Learning Objectives:

  • Explain the role of cryptography in financial technology.

  • Understand the three key cryptographic tools: secret key cryptography, public key cryptography, and hash functions.

  • Recognise how cryptography underpins blockchain and digital currency security.

2.1 The Role of Cryptography in FinTech

Cryptography plays a critical role in many contemporary financial technologies, underpinning a wide range of applications from secure cash transfers to blockchain . It is essential for financial professionals to understand the basics of modern cryptography to comprehend how digital assets and blockchain networks achieve security and trustlessness .

2.2 Secret Key Cryptography (Symmetric Encryption)

Secret key cryptography, also known as symmetric encryption, uses a single key for both encryption and decryption . The same key is shared between the sender and receiver, who must keep it secret. This method is efficient for bulk data encryption but faces challenges in secure key distribution . It is commonly used for encrypting data at rest and securing communication channels.

2.3 Public Key Cryptography (Asymmetric Encryption)

Public key cryptography uses a pair of keys: a public key for encryption and a private key for decryption . The public key can be shared openly, while the private key must be kept secret. This enables secure communication without a shared secret and is the foundation for digital signatures and blockchain wallets . In the context of cryptocurrencies, the public key serves as the wallet address, while the private key authorises transactions.

2.4 Hash Functions

Hash functions are cryptographic algorithms that take an input of any size and produce a fixed-size output (the hash) . Hash functions are fundamental to blockchain technology, as they link blocks together and ensure the integrity of the blockchain. Key properties include:

  • Deterministic: The same input always produces the same output.

  • One-way: Infeasible to reverse the process to find the original input.

  • Collision-resistant: Infeasible to find two different inputs that produce the same hash.

Hash functions are used in secure messaging systems, digital signatures, and the mining process for cryptocurrencies .

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