifically, it’s entries in a database that no one can change without fulfilling specific conditions—just like regular currency. But unlike dollars or euros, cryptocurrency is not backed by the government or banks. Instead, it’s created and managed by a network of computers belonging to no one entity. And its database is a digital ledger called blockchain.
Blockchain works by merging ancient technology with the cutting edge. While ledgers may be older than writing for human communication, blockchain has been around for only a little over 10 years. Blockchain combines asymmetrical cryptography, hash functions, digital signatures, timestamped blocks and more to control the creation of money and verify the transfer of funds.
Blockchain is a communications protocol based on a consensus that’s secure and anonymous. Once something happens on blockchain, it’s there forever. The creator of this technology claims it solves the Byzantine Generals Problem. Applied correctly, blockchain could be used to secure the entire Internet.
So why are we doubting the validity of cryptocurrency again? Unfortunately, the very process that allows cryptocurrency to be decentralized has also involuntarily led to some of its difficulties. We’re talking, of course, about cryptomining.
Cryptomining is an essential function of blockchain, as miners are the ones who audit the digital ledger and generate cryptocurrency. How? By harnessing computing power (GPUs) to solve complex hashing puzzles. Each math problem solved credits a miner with verifying 1MEG worth, or block, of Bitcoin transactions. But in order to get paid for their efforts, cryptominers must be the first to come up with the answer.
Kathy Wang, CISO of Very Good Security, said in the RSAC session “Displacing the Dollar: Is Crypto Robust Enough to be the New Reserve Currency?” that “the probability of being the first to discover the solution is proportional to the amount of mining or computer power the miner has on the network.”
This process used to be easier when Bitcoin mining first started but has increased exponentially in difficulty as cryptocurrency has caught on. Today, miners must generate extremely high hash rates—terahashes per second—to get paid. (That’s why every gamer is going berserk trying to find a decent graphics card.) There are now entire mining farms dedicated to Bitcoin mining.
The difficulty of getting paid to mine crypto has led to the exploitation and abuse of the process. Some miners have pooled resources, while others have created hundreds of fraudulent free accounts on GitLab or GitHub to take advantage of free Continuous Integration (CI) minutes.
And then there’s cryptojacking, where miners are targeting, attacking and siphoning off computing power from other users without consent, essentially stealing other people’s resources to make money. Sadly, the buck doesn’t stop there. There’s a wide array of cryptomining malware for Windows and Mac PCs, as well as mobile devices—even malware that swipes crypto wallets.
Crypto vs. US dollar
In order to become successful enough to dethrone the US dollar, cryptocurrency must become a medium of exchange, unit of account and store of value. These are the three essential elements of money. To be a medium of exchange, a currency needs to be an intermediary token of a certain value that can be traded for goods or services. A unit of account is a stable measure that can be used to calculate cost, prices, profits and performance. And a store of value is a durable asset that has stable demand and saved purchasing power.
It will be difficult for cryptocurrency to achieve these statuses in the foreseeable future, never mind displace the US dollar. The dollar has been around for so long as a stable currency that it’s not only the world’s reserve currency—other countries fall back on it for risk management—but countries in Africa, Central America and Asia have replaced their own volatile currencies with the dollar instead. The belief system holding up the US dollar is strong, and trust in it remains high.
Cryptocurrency will not replace the US dollar today because there’s too much risk, which can be summed up by one person accumulating over $220 million in Bitcoin, but being unable to access it because he forgot the password to his digital wallet. But forgotten passwords and lost hardware are just two of the concerns investors and governments have with crypto.
Volatility practically defines cryptocurrency, which has experienced such fluctuations in the market that it’s considered a high-risk investment today. On May 1, 2021, Bitcoin was valued at $57,828.51 USD. By June 1, just one month later, it had fallen to $37,340.68. During the week of RSAC, China targeted Bitcoin, and it crashed and burned. When your currency hangs on the balance of Elon Musk’s word, it’s in a rather precarious position.
Lack of trust is another challenge for crypto. It suffers from weak Know Your Client (KYC). Bitcoin exchanges that are high-risk may be criminal or even terrorist in nature. By its nature, cryptocurrency allows for total anonymity, making it difficult to attribute to cybercriminals, such as RaaS organizations demanding ransom payments in Bitcoin.
Finally, cryptocurrency suffers from slow transactional speed in relation to the US dollar. Bitcoin processes only 12 transactions per second today compared to Visa, for example, which can run up to 70,000 transactions. But there’s plenty of space for growth. It took 15-20 years for congress to pass laws that understood and managed credit cards after they were introduced in the 1950s. Fintech companies are already making improvements in the speed and efficiency of crypto.
Clearly, there is vast potential for cryptocurrency and blockchain technology, from smart contracts to transnational cooperation. Public adoption will become a societal norm, but it’ll take time. The security risks need to be addressed. The speed in the payment system needs to be faster. And governments will need to get involved.
For now, cryptocurrency is an alternate way to invest and save other than being dependent on the US dollar. It could help the rich shift risk and diversify their portfolios, just as it can assist the poor in gaining access to wealth. In fact, El Salvador recently voted to adopt Bitcoin as legal tender alongside the dollar—the first country to do so.
There is no doubt that cryptocurrency is a game-changer. There are over 1,000 different types of cryptocurrencies today, which shows its promise. Blockchain could be as big as the Internet itself. But in the near term, it’s best to hold onto those dollar bills (and debit cards).