Here are ten things you should take into account while working with blockchain technology and the cryptocurrencies that run them. Always consult your CPA and attorney before making financial decisions. This technology is new, and the rules that govern it are not fully developed.
Don’t use cryptocurrency or blockchains to skirt the law
The legality and the legal zoning of cryptocurrencies are still fluctuating in many places of the world.
- Can you use cryptocurrency as a way to hide money? This idea is a dangerous one. Remember: Blockchains keep records of all transactions forever, so even if you think you came up with a clever way to hide some tokens, those looking for bad behavior have time to find it.
- Can you use blockchains as a way to smuggle money out of the country? Many countries have limitations on the funds citizens can take out of the country. Blockchains keep records of all transactions forever.
- Can you use cryptocurrency to buy illicit goods? The answer is — you guessed it — no! Blockchains keep a trail of your actions forever!
Don’t do anything with cryptocurrency and blockchains that would be illegal to do with real money.
Keep your contracts as simple as possible
Decentralized autonomous organizations (DAOs), smart contracts, and chaincode are all the rage at the moment. The promise of cutting administration and legal cost is very enticing to many corporations. A sometimes overlooked characteristic of this technology is that it is just code. That means that there is no human being interpreting the rules that you’ve laid out for everyone to follow. The code becomes law, and the law only stretches to what is incorporated into the blockchain contract. The “fat” that was cut can sometimes be very important.
There is no one to interpret the code. That means that if the code is executed in a fashion that you did not expect, there is also no one to enforce the intent of the contract. The code is law and nothing unlawful occurred. That’s why you should to keep your contracts simple and modular in nature to contain and predict the outcomes of contract fulfillment. It’s also a good idea to have your contract tested and beaten up even by other developers who are incentivized to break it.
Publish with great caution
The whole point of blockchains is that once data is put in, it’s hard to take it out. That means that what you put in will be around for a long time. If you publish encrypted sensitive information, you need to be okay with the fact that the encrypted data may one day be broken and what you published may be readable to anyone.
There is work being done in cryptography to make quantum proof encryption, but because both quantum computing and quantum proof encryption are still in the testing phase, it’s difficult to say what the technology will be capable of 20 years from now.
Back up, back up, back up your private keys
Blockchains are very unforgiving creatures. They don’t care if you lost your private keys or passwords. Many a crypto nerd has been laid bare and given up countless tokens to the great blockchain oceans — treasure that will never be recovered.
The private keys that control your cryptocurrency often live inside your wallets, so it’s important to protect and secure them. Be careful with online services that store your money for you. Many cryptocurrency exchanges and online wallets have had their funds stolen.
Only store small amounts of tokens for everyday use online or in an Internet-accessible device. Think of cryptocurrency wallets like your cash wallet. Don’t keep more money in it than you’re willing to lose at any given time. More than a hundred known malware applications are looking to get ahold of your private keys and steal your tokens.
Keep the rest of your currency in cold storage — completely offline with zero access to the Internet. This could be in a paper wallet, on a computer that can’t access the Internet, or in a unique hardware device built for securing cryptocurrency.
Back up your digital wallets and store them in a safe place. A backup is in case your computer fails, or you make a mistake and delete the wrong file. The backup will allow you to recover your wallet in case your device was corrupted or stolen. Also, don’t forget to encrypt your wallet. Encrypting your wallet allows you to set a password for withdrawing tokens.
Triple-check the address before sending currency
Cryptocurrency has attracted a fair number of scoundrels, so be careful when you send money. As soon as the money is out of your wallet, it’s gone forever, and there is no way to get it back. There are no chargebacks and you can’t call customer support. Your money is gone.
Triple-check the wallet address before sending. You want to make sure you’re sending it to the right address.
Take care when using exchanges
Cryptocurrency exchanges are central points that hackers like to target to steal tokens. They’re seen as pots of gold just ripe for the picking, and more than 150 of them have been compromised.
Keep this in mind while using exchanges, and follow the best practices to keep your tokens safe. Do a little research on the exchange you’re using to see what security measures it has in place.
Finally, just use exchanges to move your funds in and out. Don’t use the exchange as a place to store value. Instead, hold significant amounts of crypto in cold storage or in a laminated paper wallet with several copies.
Beware wi-fi
If your router wasn’t set up correctly, it’s possible for someone to see a log of all your activity. If you’re on a public network, assume that the owner of the network can see your activity.
Only use trusted Wi-Fi networks and make sure you’ve changed the password on your router to something as secure as a password. Most Wi-Fi router passwords are set to a factory default of “admin” and can easily be taken over by a third party.
Identify your blockchain dev
Blockchain technology is new, and there just aren’t that many people who have a lot of experience when it comes to building blockchain applications.
If you’re thinking about hiring a developer to help you with a project, check out her GitHub and see what work she’s done before you get started. She may not need to be experienced with blockchain specifically, but if she isn’t, she should be a very experienced developer outside of the blockchain world.
There aren’t many resources out there yet to help developers when they get stuck. Inexperienced developers may struggle more and take longer to develop your application.
Don’t get suckered
The blockchain industry as a whole does not have the same protection and security measures that banks and other financial institutions have, and there are not the same laws for your protection and financial welfare. There is no consumer protection and no FDIC bank insurance of funds from the government. If you get robbed or conned, you may not be able to turn to anyone for help.
Also, the industry has had a lot of hype in the last few years without much delivery of things of real value. The year 2016 saw over a thousand new blockchain companies pop up overnight claiming expertise. When you’re looking at developing a project and trying to decide if it’s worth the investment, it’s always a good idea to take a minute and make sure it even makes sense. Ask yourself the following questions:
- Is there real value generated?
- Is the value created in the way that benefits you?
- Are there other more tested technologies that could be used to accomplish the same thing with the same efficiency or better?
Blockchain technology holds a lot of promise and power and, as such, should be approached thoughtfully and carefully.
Don’t trade tokens unless you know what you’re doing
Cryptocurrencies are very volatile and will swing wildly in value at any given time and sometimes for no discernable reason. Many of the cryptocurrencies have little depth, and trading large amounts can crash the market value. Working with published blockchains means that you’ll likely need to hold some amount of the currency to utilize them.
Don’t get caught up in trading the tokens unless you take the time to understand the market well. If you do choose to trade the tokens, don’t forget to report this activity to your CPA. You may need to report your gains or loses on your income tax return.