Will cryptocurrencies ever be fully secure?

The cryptocurrency industry, which lost more than $1.1 billion to theft in the first half of 2018, needs to beef up its security in order to win investors’ confidence or it risks losing the public's trust entirely, analysts say.

"Cryptocurrencies allow users to hold their own funds without the need for a bank," Andrea Bonaceto, chief executive of Eterna Capital, a London-based fund management firm, told The National.

But it cannot be up to individuals to protect themselves, Mr Bonaceto said, adding that "in many jurisdictions around the globe we are seeing regulatory pressure on exchanges to tighten up their security".

The UAE, the second-biggest Arab economy, is set to join the ranks of top global financial markets regulating crypto-assets, with rules for initial coin offerings to be finalised by mid-2019. Abu Dhabi Global Market and Dubai International Financial Centre, two of the fastest growing financial hubs in the region, are both keen to implement crypto-exchange legislation in 2019.

The cryptocurrency market is massive, with around 12,000 exchange marketplaces where crypto-assets like Bitcoin, Ethereum and other digital coins are traded - a veritable smorgasbord for hackers to choose from, according to cyber-security company Carbon Black.

Account details, known as private keys in cryptocurrency parlance, can be hacked if not secured properly and the funds held in those accounts can be stolen.

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[ UAE to finalise initial coin offering regulations in mid-2019, regulatory says ]

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"Many of the crypto-applications lack the security to prevent hackers from stealing private keys and wallet addresses," David Schoenberger, chief innovation officer of a digital security company Krypti, told The National.

Even before data gets recorded to the blockchain and distributed, hackers can steal the value, cautioned Mr Schoenberger, adding that until security is fully in place, cryptocurrency will not mature beyond its speculative, Wild West reputation.

“For the consumer side, it is very hard to invest in or utilise when major hacking is occurring almost daily,” said Mr Schoenberger.

Cybersecurity is all too often thought of as a technical issue, whereas in actual fact it's a risk management issue, Hans Fraikin, chief executive of Abu Dhabi-based Libra Project, which is issuing equity tokens in green utility infrastructure, told The National.

“The real risk lies within the lack of security measures put in place by some exchanges and wallet providers the cryptocurrencies are associated with,” he added. “It is essential to comfort our investors,” said Mr Fraikin.

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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Our legal columnist

Name: Yousef Al Bahar

Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994

Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers