New Risk on HORIZON. Understand the nuances of digital risk in investments

Digital Risk was not part of syllabus a few decades ago, while I was pursuing education as financial planner.

The reason to mention this at the beginning of the article is that as times change, newer risks will spring up. Also, few risks that were in existence or currently prevalent may simply become irrelevant.

Over the years more and more of our assets are being held in digital mediums. They are protected by username, password etc. Currently we are living in times where hacking digital accounts etc. is prevalent. This may not remain permanent or could even become obsolete.

Let us discuss this with an example. Many years ago, when I wrote my first cheque, my father had taught me the techniques to ensure cheque is not fudged. Those were the years when there were non MICR cheques. A cheque issued outside the city where an entity had its bank account would take 2/3 weeks to clear. The current generation will not be able to comprehend this.

However, they are encouraged to find out and read about those days and the system. This will help them in realising the evolution of banking and other financial systems and most importantly, accept the reality that nothing in life (Read: Investment Risk) is permanent.

To protect ourselves from digital risk, the Reserve Bank of India, keeps issuing warnings and also runs awareness campaign. Even SEBI runs campaigns on cyber risk and ways to protect ourselves.

Digital risk is all about a threat to our assets, by an unknown entity which acts like us, accesses our assets and even siphons them off.

This takes place because as per the current technology, we are recognised by our user name and passwords. This was not the case earlier. Earlier, an investor had to visit the bank in person. Officers of the branch would know the account holder with his physical attributes. There was a real human element in it. Today, this element has literally vanished. The intention is not to appreciate or criticise any system.

Soon, we will be having our currencies in digital forms. There will be more evolved digital wallets. Our documents and other important legal proof of ownerships will be in digital forms e.g. documents of ownership of a real estate. We already have almost of our banking assets’ ownership in digital format e.g. fixed deposit receipts.

Capital-market assets like equity shares, bonds and debentures, bullion assets such as gold etc. are slowly converting into digital medium. Insurance policies are now turning digital. The list is endless.

Because human being and username and password are two separate entities, there is a situation of identity theft. Any entity who gets access to username and password will be able to play mischief with our digital assets, pretending it to be us.

Towards biometrics

Slowly, we are moving towards biometric solutions to resolve the problem. However, all biometrics are captured and stored in digital medium. Can they be tampered with or hacked? Only time will tell.

Last week, while discussing the draft of one of client’s Will, I brought a point with my team to be added. My contention was, who will get the username and password for digital assets? When I checked with the legal fraternity, younger counsels could comprehend the problem. Very senior and elder counsels rejected my contention right away.

In fact, a similar situation may also arise with Power of Attorney. Let us say my assets are held in digital form on a cloud owned by an entity not domiciled in India. In that case even if a Will or Power of Attorney confers rights, will that entity accept the Will or Power of Attorney?

In case of assets I decide to bequeath to more than one individual, who will get access to usrname and password? If my assets are held in a format protected by biometrics, how do beneficiary/beneficiaries access the underlying assets, if they are more than one.

The current legal system is not geared up to deal with these situations. The legal fraternity and technologists will have to first accept the concerns. Only then, they will brainstorm to find solutions.

Coming back to our topic of discussions on risk, we need to accept the fact that no investment is risk free. The main reason we get returns on investment is because we take risk. Let us start by accepting this reality first and then, accept that newer risks will emerge and earlier risks may extinguish. Risk and returns are two sides of the same coin.

(The writer is a financial planner and the author of Yogic Wealth)

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