The cryptocurrency love affair has ended. After years of expansion and investment profits, everything came crashing down in November 2022 with the demise of the FTX Trading exchange. The devastation was evident.
Since then, investors have abandoned cryptocurrency, a steady stream of news reports about collapsed exchanges has been published, and political figures have demonised digital currencies. All of this is justified.
John J. Ray, the new CEO of FTX, acknowledged to lawmakers that there had been "no record keeping whatsoever" and that the cryptocurrency exchange had effectively participated in "old-fashioned embezzlement" before a hearing of the US House Financial Services Committee in December.
It makes sense that the public, the press, the markets, and the political class are all incensed. At first look, all this commotion and confusion suggests that there is a fundamental issue with crypto. But this couldn't be further from the truth.
The exodus away from cryptocurrencies is not a critique of their importance to society or of the blockchain technology that underpins them. The root of the difficulty with encryption is an identification issue.
Leaving currency behind
Crypto facilitates transactions online and in the metaverse that would not otherwise be possible. It enables people to preserve ownership over money, data, and other assets in a highly connected digital environment without a centralised authority, together with blockchain.
However, despite the fact that gaining digital ownership is essential for spurring a wide range of innovation, the FTX collapse has highlighted a dilemma. The digital wallets that stored people's cryptocurrency money have security weaknesses built right in.
Clients at FTX lacked the only thing that could have safeguarded their money: they did not possess the encryption keys to their digital wallets. The central authority, FTX, did. Furthermore, things got out of control because there were no regulators in place to supervise interactions and transactions.
Digital wallets control cryptocurrency
Using a crypto-based digital wallet, one can purchase and trade non fungible tokens (NFTs) and other digital assets, as well as use real-world goods in virtual environments and vice versa.
Although blockchain made it possible for a central authority (such as a bank) to no longer administer digital assets, that authority has typically retained control over the digital wallet that serves as a vault for those assets. This is what made it possible for FTX to access client funds without their permission.
A system that is already in place for proving ownership online and protecting the wallet to that person is what's now missing. Fortunately, the solution isn't difficult to implement or prohibitively expensive. Users have authority over their digital identity and all of its associated elements thanks to self-sovereign identity (SSI). This encompasses NFTs, virtual things, digital money, and more. Consider an SSI as a private and secure digital passport that combines identity information and a wallet for identities.
The development of a virtual environment that reflects existing trust in the real world depends heavily on SSI. These include the right to own property, the rules and guidelines established by governments and financial organisations to allow the transfer of ownership of commodities and property, and central administrators like escrow firms that handle bigger, more complicated transactions.
The situation changes from one that is fundamentally risky and unreliable to one that provides a high level of security when using a secure digital wallet. Without it, Web3, the metaverse, and other decentralised token-based developments cannot be fully utilised.
