Cryptocurrency adoption’s secret weapon
Who can solve the biggest problems between now and cryptocurrency mass adoption?
In 2020 we witnessed a surge in interest for cryptocurrencies, with Bitcoin reaching a new all time high as institutional investors and corporations entered the market.
While a lot of progress has been made, there are still a few things that stand in the way of mass adoption, specifically in areas around custody, security and regulation.
Mostly secure ≠ secure
While cryptocurrency has traditionally been all about self-custody, and it's still regarded safer to personally hold digital assets rather than leave them on exchanges, reliable and secure custodial services are crucial for mass adoption.
For example, in the USA, about a third of the country's adult population lives in shared houses. Australia is similarly seeing trends shift towards shared housing and overcrowding as the property bubble continues inflating.
Simply having the physical space to safely custody your own cryptocurrency is increasingly a luxury, rather than a norm.
Key recovery and secret sharing schemes are getting increasingly ingenious, but still suffer from the fundamental risk of something going wrong and users being left without recourse. If you're looking at true mass adoption, where billions of people start holding and using cryptocurrency, a scalable alternative for secure, trusted and reliable third party custody of crypto assets is crucial.
Unfortunately, crypto businesses haven't always had perfect security either, hence why personal custody is still regarded as safer despite its flaws. Several major exchanges have let slip user funds to hackers at some point, while key person incidents - pun intended - like we saw with QuadrigaCX highlight the challenges associated with secure custody of cryptocurrency as an asset class.
Regulation is in a similar boat. While cryptocurrency has typically eschewed regulatory oversight, it's likely that mass adoption won't occur without some sensible frameworks in place to help set security standards for crypto custody services.
For true crypto mass adoption, it's not enough for exchanges to be on par. They need to be able to offer clients at least as much certainty as banks, and ideally more.
Here's where we find the secret weapon for crypto mass adoption: exchanges that are not only matching, but exceeding, bank-grade safety for customer fiat and crypto, without sacrificing the usefulness of either.
It's important to emphasise that this doesn't happen by itself, and it's an ongoing process. Simply coasting along on industry best security practices is one thing, but actively pushing the envelope until it gets to a point where it enables mass adoption is something else entirely.
Kraken is probably the best example of an exchange that's actively pushing the envelope across these areas, towards viable cryptocurrency mass adoption.
Starting at the top, Kraken allows both fiat and cryptocurrency deposits and withdrawals, including some you probably won't find from newer bank and fintech crypto services.
Once deposited on Kraken, they can be used to access a range of crypto trading services, as well as newer offerings from both the fiat and crypto side of the fence, like FX trading and staking respectively.
The cryptocurrencies can also be withdrawn to one's own personal wallet, which is not possible with many of the newer crypto services. While personal crypto custody isn't for everyone, it's still a very useful feature of cryptocurrency that shouldn't be ruled off entirely.
Both fiat and crypto also need different types of safe storage.
Cryptocurrency custody is very much a physical affair, for which Kraken uses airgapped offline storage, protected with round-the-clock surveillance and armed guards.
Additionally, Kraken is also the first exchange to show proof of reserves, which is essentially a way for exchanges to cryptographically prove that they hold enough Bitcoin to match customer deposits. While a few other exchanges have picked it up, this is still not the norm. Maybe someday it will be.
Equally notable for such an old and prominent exchange, Kraken has never been hacked.
On the fiat side, Kraken is the world's first exchange to get licensed as a special purpose depository institution (SPDI) under new legislation Wyoming enacted in 2019.
SPDIs are banks that can receive deposits and conduct a range of other banking activities such as fiduciary asset management, custody and related activities. However, SPDIs are prohibited from making loans with customer deposits and therefore are not required to obtain FDIC insurance - although they are permitted to do so.
So in other words, Kraken became a real bank in the US. Under this legislation its fiat holdings are fully backed at all times, unlike more traditional fractional reserve banks.
To be precise, it maintains unencumbered liquid assets (to the extent that customers aren't depositing encumbered assets) valued at no less than 100% of its depository liabilities.
Customers remain the owners of their deposited assets, and Kraken does not "sell, transfer, loan, hypothecate or otherwise alienate received assets in [a user's] Kraken account" to quote the terms and conditions.
This is unusual by the standards of both traditional banks and cryptocurrency exchanges. The former is in the business of lending customer assets, while the latter is typically quite opaque and largely free to use customer funds as it sees fit, in the absence of regulations to the contrary.
Account level security
It's also worth exploring Kraken's account-level security, which also goes beyond what's found at many banks and crypto exchanges.
Most cryptocurrency theft from exchanges is the result of user error, with SIM swap attacks being especially prevalent.
This is when a thief accesses someone's mobile phone number and uses it to impersonate a victim and reset passwords to gain access to funds. While most often associated with crypto exchanges, it's also been used to rob banks.
Kraken completely removes the false sense of security associated with mobile 2FA, and instead requires Google Authenticator or Yubikey 2FA.
It also takes aim at phishing by signing official Kraken emails with a PGP key, and gives customers fine-grained control of account settings like account timeouts.
Now that Bitcoin is pushing new all time highs once again, and getting distinct, public nods from an array of institutional investors and businesses, the next challenge is making the asset easier accessible to more people. Security is at the heart of this.
And while traditional banks and fintech companies like PayPal are moving into the crypto space, there's still a clear gulf between the selection and services they're offering - including only a tiny selection of coins and an inability to withdraw funds - and the superior features of crypto natives like Kraken.
While there's still a long way to go before we can truly speak of mass adoption, it's impossible not to look back at just a few years ago and marvel at how far things have come, while looking ahead to see what's still left to do.
Custody, regulation and security will be critical issues for cryptocurrency in the near future. Here, exceptionally high quality exchanges are an ace in the hole.
Interested in cryptocurrency? Learn more about the basics with our beginner’s guide to Bitcoin, see how to keep your crypto safe with our end to end guide to cryptocurrency security and dive deeper with our simple guide to DeFi.
Disclosure: The author holds cryptocurrencies including LINK at the time of writing
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