Informational Efficiency and Cybersecurity: Systemic Threats to Blockchain Applications

Crypto-assets and blockchain technologies hold the promise of providing more secure systems for managing public and private data, enhancing public trust in data collection, and increasing the efficiency of social impact finance transactions. However, to date, blockchain technologies have struggled to deliver on these promises. Specifically, cybersecurity threats to blockchain technologies are accelerating and becoming more impactful over time. This generates growing risk toward the use of the blockchain technologies in social impact finance services provision. Our analysis data on cybersecurity breaches involving cryptocurrencies trading platforms from 2014 through 2019 shows that cryptocurrencies markets have, to date, failed to develop the informational efficiencies necessary to sustain these technologies’ deployment in impact finance. Faced with increasing cybersecurity threats, permission-less blockchain systems appear to be more vulnerable to shocks than they were in the past. Cyber breaches in the cryptocurrency markets create major risk contagion pathways, which are dramatically increasing volatility of the directly attacked currencies and other major cryptocurrencies. They also present an increased risk of system-wide attacks that threaten not only the accounting and transactional accuracy and efficiency of the crypto-based FinTech solutions, but also the data stored using public blockchain protocols. These findings lead us to conclude that, due to the absence of dramatic improvements in the regulation of cryptocurrencies and exchanges, public blockchains based on traded crypto-assets are not suitable for large-scale deployment in social impact finance applications.