Crypto’s consumer safety and security issues haven’t gone away

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This week, the U.S. Securities and Exchange Commission sued Binance, the largest cryptocurrency exchange in the world, for an array of alleged financial violations. This follows the spectacular failure of the second-largest exchange, FTX, and the arrest of its CEO Sam Bankman-Fried on criminal charges of fraud and conspiracy late last year.

These events came after what was coined the "crypto winter" in 2022. Asset values collapsed, and other crypto stars like Terra coin and Celsius imploded, leaving everyone from retail investors to pension funds with significant losses. Analysts speculated on whether or not these events would lead to the end of cryptocurrency.

And yet, six months later, crypto has risen again. Major digital currencies Bitcoin and Ether have nearly doubled in value from late 2022 lows, powered in part by the financial uncertainty caused by the recent U.S. bank failures.

Canadian financial regulators have recently increased measures to protect investors. Crypto trading platforms, both domestic and foreign, have been subjected to an adapted version of Canada's securities laws, requiring that they be registered, and that prudential safeguards in areas like compliance and risk identification, and anti-money laundering, be in place. Some global crypto trading platforms, like Kraken, signed on to these rules. Binance opted to exit the country instead.

But while investors return, many of the issues that led to the crash, and the significant financial losses and other harms to its users, haven't gone away.

The problem is, as the global crypto gold rush captured the zeitgeist of the early ’20s, the features enabled by crypto and blockchain technology have been exploited for malicious intent by bad actors — a sociotechnical dynamic that hasn't been entirely addressed yet by today's regulatory space.

In a new report by our team at Toronto Metropolitan University, we assessed the risks of crypto asset trading in Canada through a cybersecurity lens, looking at both the technical vulnerabilities with blockchain-based assets, and another category of threats resulting from social interactions with the technology (or "sociotechnical" threats).

Traditional cyber attacks target blockchain networks, crypto-asset exchanges, individual users, and third-party applications like crypto wallets. These took many different forms, with the aim of stealing crypto assets, user data, or even infiltrating devices to covertly use the victim's computing power to mine crypto for profit.

Other types of threats fall under the sociotechnical category. Most recognized are widespread financial scams and frauds, ranging from phishing attacks to access a victim's wallet, to government impersonation scams and social media "friendships" to coerce and defraud victims. Others exploit the high-risk culture of crypto, from the proliferation of misinformation and deceptive promotion, to pump-and-dump schemes pushed by celebrities.

Some threats have resulted in physical harm to users. Examples include crypto muggings at Bitcoin ATMs, personal data theft from crypto users that enabled physical attacks, and "SWATting" incidents where law enforcement was called to a crypto user's home as a form of harassment.

How widespread are these threats for Canadian crypto consumers? To gain a clearer understanding, we conducted a national survey to assess user demographics and experiences with crypto.

The survey findings painted an alarming picture. Of the one in 10 Canadians aged 16 and older (about 3 million people) that have owned a crypto-asset such as Bitcoin, Ether or a nonfungible token (NFT), one in three (35 per cent) reported at least one experience of fraud, scam or criminal victimization. Most common, according to the survey, were fraudulent crypto investment advisers, artificial inflation of assets through misinformation, or scams seeking access to their crypto wallets. Negative experiences were most common among people with lower incomes and less education.

As digital currencies emerge from the crypto winter, Canadian securities regulators should be lauded for establishing clearer financial regulatory guardrails. But more needs to be done to address the cybersecurity and sociotechnical threats, including enhanced public awareness of these threats, consumer protection, and deeper understanding of the groups of Canadians being harmed. It also requires that financial regulatory oversight of crypto is aligned with emerging tech policy and legal regimes, for cybersecurity, privacy and data protection, and online safety.

The jury is still out on whether crypto and decentralized finance can play a meaningful role in our financial ecosystem, but FTX's ignominious collapse taught us that crypto's Wild West era needs to be over.

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