Cryptocurrency: The Good, The Bad and The Ugly

The enigma that is cryptocurrency elicits a multitude of responses and emotions among many of us. For the young software techies wearing converse and with an official jacket thrown over their faded jeans, it’s a blue ocean ripe for fishing. But for the rest of us, it’s usually followed by one word: scam.

It’s not hard to see why; from the inception of cryptocurrency, there have been numerous headlines splashed across the world relating to how thousands were conned of their hard-earned money. At the same time, you may come across articles telling of a farmer in the United States of America (USA) turned billionaire after dropping 100 dollars into bitcoin and reaping an abnormal harvest after just six years. So, what exactly is this monster called cryptocurrency? And what does bitcoin have to do with it?

For a proper comparative analysis, let’s take a bank. When you open an account with a bank, you deposit X amount of money. Your balance may now read KES 20,000. Okay. Now, a premise on which bitcoin is formed is the centrality of this data – the data that is yours and others’ bank balance and records. You see, the bank may have various servers to back up their data. But, what if, by some chance or occurrence, that data was wiped away? Or worse yet, it was altered, and you went to the bank today and found KES 20 indicated as the account balance instead of your KES 20,000.

Okay, another example: Take the election process in Kenya. Over the past decades, our acceleration in election technology has been remarkable and quite commendable. Now, a hypothetical situation may occur whereby you have the tally of votes of rival candidates switched in the infamous election servers. Besides security protocols, how can this be prevented?

That’s where blockchain technology and, by extension, cryptocurrencies such as bitcoin comes in. Blockchain technology is one where computers in a network practice peer-to-peer sharing; in simple terms, this is where different computers, called nodes in this case, are connected to each other, and share data amongst themselves. 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. This server can be illustrated as a form of computer storage that different nodes can send data to. It’s a simplified way of imagining cloud storage, where a computer sends data to this centralized server and the different computers in the network can retrieve that data from the very same server.

So, what makes blockchain special? As data moves from one computer in the network to another, the data is duplicated and stored. When a change is made in one computer, blockchain technology enables the other computers which are connected to the network to verify the data. If the change is contrary to what is stored in the rest of the computers (or blocks) in this network (or chain), then the change is rejected.

In summary, 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. This reduces the chances of fraudulent claims such as double claiming, and policy manipulation.

But it sounds just too good to be true. If bitcoin is this reliable, this secure against modification and deletion threats, then why doesn’t everyone use it? Well, for one, its decentralized nature creates a hindrance when it comes to regulation. 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.

And from this, a new problem is birthed. With the lack of regulation, there have been numerous cases of mass fraud schemes being built on cryptocurrencies. One of the most infamous schemes was perpetuated with the crypto coin dubbed One Coin, headed by Dr Ruja Ignatova, who later became known as 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.

It hasn’t stopped there; in the past year, we’ve seen the fall from grace of FTX, founded by Sam Bankman, the legendary Crypto King. He used his crypto coin proceeds as loans to his hedge fund, which eventually went under. He’s currently facing charges in the USA after being arrested in the Bahamas.

But what can we say? Like most things in life, blockchain technology and cryptocurrency is complicated. It has its share of pros, with its various applications that bring reliability and decentralization to various processes, such as what could be achieved with election tallying. But with decentralization, we see the con in a lack of regulations. And like a cord that cannot be broken, the unregulated crypto market has been haunted by its share of fraudulent schemes over the years. But despite it all, the possibilities that cryptocurrencies present to the underbanked population of sub-Saharan Africa are limitless, if and only if we can plug the holes in its processes.