Like the early web, cryptocurrency represents big risks and major opportunities

Like the early web, cryptocurrency represents big risks and major opportunities
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Cryptocurrencies hold great promise for the future. Not only can they revolutionize money, but their underlying technology has the potential to create a new kind of internet that’s fully protected from security breaches or cyberattacks.

Unfortunately, the crypto space also has a dark side. It suffers from lax standards, murky operators, marketing hype, and periodic market crashes. It desperately needs the clarity that only robust, impartial ratings can provide.

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To that end, my firm recently became the first financial rating agency to issue grades on cryptocurrencies. They’re on a scale from A to F (similar to school grades), using a computer model that examines each crypto’s technology, adoption and investment risk/reward.

 

When we launched our cryptocurrency ratings in January, bitcoin initially received a C+, while no currency merited an A. This enraged crypto fans around the world, setting off a firestorm of protest on social media. We were not surprised. The industry reaction was similar to that of the nation’s large insurance companies and banks that we rated D years ago. When they went bankrupt, those who heeded our warnings avoided big losses, and the accuracy of our ratings was recognized, including by the U.S. Government Accountability Office (GAO). Likewise, crypto investors who used our recent ratings could have avoided large losses as bitcoin plunged.

Our ratings model tells us that older, tried-and-tested cryptocurrencies, such as bitcoin (currently B-) and Ethereum (C+), face challenges with slow speed and limited scalability. But newer cryptocurrencies — such as EOS (B-), NEO (B-), and Cardano (C+) — which promise to overcome these issues with more advanced technology, are still mostly experimental. Meanwhile, many cryptocurrencies, using copycat or buggy technologies, get D grades or lower. And virtually every cryptocurrency suffers from extreme price volatility.

However, neither investors nor policymakers should let these challenges overshadow the potential of cryptocurrency technology to help overcome some of the most serious threats to modern society.

Cryptocurrencies are based on blockchain, or, more broadly speaking, distributed ledger technology (DLT). Instead of storing big databases in a central location, which can make them sitting ducks for hackers, DLT stores data across multiple sites. To penetrate DLT databases, hackers would have to penetrate an insurmountable number of computers all over the internet. In addition, DLT supports a broader, more efficient decision-making process for almost any kind of institution.

The potential benefits are vast.

DLT could help modernize democratic election systems, largely eliminating voter fraud, vote count inefficiencies, and hacks.

DLT could provide the foundation for a more stable financial system. Indeed, bitcoin was originally created in the wake of the 2008 debt crisis as an alternative system that would not require large government bailouts or massive quantitative easing. And today’s newer cryptocurrencies take this a step further by clearly defining rules of monetary policy.

DLT also supports new a kind of social media platform. One, already in operation, allows users to store their data on the blockchain and rewards them for their content contributions with cryptocurrency. Another still in development aims to add key features, such as user privacy and user control over data.

Overall, crypto technology could provide the ultimate in protection against hacking. Massive data breaches, such as those at Facebook, Equifax, Yahoo! and countless others, would have not been possible if their platforms and business models had been built on DLT. Nor would it be possible for foreign cyber actors to invade America’s critical infrastructure sectors, such as energy, nuclear, water, aviation and manufacturing.

Right now, the U.S. and other countries are struggling to get a grip on how to regulate this sector. We believe they should begin by focusing on standards for reliable data and risk disclosure for investors. Moreover, in order to create an environment that encourages growth, governments will soon need to move beyond regulation. Two decades ago, the struggle to regulate the internet resulted in a “do-no-harm” approach that helped usher in an era of enormous progress. A similar approach today vis-à-vis crypto technology could unleash a new wave of innovation that generates even greater benefits.

Martin D. Weiss is the founder of Weiss Ratings, and has a doctorate from Columbia University. Neither he nor his company accepts any compensation from rated entities. His cryptocurrency investments are limited to a small model portfolio for investors that’s fully disclosed.