The cryptocurrency Ether, backed up by the Ethereum blockchain, has suffered some interesting problems this year.
It suffered a so-called flash-crash in June, going from over $300 to as low as 10 cents. And this week, a popular wallet for people using the currency was frozen following a vulnerability, incapacitating around $280m.
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The freezing was caused by Parity Technologies, the company behind the wallet Parity after it discovered an issue that could lead to the contents of a wallet holding Ether and other crypto tokens to be wiped.
This particularly affected wallets that were involved in initial coin offerings (ICOs).
Similar to crowdfunding, startups are increasingly turning to ICOs to raise funds for their proposition. Investors can buy into the ICO to receive coins of the new cryptocurrency, an Ethereum token.
They can then use the coins for future goods and services, or sell them for a profit if the value goes up.
The reason ICOs have been particularly affected by this mishap is that Parity’s issue affects multi-signature wallets.
According to TechCrunch, it is a technology “that uses the consent of multiple parties for additional security on transactions.” These are often used in ICO fundraising rounds.
What’s going to happen to ICO-raised funds?
Marko Sjoblom is the chief executive of a soon-to-be-launched challenger bank in the UK, called Fiinu. The company was in the pre-ICO phase and was going to launch its official offering on 9 November to get the necessary funds to kickstart the project.
Around $6m had been raised in a pre-ICO round which has been frozen as a result of the Parity problems. Fiinu was forced to pull its ICO and all the money that has been raised is funding.
Sjoblom tells Verdict:
All the money has been frozen within this Ethereum problem at the moment. We are intending to return all the money to investors, 100 percent, but the trouble is right now all the assets are frozen.
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Depending on who you’re talking to, ICOs are a great way for startups to raise funds, or they are a scam.
Earlier this year, the UK’s Financial Conduct Authority issued guidance on this method of raising money. As well, China banned the practice in August.
However, Sjoblom doesn’t think the Parity problem will lead to people turning against ICOs in the future.
In the wider context, there are various cyber security things that happen in other parts of the financial services. Whilst it sounds crazy to say that, these things do happen when you’re dealing with technology.
I guess if there weren’t any events like this, then something would probably be wrong because it would be perfect from the first try.
Instead, he sees this as an opportunity for new startups, particularly challenger banks, to change the perception of cryptocurrencies and the blockchain. When Fiinu launches, hopefully at the end of 2018 when it receives a banking license, it wants to bridge the gap between banking and the crypto world.
Sjoblom uses the example of the Financial Services Compensation Scheme which protects consumer savings up to £80,000.
This is not what you get in the crypto world. But what we’re trying to do as a bank in the future is to bring that gap a little bit, to allow you to access the crypto-world without having to go underground and potentially falling victim to some of the fraud that is happening in that world.
As a digital-only bank, you can set your strategy from the table, and use these opportunities to our advantage.
However, there is still a while to go before crypto will be brought into the banking mainstream.
There is a need to educate people. We are really in the infancy of major changes. In the next five to 10 years, we will see the opportunities and challenges of blockchain as a whole grow.