Bitcoin is a revolutionary new technology. The digital currency has become highly popular and continues to disrupt standard financial systems (to the surprise of many). While early adopters and businesses integrated digital tokens, the overall market value of Bitcoin skyrocketed by a trillion dollars. Even enterprise corporations such as Amazon, Starbucks, and Burger King accept consumer payments via cryptocurrencies. It is an exciting new financial vehicle.
But with any new technology, questions about safety and security arise. As a Bitcoin ATM operator, your customers and partners will likely have questions regarding the authenticity of the entire operation. We already pointed out just how safe a Bitcoin ATM is, but what about the underlying asset, Bitcoin itself?
Let’s look into some of the common security concerns related to digital currencies and explain what makes Bitcoin safer than some of today’s financial systems.
Common Security Concerns for Bitcoin
Like any financial system, asset, or technology, Bitcoin is not immune to drawbacks, errors, or weak points that fraudsters can exploit. Whilst Bitcoin is established in its security record, most cryptocurrencies are in their infancy, so while developers and community members continue to address security concerns, there are still a few key safety issues you should remain aware of:
With the introduction of Bitcoin, bad actors simply moved their existing fraud strategies into crypto. Common social engineering schemes such as phishing work just as well with digital tokens, even if they are currently minimal in scope (crypto scams only account for 4.7% of the total fraud, according to the Better Business Bureau).
But fraud losses in cryptocurrency reached a massive $14 billion in 2021. Scams occur less often, but the average value is far higher with cryptocurrencies, especially non-Bitcoin cryptocurrencies (known as alt-coins). These scams only apply to protocols outside the Bitcoin network, but you should be aware of them:
- Coin offerings: Since crypto is unregulated, anyone can create a coin of their own and trade it for profit. After the initial offering, the creators can shut down and run off with the investors’ money (there is no stable asset or insurance entity to recoup losses). False Independent Coin Offerings (ICOs) are common scams.
- Rug pulls: Rug pulls are similar to coin offerings, but focus on the entire protocol itself. Developers realized that they could use Bitcoin for more than just a money supply and started to build Decentralized Finance (DeFi) communities that vote on and decide the direction of a particular token. While most DeFi outfits operate honestly, some fraudsters “pull the rug” from under the investor community, leaving with all the collected money.
- Pump and dumps: While less intentional than rug pulls, owners with high stakes in cryptocurrencies will engage in viral marketing tactics that pump up a cryptocurrency. Once the token reaches artificially propped up values, the bad actors pull out their money and tank the token values.
Efforts are underway to limit the damage of such crypto-specific scams, but it is a good idea for users to understand the risks involved with cryptocurrencies.
While the crypto network is safe from hacking, the individual digital wallets you might use to hold a cryptocurrency remain vulnerable. Private keys that store digital assets online are a current weak point, and since it is a decentralized system (i.e., not governed or regulated by one central authority), there is no way to recover tokens lost when in your possession. Hackers often focus on digital wallets that hold large sums of tokens.
Luckily, several secure digital wallets exist – both hosted (e.g., on an exchange) and self-hosted (where you manage your own private keys). Many owners also store their coins offline, immune from hackers. Large cryptocurrency exchanges continue to improve their cybersecurity to better protect their customer’s funds.
Why Do We Trust Banks With Our Money?
We trust our financial systems because of the high levels of authenticity. Governments and institutions have built a complex regulatory body that protects against fraud, maintains currency supply, and upholds price stability. The following regulatory bodies each help verify and control all monetary transactions:
- Customer Identification Programs (CIPs): Under the USA patriot act, businesses must comply with CIP requirements to help limit money laundering and other illegal activities. Know Your Customer Compliance (KYC) is a standard identification program. CIPs also fit into the Bank Secrecy Act (BSA), which includes compliance with Anti-Money Laundering (AML) programs and suspicious activity reporting.
- The Financial Crimes Enforcement Network (FinCEN): A branch of the state treasury, FinCEN enforces all BSA regulations and examines financial institutions for compliance, helping ensure the safety of the entire banking system.
- Federal Deposit Insurance Corporation (FDIC): The FDIC offers the necessary liquidity for deposit insurance. All citizens and businesses of America are protected from undue losses in the event of a bank failure.
- Federal Reserve: The Federal Reserve System makes macroeconomic decisions that help maintain the security of the US dollar and the American economy.
In summary, a centralized authority ensures the safety and price stability of the fiat currency system. The value and strength of the dollar are insured through monetary policy (central interest rates, minting new money, purchases of commodities, etc.). For consumers, such overt control makes fiat currencies a safe bet.
But there are problems. The American dollar has lost a significant portion of its value (a dollar in 1913 is worth $26 in 2020). The legacy banking system is also vulnerable to the same risks: scams, fraudsters, and crashing markets. The administrative costs to protect our system continue to hamper our economy’s strength.
Financial policy is ready for the innovation that cryptocurrencies provide.
What Makes Bitcoin Safe?
Bitcoin offers a new level of safety due to its underlying technology; many consider it better protected than most current financial systems. Even without a central authority, the Bitcoin security protocol is so strong that it would take insurmountable compute resources to crack private keys. Let’s look into the innovative nature of Bitcoin and what makes it safe.
1. Blockchain technology
Bitcoin uses a distributed ledger technology known as the blockchain. All transactions are submitted to a public pre-approval list, known as a mempool – once the transaction is deemed valid, a new block is added to the chain and the transaction becomes part of the public ledger. You cannot edit or reverse confirmed ledger information, meaning you can maintain a clear ownership history.
Bitcoin uses cryptography for enhanced security and to ensure the legitimacy of its blockchain. It generates an immutable transaction record that is guaranteed and protected by immense computing power, which authenticates each transaction in a block and prevents any double-spend. Any fraudulent attempt to spend money in a wallet not controlled by the attacker key gets thrown out by the network nodes.
Since no one can change or edit the cryptographically verified blockchain, it is easy to confirm the legitimacy of a transaction – a technology that is remarkably resistant to fraud.
Having a clear record of events also removes the need for a single judge (aka, a bank) to make decisions. Crypto developers want to avoid creating system weak points that could fall victim to attacks, hacking, bribery, etc. So, the verification of any cryptographic key spreads across the network of users who hold the specific digital token.
With decentralized blockchain technology, there is no single point of failure. It relies on consensus from the entire network through a public and open display. It is a case of safety in numbers, and the blockchain is highly transparent. If one part breaks down or falls victim to an attack, another server can jump in and maintain security.
3. Technical security
With the blockchain requiring extensive mathematical proofs solved across a massive network, a hacker would need over 50% of the network’s computing power to make any false changes to the blockchain (known as a 51% attack).
For one person to harness that much computing power is improbable – once again giving Bitcoin a level of security and corruption immunity unmatched matched in fiat systems, and competing cryptocurrencies (alt coins). It is a disruptive way of approaching digital transactions that could change almost every facet of global finance.
Bitcoin is as Secure as Its Technology
In short, while Bitcoin may feel new and risky, many would argue that it is far more secure than fiat currencies. Both crypto and fiat financial systems have benefits and drawbacks, but you can happily inform your customers that Bitcoin relies on some of the safest technology. As digital tokens continue to integrate into the economy and as regulation increases, it will only become safer. Bitcoin will likely become the base layer of the modern financial system, in a similar way that TCP/IP powers the internet we all know and trust today.