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What Financial Meltdowns Can Teach Us About Cyber Attacks

Global Markets
/
August 1, 2021

With global economies becoming increasingly dependent on digital technology and internet connectivity, experts are becoming concerned about the growing cyber insecurity. The World Economic Forum said in January that cyber attacks and data frauds have become the biggest threats to global economy in 2018.

Although the multi-dimensional risks posed by digital and internet connectivity today’s age are undeniable, there still lacks a clear understanding of the impacts of a large-scale cyber attack and the necessary procedure for handling the crisis. But from similar incidents of financial meltdowns in the past, we can learn an important lesson about global disruption and its chain effect on economic development.

Financial and digital networks are both centralized and highly interconnected systems which circulate funds and information respectively

Similarities Between Financial and Digital Networks

At a closer look, financial and internet networks have quite a lot in common. For one, they are both centralized and interconnected systems which form the fundamental infrastructure for the entire economy through the circulation of funds and information respectively. There are three main dimensions of a potential cyber crisis which make it relatable to a financial meltdown.

Origin: Due to complex and interdependent nature of the system, the digital network can quickly accumulate vulnerabilities if some of its agents are involved in excessive risk-taking.

Progression: As vulnerabilities grow, the system becomes increasingly volatile, and once signs of weakness begin to show at even a single point of the network, the disruption can spread within the entire system like wildfire, resulting in a massive crash.

Aftermath: A system meltdown often results in irrevocable consequences that tend to linger on for years after the crisis. Often, counter-parties lose trust in each other and the system making the entire economy come to a screeching halt. When one institution of a highly interdependent network falls, it takes the rest of the system down with it – as we have witnessed with financial meltdowns in the past.

Distorted Incentives

These problems can be remedied through various safeguards and policy responses that have been integrated into the financial system over time. An example of such policies includes strict lending requirements for banks after the 2008 Great Recession that had initiated by banks’ subprime lending practices. Policymakers have also taken several data-collection measures at a micro level to identify any weak points in the system which could trigger another crash.

Unlike the financial system, the world of cyberspace hasn’t matured in security which makes it more vulnerable to meltdowns. A common misconception about a potential cyber crisis is that it could only be triggered by systematic attacks, when in reality, factors like distorted incentives are more likely to cause accumulation of vulnerabilities inside the system.

In 2001, a computer scientist named Ross Anderson said that increasing competition between software developers is leading them to release digital products into the market as quickly as possible, while compromising strict security measures which creates system vulnerabilities. Moreover, vendors in the digital market often take advantage of their customer’s lack of technical knowledge and products that aren’t just expensive but also insecure.

European Union’s General Data Protection Regulation (GDPR) levies huge fines on vendors who forego security measures and exploit consumers’ confidentiality in cyberspace

More Efforts Required

European Union has already introduced a General Data Protection Regulation (GDPR) which levies huge fines on vendors who forego security measures and exploit consumers’ confidentiality in cyberspace. According to the Regulation’s policies, businesses are required to disclose all security breaches to their subjects as well as appropriate authorities.

Although the European Commission has taken steps to ensure security in cyberspace, they aren’t nearly enough for filling in the knowledge gap that exists in identifying weak nodes within the cyber security system. In order to remedy this, policy makers must gather impartial and reliable data on the frequency of cyber attacks and their effects on the economy. This data will help policymakers identify the areas of the system that need immediate intervention in the form of regulatory policies.

However, the hardest part to deal with is restoring public’s trust in the system in a crisis’ aftermath. After the financial meltdown in 2008, the government had to inject large sums of money into the banking system in order to revive the economy.

Policymakers also set up a number of organizations such as the Bank for International Settlements, a Financial Stability Board and the International Monetary Fund to reinforce the security framework. However, a similar framework is difficult to implement in the world of cyberspace because a crisis can easily be triggered by one nation’s malicious actions and quickly spread to the entire system.

Do you think a large scale cyber crisis could have similar economic impacts to a financial meltdown?

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