Cryptocurrency Is Here to Stay

Few investment assets generate as much heated debate as cryptocurrencies, and Warren Buffett stirred the pot last week by saying he won’t buy them.

That’s a position that’s bucking the trend. The public and financial worlds are becoming more accepting of digital currencies, and governments worldwide are studying them with the expectation that they’ll take hold in a much bigger way as time goes on. Digital assets have grown explosively and now have a market cap of about $1.7 trillion.

That more accepting stance certainly wasn’t on display at the annual Berkshire Hathaway shareholders meeting last week, where Buffett said he wouldn’t buy crypto because it isn’t productive and it doesn’t generate anything tangible.

“It’s got a magic to it, and people have attached magic to lots of things,” he said.

Digital assets are indeed in their infancy, so buyers beware. There are numerous ways to value them, some of which lack transparency, and exiting them sometimes brings unexpected costs.

What’s more, the pseudonymous structure of cryptocurrencies such as Bitcoin or ETH makes them ripe for abuse, especially in the absence of regulatory frameworks.

But some prominent figures have softened their once-hostile stances, including Ken Griffin from Citadel. The man who once dismissed cryptocurrencies as a “jihadist call” against the dollar now says that Citadel – a hedge fund that manages some $50 billion in assets-- can’t ignore them anymore.

JPMorgan Chase chief Jamie Dimon, who once called Bitcoin “worthless,” now says he sees value in blockchain's underlying technology. And his bank has created a digital coin, JPM Coin.

Central banks are also treating cryptocurrencies seriously. The U.S. Federal Reserve Board recently released a discussion paper examining the pros and cons of potentially issuing a digital currency itself. Many other countries are weighing the same. El Salvador has gone so far as to adopt Bitcoin as an equivalent of the country’s currency, which will be an interesting experiment to watch.

With all these regulators weighing in on this space, they’re giving cryptocurrencies a legitimacy that suggests they’re here to stay. And they’ll probably exist in several different forms. There’s the Bitcoin-style asset, less-volatile stablecoins, and possibly central bank-issued digital currencies. It’ll take at least five years before we see what the final mix looks like.

All this will require robust regulation that goes against the spirit in which bitcoin was created. It will be essential for us to get the regulations right. With the proper regulations, digital assets will gain what they need to become more mainstream. This also opens new challenges for CISOs, because protecting digital assets is a very different ballgame. How many people understand how crypto and crypto wallets work right now? How do you secure them? How should you be thinking about blockchain security? The list goes on.

Once a digital asset is stolen, in most cases, it’s gone.?With the current state of regulation, you can’t call up the FDIC and say, I got robbed; I want my money back. How do you plan for business continuity and disaster recovery??

There will also be a need to clarify digital identity. While some Nordic countries issue digital identities, the U.S., Canada, and other major Western governments do not. This will be another challenge for CISOs. What does digital identity look like, and how do you protect it? Who operates it? This may bring the case for self-sovereign identity as an example.

It will be an explosive market for vendors and CISOs that will only increase their value. There will be more buzzwords that CISOs must navigate to determine the actual value new technology brings.

Warren Buffett’s hostility to cryptocurrencies is a reflection of his investment philosophy. He puts his money in tangible things that you can hold. But sentiment worldwide is moving in the opposite direction.

Disclaimer: The views are solely those of David Cass.