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Cryptocurrency security isn’t totally anonymous. And that’s good.
Cryptocurrencies carry emerging theft and security risks. But there are steps institutions can take and encourage to adjust to a different type of fraud risk.
The best advice to prevent the loss of cryptocurrency is to protect user passwords and digital signatures as diligently as people protect other valuable confidential information.
Cryptocurrencies do carry protection as part of the model. Cryptocurrencies are small pieces of digital information that are recorded on a blockchain ledger and the information is cryptographically secured.
In order to access the ledger and transfer ownership, you need to use the password linked with the public or private encryption key that is part of the digital signature associated with that account on the ledger that holds your cryptocurrency. If you have not got the right password you cannot access the ledger. If the encryption standard is based on a secure algorithm with a sufficiently long bit size, your digital signature cannot be hacked.
But someone might simply try to change the entry into the ledger by altering the ledger itself, replacing the correct ledger with a new copy that shows an entry where your cryptocurrency has been transferred to another account as though you had authorized the transfer with your digital signature.
This is where the security of blockchain technology comes to the rescue. The decentralized decision-making process (the consensus mechanism) for validating new copies of the ledger prevents unauthorized copies of the ledger from being accepted by the network validators (“miners”). Hence the use of digital signatures and the consensus mechanism protect cryptocurrencies such as bitcoin from double-spending.
However, someone may steal a password. They may hack a computer or the servers of the service provider that holds the digital wallet. By using the user’s digital signature, the hacker would transfer cryptocurrency to another account on the ledger and the transaction would be validated on the blockchain. The cryptocurrency would then be lost, as if someone had stolen cash in the analog world. There is no third-party intermediary like a bank or credit card company to correct the error. This immutability of the blockchain is the whole point of its security.
If the victim or firm can find the thief (i.e. the person who hacked the account or the person who holds the blockchain account where the cryptocurrency has been transferred to) then the victim or a representative can address the claim against them.
There is an advantage here over the analog cash world. On the internet everybody, including hackers, leaves digital traces. New recovery services have emerged that offer to track stolen cryptocurrencies by analyzing IP addresses and other types of traffic data that can lead to the hacker.
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