By Hugh Brooks, Director of Security Operations, CertiK
The rapid expansion of the cryptocurrency industry has brought technological innovation and financial inclusion, while promising a freer and fairer global financial landscape. However, this growth has also introduced some growing pains, such as the more than $3.7 billion lost to hacks, scams, and other exploits in the past year alone. Furthermore, the recent collapse of FTX, the world’s second-largest crypto exchange, underscores the inadequacy of existing regulation to appropriately protect users from risk. On the flipside of this coin are all the potential benefits of a truly crypto-native approach. By voluntarily adopting stringent and effective security and transparency measures, the crypto industry can ensure it’ll be around to realize its transformative potential.
Without delving too deeply into the potential motivations of such policy, the fact remains that external regulation of the crypto industry has often proven to be contradictory, unclear, and ineffective. This uncertainty hinders the growth and stability of a burgeoning trillion-dollar global industry that transcends geographical boundaries. Aggressive regulators inadvertently drive innovation and investments offshore, undermining the potential of the sector. And major nations have learned painful lessons about the importance of resilient systems over the last few years, from the supply-chain disruption of the pandemic to the unknown cost of cybersecurity incidents such as SolarWinds. Punishing some of the brightest minds in the country for their online experimentation is not just a great way to discourage innovation of all types, it’s a national security risk.
Meanwhile, the FTX debacle highlights the drawbacks of government-led regulation, which can be manipulated by outside special interest groups. A crypto-native approach, based on the open, auditable, and transparent foundation of blockchain technology, however, offers a solution devoid of coercion. Compliance with such an approach is binary: the math either checks out or it doesn’t.
One of the best examples of a crypto-native solution is Proof of Reserves. This innovative approach enables users to access real-time, on-chain data that verifies the solvency of a Web3 platform. Unlike traditional financial reports which come just once a quarter, Proof of Reserves offers instant, transparent, and verifiable information. The widespread implementation of this self-regulatory measure would be a major step towards the crypto industry boosting its credibility in the eyes of regulators and users alike.
Another powerful tool for proactive self-regulation is Know Your Customer (KYC) verification for project teams. By having legitimate founders verify their identities, the industry sets a higher bar for trust and transparency. While the anonymous nature of Bitcoin, brainchild of the still-pseudonymous Satoshi Nakamoto, is essential to the crypto ecosystem, projects soliciting financial investment from the Web3 community must strike the right balance between their right to privacy and their responsibility to transparency.
By undergoing KYC verification, project teams can confidently stand behind their work without necessarily publicly doxxing themselves, while investors can make informed decisions based on accurate, reliable information. This approach safeguards the interests of all parties and cultivates a more stable and secure environment for growth.
All those who believe in the future of the blockchain industry share a collective interest to ensure the industry’s success and prosperity. It is vital that we address the significant losses attributed to hacks, exploits, and scams in order to guarantee the industry’s long-term viability. By adopting a proactive approach, we can demonstrate our commitment to security and transparency, outpacing regulators in the process.
Embracing self-regulation and implementing native solutions like Proof of Reserves and KYC verification allows the crypto industry to confront its challenges head-on. And the flexibility of blockchain technology enables the development of new solutions as fresh problems arise.
The self-regulation of the crypto industry is of paramount importance. As the sector continues to evolve, it is crucial to come up with native solutions that address its unique challenges in the most effective, hands-off manner possible. By fostering transparency, trust, and security through self-regulation, the crypto community can lay the groundwork for a more sustainable and successful future of the industry.
About the Author
Hugh Brooks is the Director of Security Operations of CertiK. Hugh can be reached online at (@Crypto_tauros) and at our company website http://www.certik.com.