Operational Risk Management

CHAPTER 19Operational Risks in Cryptocurrencies

CONTEXT AND ACADEMIC RESEARCH

The cryptocurrency Bitcoin experienced a bubble at the end of 2017 that was comparable to the tulip mania of the 17th century, when heady speculation pushed the price of tulip bulbs to ridiculous levels before the price crashed abruptly. The sudden widespread interest in the cryptocurrency and associated speculation brought Bitcoins to the evening news. Its future is uncertain, but blockchain, the distributed ledger technology that underpins Bitcoin, is viewed by many as one of the most promising developments for monetary transfer and, more generally, for secure transactions in a peer‐to‐peer network.

In 2014, when Bitcoin and blockchain began to be discussed keenly in universities and by some payment providers but had yet to capture the public imagination, I had the pleasure of working with UCL colleagues on an academic paper on the risks and implications of virtual currencies from a banking regulation perspective. The paper, pioneering at the time of its publication, looked at some of the main operational risks that banks would face if they decided to trade cryptocurrencies; its section on operational risk is summarized in this chapter. For further detail, please refer to the full publication and its references.¹

SUMMARY

The paper presented the first basic operational risk perspective for key risk management issues associated with the emergence of new forms of electronic currency in the real economy. ...