Improving crypto security protocols through regulations

By Muthuswamy N Iyer

If you look at the policies being drafted by countries, global watch dogs, etc., you’ll find security and user protection at the forefront of these laws. Ensuring that consumer funds are protected while dealing with virtual digital assets, preventing the misuse of investor funds, malpractices, and eventually disabling the larger effects of these actions from spilling over to traditional finance, are at the top of the list for lawmakers after incidents from last year left not just the Crypto Asset (Virtual Digital Asset (VDA) ) community but the larger financial system in shambles.

In what seems to be a silver lining, a report by security firm TRM Labs, security hacks in Crypto Assets dropped by 70% in the first quarter of this year as compared to the same period last year. In fact, the same has been attributed to improved security protocols and better regulatory moves. Most amounts which were stolen from users or project funds have been recovered. This is a significantly positive development after the security aspect of virtual digital assets was questioned by experts amidst conversations of wider adoptions. The vulnerability of users which came to light as a result of these hacks was a motivator for lawmakers to create stricter policies in the area of cybersecurity on blockchain.

While it is safe to say that the industry is on the right track when it comes to improving and scaling the safekeeping of VDAs and ensuring a smooth transaction process across blockchains, there can be a few things to ensure this is accelerated and improved as we progress with VDAs.

1. The most common narrative which has marred VDAs is that it’s being used for money laundering. Countries like India and the UK have taken steps to bring Crypto under the ambit of their anti money laundering laws to ensure compliance of platforms with licensing protocols fit to the industry standards. However, this needs to be more robust and must evolve with the dynamics of Crypto.

2. Bug Bounties have become quite common for private Crypto platforms to identify security loopholes and reward the identifier in order to motivate them to do a thorough job. This can be replicated by government bodies to ensure an overall secure ecosystem when it comes to public blockchains, CBDCs, cross border transactions, account settlements, etc. This kind of capacity development can also increase collaboration between public and private entities and bring the best out of both industries to tackle issues of breach/hacks.

3. The application of Artificial Intelligence in various aspects of emerging technologies seems inevitable. The Indian government has been vocal about its objective of using AI for access to complex datasets, disintegrate behavioral patterns in different industries and also capitalize on its potential to scale the economy. The US in its latest AI strategy has focussed on international collaboration and governance through the use of AI. This is besides G20’s announcement on how AI’s prowess can be used by nations to create better regulatory measures in different industries. Needless to say, countries should immediately look towards implementing these for Crypto Asset regulations, narrowing it down to security protocols.

4. Smart contracts which are an integral part of blockchain should be utilized to its full potential. They have a crucial role to play when it comes to holding tokens, equity, voting rights, transactions, future contracts for settlements for derivatives trading etc. They can be made airtight to ensure there is no chance of breach without the attacker facing adverse consequences for his actions.

The regulatory approach towards Crypto Assets should not be clouded by the anticipation of security hacks. Instead there should be enough room for innovation which could also extend to creating full proof security measures on blockchain. Actively reporting fund thefts by private entities to authorities or governing bodies will ensure that the industry is apprised of similar moves and can collectively work towards insuring all stakeholders in the event of such an occurrence repeating itself.

Needless to say, besides such disclosures, widespread education programmes with lawmakers, investigators, as well as users will lead to a significant reduction in frauds related to VDAs. School curriculums, technology courses which teach about digital assets must make it clear that caution needs to be exercised while dealing with Crypto Assets.

Nations across the world should work on cooperative incentive mechanisms for lawmakers, users, think tanks, etc. for R&D in digital asset security. These approaches should significantly enhance the security aspect of the Crypto Assets  industry and set the tone for its safe adoption by users worldwide.

The author is head, legal and compliance, WazirX

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