What risks do crypto and digital currencies pose? Interview with Rasmus Nielsen

Digital currencies are a new and complex technology and they bring with them a number of risks. These risks are both technical and related to how we use these currencies and how we monitor these risks, says Rasmus Nielsen, а senior manager of risk and financial consultancy, ethical and responsible use of AI at Deloitte's, in an interview with NEWS.am Tech.

According to him, usually when assessing the risk of an asset, it takes into account its usage history, what data has been recorded over the years, etc. For example, historically there is not a lot of information about cryptocurrencies and it is difficult to understand why they behave this way or that and accordingly it is difficult to assess the risks associated with them.

"We can see the price of a certain currency, but we don't really know if it's the so-called true value or not, because we have nothing to compare it to," he says, adding that digital currencies are certainly an interesting technology, but there are still a number of unresolved risks that need to be assessed and considered before implementing it.

How to solve the risk problem?

According to Rasmus Nielsen, today there are continuous discussions about how far the existing regulations can solve the problems related to the risks of digital currencies. According to him, it is necessary to develop new regulations, for which today there are good reasons. For example, in the US there are regulations that promote the responsible use of currencies.

But on the other hand, according to him, there are so many unique risks associated with cryptocurrencies that it may not be clear whether these regulations cover the whole field or not. Nevertheless, the specialist believes that the government of each country should decide how ready it is to accept this or that digital currency, of course, taking into account all possible risks.

When making such decisions, he personally would also take into account such questions as exactly which currencies an investor can use, what kind of investor it is, whether institutional investors are allowed to invest in that currency or not. According to him, safety and security requirements should also be included in these regulations, especially in the case of cryptocurrencies, as they are quite complex to regulate.

Digital VS fiat currency

According to Rasmus Nielsen, there are a number of risks associated with digital currencies that are not present in the case of conventional currencies. For example, in the case of blockchain, forking (a situation where a blockchain splits into two or more separate chains due to differences in consensus rules between network participants), the risk associated with cryptocurrency wallet ownership when your wallet is on a platform that has problems, private key management, etc.

According to him, the most important risk for specific retail investors, individuals, is related to access to wallets and private keys. Before making an investment, he says, you should be sure that you are familiar with the given currency, you know everything about it, because some currencies are reliable, some are not so much. “You have to make sure that it's a trusted currency, that the exchange platform is trusted. We have seen the opposite cases before. These are the issues you have to think about as a retail investor,” he says.

As for business, according to him, the principle is the same: businesses should also be careful what cryptocurrency they invest in, what wallets they use, and learn as much as possible about that cryptocurrency before investing. According to him, we cannot actually predict how these currencies will behave.

According to him, in the case of the US dollar or any other currency, there are also risks, however, they are relatively limited, and in the case of cryptocurrencies, the risks are not always clear and there is always a risk related to the fundamental values of these currencies.

“But in particular in this case we don't really have any information. We are not able to do any analysis of performance. We do not have the history. We do not have any information about the fundamental value of this asset. Unlike equities for example, you do have, you can have idea of what an underlying value is. You do not really have that for cryptocurrency because it is software, its technology. Yes, it does not have an underlying value. This should be always going to be an inherent risk in its current form,” he says.