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The promise of blockchain is nowhere more bold than the idea of “sovereign identity solutions,” which use the blockchain to create an immutable record of a person's personally identifiable information which only they can access.

Many see sovereign identity solutions, which are not yet fully developed or deployed, as being a better and more secure alternative to physical paper identification documents. But for others, sovereign identity solutions suffer from the same security pitfall that plague most, if not all, blockchain-enabled technologies, including cryptocurrency: They become fast targets for consumer fraud.

“I think it's interesting, the more control you give more consumers, it's like pushing security to the edge,” said Duane Pozza, assistant director at the Federal Trade Commission, at the CDX Academy Blockchain Brand Innovation Summit in New York on May 11. “In the world of bitcoin, the consumer is basically in charge of securing their own bitcoin if something goes wrong; if they lose their keys or if someone hacks them, they can't get it back. The architecture of many of these systems puts it on the consumer to secure it and take a lot of control over it.”

To be sure, blockchain is an immensely secure technology. Like encryption, it relies on cryptography and public and private keys. Speaking at the summit, Gil Beyda, managing director at Comcast Ventures, explained that while anyone “can encrypt something with that public key, only you can decrypt it with your private key and keep it to yourself.”

Information on the blockchain, therefore, cannot be accessed without a private key because “it is extremely difficult or near impossible to crack that private key,” he said.

But there is an indirect way to get around this near impenetrable security.  “If someone gets a hold of your private key, you lose, it's over,” Beyda added.

Pozza, however, noted that the threat of lost keys and fraud could motivate some companies to help store and secure those assets, and “possibly provide some protections around it if something goes wrong. They can build in fraud control” into their blockchain products.

But companies and applications that store blockchain keys might pose their own risk as well. While the blockchain may be secure, “the system that it works on, the application that interacts with it, [and] the protocol that support it are all very vulnerable to attack,” said another summit speaker, Gary Davis, chief consumer security evangelist at McAfee. 

Of course, fraud is not just a hypothetical threat in the blockchain market. “With cryptocurrencies, right now there are certainly a lot of reports about fraud, and there have been various actions taken by state and local actors,” Pozza said.

And there are other ways of perpetrating fraud on blockchain-enabled technologies beyond just stealing access. In April 2018, for instance, two founders of a tech company were charged with securities and wire fraud by defrauding investors with a fraudulent initial coin offering (ICO), which involves the selling of tokens for cryptocurrency.

In late 2017, a cryptocurrency trader was also defrauded when another trader spoofed an exchange platform to steal cryptocurrency in an escrow fund. The incident is being litigated in a Delaware court.

Regulators such as the U.S. Securities and Exchange Commission (SEC) are becoming more aware of fraud in the cryptocurrency industry, and are moving to reign in ICOs that do not comply with federal securities regulations. Whether such efforts will help effectively protect cryptocurrency consumers remains to be seen, but at the very least, the dangers facing blockchain-enabled technologies are becoming more apparent as the industry matures.