Risk Management in Cryptocurrency
Bitcoin originally begun as a means for peer-to-peer exchange that went on to effectively disrupt financial networks and traditional banking. Its rising value as a digital currency has also seen an increase in the number of firms that are introducing cryptocurrencies to their business systems. A significant number of forex brokers are also accepting bitcoins for currency trading. As a result, it has created emerging risks that may be under or wholly uninsured in regards to the current market standards.
What are some of the risks Exposures of Cryptocurrencies?
The Initial Coin Offering (ICO) aimed at raising investment capital is characterized by unclear regulation. It has been seen with different insurers declining to provide coverage for clients engaging in businesses related to cryptocurrency until there are clearly set regulatory standards.
Great concerns are mainly on the availability of proper internal controls and the level of oversight. According to the U.S. Securities & Exchange Commission (SEC), there is possibility of cryptocurrency losing out on stock and commodity regulations. With different regulations being established across the globe for different reasons, there are countries that will prohibit any cryptocurrency trading while countries such as China may attempt restricting use to financial institutions.
Based on the observations of different industry analysts, it is predicted that the future of cryptocurrency is highly dependent on improving custody in online and offline storage as well as the security involving platforms and solution providers. There is a growing volume of financial institutions such as Fidelity Digital Asset Services and the Japan bank Nomura. CCN mentioned that Citibank worth $175 billion would be offering institution investors with custody solutions through a fully insured and regulated format.
Cryptocurrency is also not backed by a central bank, and this brings concerns of systematic risks including credit risks and currency inconvertibility. Platforms such as Bitcoin Prime trading review, take keen consideration to providing robust risk control measures. The platforms depict that cryptocurrency trading comes with insane risks owing to the high levels of volatility. It is for this reason that platforms such as Bitcoin Prime provide users with options such as Stop-Loss, Negative Balance Protection, and Take Profit.
Another area of concern is the low level of security expertise as depicted by a report by Trend Micro. Individuals and businesses are facing complex ransomwares, extortion events, large disappearances as well as AI-powered bots seeking weak links. A cryptocurrency firms stand to lose the blockchain technology which is their main security feature is they choose to operate from a centralized point.
Financial institutions face high pressure to make proper decisions concerning cryptocurrency strategies and the level of investment. The pressure comes from the possibility of cryptocurrency ultimately goes mainstream and becomes a requirement. These institutions have to consider the impact both negative or positive it may bring to its brand and reputation. Engagement in cryptocurrency may be a form of attracting a new customer base but it could also make current clients frightened by the institution’s divergence from traditional services.
With the continuous development and maturity of the cryptocurrency industry, there is bound to be a growing appetite for digital assets cryptocurrency being prime. With every growth, comes a heighten in its associated risks. It is thus critical that financial institutions prepare adequately and protect themselves from both direct and indirect vulnerabilities. It means institutions understanding the various risks associated with cryptocurrency from cybersecurity, proper internal controls, to high volatility of the industry. It is important that a platform constantly monitors evolving guidance, attack vectors, and registers (e.g., licensed Bitcoin business). Better risk management would also include integration of third-party information and negative news with the activity of its account holders.