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June 23, 2021

Cryptocurrencies may have just gotten a lot less secure

By GlobalData Financial

The US government has managed to recover the vast majority of the $4.4m ransom that the Colonial Pipeline had paid to the hacking group, DarkSide, following the ransomware attack in May.

This was a particularly obstructive hack, causing fuel shortages on the US East Coast, and usually the recovery of these funds would be heralded as a solely positive outcome. However, the funds that they recovered were not dollars but rather they were Bitcoin.

These cryptocurrencies were previously seen to be beyond the reach of government entities as they operate on a decentralised, open system, across hundreds of different countries. This may bring in to question the main rationale for the use of cryptocurrencies, posing an existential risk to their ongoing use.

Cryptocurrencies have been championed by people who are seeking to get away from government control and oversight. They desire a world where their money is decentralised and secure, where people determine the value of currency rather than a government, and most importantly, where their money can be kept out of the control of government. Cryptocurrencies traditionally met, in some way, most of these criteria.

One of the biggest governmental criticisms of cryptos has been the fact that they are anonymised. This made them an effective tool for criminal use and many criminals, including hackers, have begun to operate and demand payments in cryptocurrencies, to avoid the threats posed by the authorities. A major reason behind China’s crackdown on cryptocurrencies has been the fact that Chinese mainlanders were using them to get their money out of China, something that the CCP does not tolerate.

However, the open nature of crypto was only marginally used in criminal activities. The main driver for their adoption was the intangible value that individuals placed on the sense of liberation from government and new form of currency that could usurp old, clunky, government-controlled fiat currencies.

Many experts accepted that even if cryptos were being used by criminals, the proportion was still less than the amount of fiat currencies used by criminals. Therefore, there was still a net positive to crypto use.

However, the US may have fundamentally undermined one of the key pillars driving the use of cryptocurrencies with their seizure of the Colonial ransom. This demonstrated that these cryptos are not as untouchable as they first seemed and are clearly susceptible to government control.

This may put crypto-maximalists in a situation where they have to reconsider their position and whether they can really rely on cryptos to be the liberating, almost anarchic, currencies that they once thought they could be. Cryptocurrencies will continue to exist and be popular, however, the question is whether the core belief around what they are actually capable of has been fundamentally changed.

This was written by GlobalData Thematic Analyst Danyaal Rashid. 

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