Cryptocurrency: A Double-Edged Sword

Cryptocurrency, a concept that has sparked an array of reactions among different demographics, remains a perplexing enigma for many. For tech-savvy jeans and sneaker-wearing millennials, it represents a new frontier teeming with opportunities. However, for the uninitiated majority, it’s often synonymous with scams.

The skepticism isn’t unfounded. Since its inception, cryptocurrency has been marred by numerous reports of fraud, with countless individuals losing their hard-earned money. Yet, there are also stories of overnight millionaires who made a fortune from a meager investment in Bitcoin.

So, what exactly is this complex beast known as cryptocurrency? And how does Bitcoin fit into the picture?

To understand this, let’s compare it to a traditional bank. When you deposit money into your account; let’s say you deposited KES 20,000, and that instantly reflected on your account balance. The bank stores this data on their servers. But what happens if this data is compromised, wiped away or altered? One day you went to the bank today and found KES 20 indicated as the account balance instead of your KES 20,000!

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That’s where blockchain technology and cryptocurrencies like Bitcoin come into play. A premise on which cryptocurrencies like bitcoin is formed is the centrality of this data – the data that is yours and others’ bank balance and records. Blockchain technology enables peer-to-peer sharing across a network of computers, referred to as nodes. The difference between such an arrangement and what was initially described with the bank is that the bank’s computers would be connected to a shared server. Unlike a centralized server, each node in a blockchain network duplicates and stores data. If a change is made in one computer, the rest of the network verifies it. As data moves from one computer in the network to another, the data is also duplicated and stored. Any discrepancies result in the change being rejected, ensuring enhanced data security.

Blockchain technology provides enhanced data security by preventing the data in the various blocks from being modified and it does this by replicating the data in each computer in the network. And this is how cryptocurrencies like bitcoin, which are built on the blockchain technology, pledge to keep your money safe; the digital money has its ledgers, or records, replicated around the world in computers connected to the appropriate network. This prevents modification of your account balance in case of security threats and allows for enhanced reliability due to the replication of the same data.

The enhanced security that blockchain technology offers can be used to not only secure online payments but to also mitigate fraud risks of other key processes. Take for example an insurance company that has hundreds of brokers, thousands of service providers, and millions of clients. For an insurer of this size, the reconciliation process can be especially difficult due to different data sources used throughout the claiming process and their traditional, centralized databases, which are susceptible to hacking and data breaches. However, by using a decentralized blockchain network, the insurer will have a synchronized and shared ledger of transactions and policy information that cannot be easily modified or tampered with reducing the chances of fraudulent claims such as double claiming, and policy manipulation.

However, the seemingly infallible nature of cryptocurrencies raises the question: why isn’t everyone using them?

By its nature, cryptocurrency cannot be regulated as it is shared amongst peer computers, without it passing through a central data source. This creates a problem in having cryptocurrencies approved by various governments globally, including here in Kenya.This lack of regulation has resulted in numerous fraudulent schemes based on cryptocurrencies, such as the infamous One Coin scam led by Dr. Ruja Ignatova, the “missing crypto queen”. Dubbed as a major investment, One Coin ended up raising billions of pounds yet what was sold was a non-existent cryptocurrency. And up to date, the whereabouts of the Missing Crypto Queen are a mystery.

Moreover, even legitimate ventures can falter. Sam Bankman, the founder of FTX, faced charges after using his cryptocurrency as loans to his hedge fund, which eventually went under. He’s currently facing charges in the USA after being arrested in the Bahamas.

In essence, blockchain technology and cryptocurrency present a paradox. On one hand, they offer potential solutions to enhance reliability and decentralization in various processes, including election tallying. On the other hand, the lack of regulation exposes users to potential fraud. Despite these challenges, the potential benefits of cryptocurrencies for the under-banked population of sub-Saharan Africa are enormous, provided we can address the inherent risks in the system.

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Mercy Kiptui is a Digital Forensics and Data Analytics Associate at the PwC Kenya.