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Data privacy

The role of cryptocurrencies in a world driven by privacy considerations

For cryptocurrency advocate Justin Blincoe, blockchain is a catalyst for promoting an understanding of digital security.

With the focus on data privacy gaining momentum in the days leading up to GDPR, debates are ratcheting up around how the permanence and transparency of blockchain technology might co-exist in a landscape where data subjects can request of data holders that their personal information be deleted. And with blockchain-enabled cryptocurrencies advancing in popularity, we might expect to see these discussions take on greater prominence.

To get the perspective of someone intimately familiar with the world of cryptocurrencies, we talked with Justin Blincoe, an early adopter and former chief operating officer and chief financial officer of Coinapult, a bitcoin broker. Blincoe shared his experience in the financial services industry, his interest in cryptocurrencies and where he sees this technology adding value to not only corporations but to our everyday lives.

ANSWERS: With GDPR coming on board in a Big Data-driven and potentially hyper-transparent blockchain world, what do you think needs to transpire culturally so governments, regulators and cryptocurrency promulgators are best equipped to co-exist?

BLINCOE: Currently, most of the innovators in the crypto space are spending the majority of their time thinking about legislation and regulation, especially in the U.S. This is a massive headwind to innovation; entrepreneurs and builders should be thinking about building, innovating, satisfying customer demand, and creating more, safe ways to hold value that were never possible in the legacy custodial banking model.

That being said, governments need to shift their focus to a customer-centric model, which I think is definitely lacking today in the U.S.

As for an example that might hit closer to home, take a look at title insurance during real estate transactions. If you buy a house and have to pay $3,000 just for title insurance, you are wasting money on silly expenses to meet basic laws and regulations. However, imagine if the government who handles the title office had a customer-focused mentality and said, “We can bring down the cost of title insurance for our customers by putting this on a blockchain, which has mathematically verifiable transactions. We could bring the cost down to near zero.” Ideally, the culture would be more along the lines of, “How can we help our customers work?”

Unfortunately I don’t think governments in general really think of their constituents as customers, and it would be a significant change in the culture to bring them to the forefront of any sort of innovation in this space.

ANSWERS: In many cases globally, we’re seeing governments taking the lead role in terms of discussing cryptocurrencies and blockchain but challenges remain. What do you see as barriers for cryptocurrency adoption among governments?

BLINCOE: The question is broad because every government is different. Bureaucracies are notoriously bad at driving and adopting innovation; they are risk averse and prefer momentum to critical reflection. In my view, governments are likely to be the late movers in any sort of adoption of cryptocurrencies. In the U.S. alone, you have 197 agencies and they all have different takes on what a cryptocurrency is and how it should be regulated. At a high-level overview, the greatest barrier is the lack of a true understanding of cryptocurrencies, combined with a feeling like governments need to do something.

The Swiss Financial Market Supervisory Advisory (FINMA) just came out with a token framework that divides tokens into three classification categories: one being an asset or security, another being a utility token and finally a basic cryptocurrency like bitcoin that doesn’t have any sort of backer or counterparty. Switzerland has decided to take a proactive approach in saying, “We’re going to define some rules and try to make sense of it.” In contrast, the U.S. SEC approach seems to be, “Everything that we’ve seen looks like something we can regulate. It looks like a security, period.” The SEC has now put out 80 plus subpoenas to every company in the space saying, “Tell us what you’re doing,” with enforcement actions soon to follow.

That type of behavior scares people away from innovation, and countries like Switzerland are going to win if that dynamic doesn’t change in the U.S.

Justin Blincoe
Justin Blincoe, early adopter and former chief operating officer and chief financial officer of Coinapult, a bitcoin broker.

ANSWERS: One of the things with the cryptocurrency culture is that there seems to be a certain degree of anonymity surrounding this technology, and it has been raised that global insurers are starting to offer protection against theft, which can be challenging if anonymity is baked in. What’s your take on the best way to protect a cryptocurrency investment?

BLINCOE:  I would push back a little on the idea that cryptocurrencies have anonymity baked in. I’d say they actually are far more transparent than cash or even banking. Cash is obviously done via person to person with no trace, and banking is done all on private computers with private databases that don’t have much transparency, whereas things like Bitcoin, Ethereum, and others have every transaction recorded publicly. It is there in perpetuity. It is a very well-propagated myth that there is a lot of anonymity because more people haven’t realized how easy it is to get past that first layer where you see the bitcoin address – a random string of numbers and letters, rather than someone’s name and social security number.

As far as protecting your cryptocurrency investment, it all depends on how much you’re looking to protect – it’s a value-based question. For example, let’s say you have $10 of bitcoin that you bought and put on a software wallet on your phone. That would be sufficient protection because, similar to a wallet you would keep in your pocket; if you lose $10 it doesn’t really hurt you. However, if you are holding larger amounts and this is an investment for you, a hardware wallet like KeepKey would be a really good investment since it is a USB dongle that plugs into your computer. It essentially stores your investment offline. For corporations, I would suggest using a combination of hardware wallets and multi-signature transactions, as well as establishing a set of guidelines and protocols for handling cryptocurrencies.

ANSWERS: Do you see blockchain assisting in an accounting firm’s cybersecurity abilities?

BLINCOE: Bitcoin has already raised the profile of digital security. Anyone exposed to this space starts to realize how insecure Internet communications and overall digital security is, even in 2018. Once an individual or company realizes that they are responsible for securing a valuable digital asset, they quickly start learning about two-factor authentication, strong passwords, removing SMS from online services, etc. This is not driven by a blockchain, but rather it forces organizations to obtain a basic understanding of digital security.

As far as accounting services and security going forward, the possibility of using triple-entry accounting to reduce most major loopholes used for fraud and theft in the current corporate Wall Street environment today will start closing, for anyone that demands a real level of transparency.

ANSWERS: Who do you see as the primary customers and users of cryptocurrencies (private individuals and investors, governments, corporations, financial institutions, etc.)? Who are the main adopters?

BLINCOE: From a dollar investment standpoint, financial institutions are starting to really take hold of the market share and buy up a lot of cryptocurrencies. There are a lot of hedge funds starting out that are investing in the space, which is where a lot of the dollars go. As far as the actual transaction count and number of users, however, I think the core user-base keeps getting bigger with people who are simply curious.

We’re still very early in this technology and its potential, so it’s a lot of experimentation, a lot of people saying, “Let me try this and see if it actually works.” There are many individuals who have really cool ideas but I think most users of cryptocurrency are still in the experimentation phase – and some just experiment with larger dollar value amounts than others.

Honestly, there are not a lot of limits here. It comes down to the fact no one really knows where this is going and everyone wants to try and dip their toes in the water to see how they can leverage it for personal or business use.

Learn more

For additional content concerning the use of personal data in the digital age, be sure to explore the rest of our multimedia series: A new dawn for data privacy and transparency.

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