The growth of digital currencies and its impact on cybersecurity

ABSTRACT

This paper illustrates how the growth in digital currencies can be a threat to cybersecurity in the face of increasing digital finance awareness and acceptance. We further examined the role of digital currencies in embedded finance and how it can be utilized in combating cyberthreats that are as a result of increasing use of digital currencies for payments. The final proposal is a conclusion that embedded finance options with a strong cybersecurity architecture in the designed applications is a key cyber risk management tool for the current dispensation in digital finance.

Keywords: Digital Finance, Embedded Finance, Cybersecurity, CyberRisk, Risk Management, Cyberthreats.

I. INTRODUCTION

The emergence of digital currencies initially encountered significant skepticism and apathy, akin to most innovations, particularly concerning their acceptance, tangibility, and mutual advantages for users. The onset of the COVID-19 pandemic, which prompted a shift in work, commerce, and financial culture towards greater reliance on digital alternatives, likewise transformed the perception of digital currencies among prominent financial institutions such as J.P. Morgan and Citibank. These financial giants, which had previously dismissed digital currencies, subsequently reevaluated their positions, thereby creating opportunities for their implementation within their banking operations, albeit on a limited scale, with prospects for more extensive application.

This global upheaval has expedited innovation across nearly all sectors; however, the financial industry stands out as one of the most significantly transformed. Propelled by technologies such as artificial intelligence and robotics, the sector has experienced rapid changes in both lifestyle and business operations, necessitating the prompt integration of technological advantages—particularly for enhanced flexibility and efficiency. Leading this movement are the domains of payments, microfinance, and investments, where digital currencies are not merely participants but are demonstrating themselves to be the indispensable foundation for a more substantial trend: embedded finance.

Nevertheless, this swift progression brings substantial complexity. The assurance of seamless and discreet financial transactions is overshadowed by rising risks concerning traceability, reporting, and accounting. The occurrence of fraud, which has already been intensified in the current global landscape, presents a significant challenge that must be resolved to ensure that digital currencies can securely facilitate the future of embedded financial services.       

II. LITERATURE REVIEW

Digital currencies are a derivative of digital finance which is simply the use of digital technology in finance (Liu, Y., Zhang, S., Chen, M., Wu, Y., & Chen, Z. 2021; Maulina, E. (2023). It involves using digital devices and technology to acquire, utilize, and distribute financial resources to economic agents, such as individuals, households, firms, and governments (Maulina, E. (2023);Liu, Y., Zhang, S., Chen, M., Wu, Y., & Chen, Z. 2021;Siddik & Kabiraj, 2020; Ozili, 2018).

The genesis of digital finance can be traced back to the 1970s with the digital stock exchange, specifically the NASDAQ, and the development of worldwide interbank financial telecommunications (SWIFT), focusing on communications for international transactions. This was followed in the 1990s by various payment systems like PayPal. Digital finance did not fully evolve until the 2008 financial crisis, which coincided with the innovation of cryptocurrency, smartphones, and the subsequent development of apps for digital banking services (Maulina, E. (2023).

This massive growth in financial technology is evident in the introduction of contactless payments via cards, phones, and watches, as well as the evolution of digital currencies. The COVID-19 pandemic further accelerated the rapid adoption and acceptance of various innovations within this space, especially in developing economies, where there is a pressing need to expedite financial inclusion among underbanked and unbanked populations. (Maulina, E. 2023)

The benefits of this growth in digital finance is evident across various economies. In developing nations, the implementation of digital technology within the financial sector has facilitated an increase in remittance inflows and has contributed to high levels of financial inclusion (Podolski, 2020; Emara & Zhang, 2021). In developed countries, it has supported the swift advancement of the financial industry by enhancing the speed at which financial market information is transmitted to investors, shareholders, and other market participants, as well as by accelerating financial transactions, payments, and the finality of payment settlements (Bech et al., 2017; Shabsigh et al., 2020; Ozili, P. K., 2023).

The current trajectory is not likely to dwindle as the prospects of digital finance is highly substantial. Digital financial services have the potential to increase the GDP of developing and emerging countries by US$3.7 trillion and create 95 million jobs across all sectors (Manyika et al, 2016; Ozili, P. K. 2023). According to a GSMA 2021 report, Fintech has dominated much of the global digital finance space, with global Fintech revenues rising from €92 billion in 2018 to over €188 billion in 2024(Ozili, P.K. 2023).

III. DISCUSSIONS

A.1       The Role of Digital Currencies in Embedded Finance

Digital currencies represent any currency that exists exclusively in electronic form (Forbes, 2022) but there are vital characteristics that differentiate a digital currency from other traditional forms of payments and flows. These two primary considerations are:

1. Non-transformation into physical money: Money in the bank can be easily converted to physical cash via the Automated Teller Machine (ATM) or cheque presentation but digital currencies cannot be converted into physical cash.

2. Exclusive Digital Exchange Mode: Digital currencies can only be transacted digitally.

A.11 Forms and Uses of Digital Currencies

Traditional forms of digital finance have been widespread and almost fully adopted in many spaces. However, digital currencies which are an offshoot of digital finance is just gaining grounds and is in three primary forms : Cryptocurrency, Stable Coins and Central Bank Digital Currencies (CBDCs). We cannot discuss the forms and uses of digital currencies without taking a look at the bedrock of this novel concept. This paper highlights the current uses of different forms of digital finance with a final spotlight on digital currencies using the Keynes concept of holding money in economics below:

1. Transactional Motives for Payments: Several platforms and stable coins have been developed to facilitate transactions and payments. For example, in December 2004, Alipay was officially established and launched the mobile quick payment function in December 2010. The business scaled rapidly given the popularity of smartphones and networks with massive data flow. In 2018, Alipay announced that it had 870 million annual active users, and its widespread use has significantly impacted China’s economy and currency (Elsevier B.V., 2020).A further insight into the statistical data from the People’s Bank of China (PBOC) reported that, in recent years, the quantity and value of electronic payment business in China have been increasing. In 2019, the scale of the domestic electronic payment business reached nearly 1 trillion transactions, with a total amount of 2,857.03 billion Yuan, demonstrating user demands for integrated financial flow.Digital currencies take this a step further. Their digital-native structure allows for instant, low-cost settlement within an e-commerce checkout, a B2B supply chain, or a creator economy platform. They eliminate the need for traditional bank accounts or card networks at the moment of transaction, making financial services truly “invisible” and contextual—for instance, enabling instant payroll payments to gig workers directly on a platform.

2. Speculative and Precautionary Motives for Investments: A wave of speculative investors has emerged in the crypto market, which gained popularity during the COVID-19 pandemic as a safer alternative to traditional investments, offering promises of higher returns. This use case further diversifies the financial utility of digital currencies, albeit with significant risk.

A.111 Constraints and Risk: Securing Embedded Digital Future:

Despite the current realities of growth and innovation in the use of digital currencies in digital finance, several significant constraints persist:

• Increased Cyber Risk: Digital currencies are attractive targets for cybercriminals due to their high value and pseudonymous nature. The rise in hacking incidents, phishing schemes, and ransomware attacks has highlighted the vulnerabilities within this space and even more when embedded into non- financial platforms.

• Regulatory Ambiguity: The decentralized nature of digital currencies makes it difficult to regulate and track cybercrime activities effectively, complicating efforts to trace and mitigate them. This regulatory uncertainty creates operational and compliance hurdles for any company attempting to embed these services.

• Fluidity and Untraceability of Exchanges: The untraceable nature of many digital currency transactions raises questions about accountability and the efficiency of reporting, a key aspect of embedded finance.

• Security Threats and Volatility: The increasing complexity of digital currencies highlights underlying risks, including the potential for widespread fraud. The Bank of England, in its 2014 quarterly bulletin, mentioned that the growth of digital currencies threatens the stability of financial markets due to their volatility and lack of transparency. These underlying risks are inherent in any embedded system built on them.

A.IV    Enablers of cyberrisks in digital currencies

The need for increased cybersecurity awareness in administering digital currencies is crucial given the complexities involved in these products. Therefore, for the growth to be sustainable, there is a strong need for the practice of protecting systems, networks, and programs from digital attacks and threats due to the form, mode and usage of these currencies. The peculiar nature of the forms and uses of digital currencies provides an enabling environment for the ease of cyber threats and attacks. We will consider these enablers in 3 different contexts:

1. Regulatory Context: There exists a lack of legal protection compared to cards, cheques, cash, and other means of payment.
2. Operational Context: With digital currencies, there is an absence of transaction recalls, unlike other modes of payment.
3. Information Management Context: Because the transactions are digital, there is no control over information and a lack of privacy, which can easily be made public.

Bearing these enabling contexts in mind, embedded finance options that will promote protection, trust and preserve the growth of digital currencies is vital. This can be achieved by increasing cybersecurity measures in embedded finance solutions as a key collaborative path to trust amongst industry players.

IV. CONCLUSION

While the growth of digital currencies and its convergence with embedded finance offer exciting, unprecedented possibilities for the future of finance, the identified cyber risks must deliberately be managed. By implementing robust security measures and fostering collaboration among stakeholders, the digital currency ecosystem can thrive firmly.

For this digital future to be built on trust and stability, industry players need to adopt a collaborative and comprehensive approach by adopting the following actions:

• Enhanced Security Practices: Users and institutions must implement robust security measures, such as hardware wallets, strong passwords, and two-factor authentication (2FA).(David,2024). Embedded finance providers need to incorporate security and compliance directly within the API layer.

• Education and Awareness: Raising awareness and teaching users about common cyber threats and security practices can help lower the risk of falling victim to scams and attacks.

• Regulatory Alignment: Governments and regulatory agencies must establish clear guidelines and collaborate internationally to combat cybercrime within the digital currency sector. Such regulatory clarity is crucial for establishing an operational framework and minimizing systemic risk within the digital and embedded finance domain.

• Technological Advancements: Continued innovation in blockchain technology, encryption techniques, and cybersecurity solutions will be essential in reducing cyber risks and developing the resilient infrastructure needed for a secure, digital currency-driven financial future.

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