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Payments fraud in crypto: Expert takes

Payments fraud in crypto: Expert takes

Dec 23, 2022
Sarah Benali

Even with growing levels of adoption and integration, we’re still only witnessing a fraction of the cross-industry transformation that crypto and web3 can host. While these technologies are relatively new, the major barrier to realizing their promise lies in what has hindered the swift adoption of revolutionary tech in the past: fear.

The fear of payments fraud at large is on the rise, with more sophisticated methods targeting people at higher frequencies. More specifically, the fear of crypto fraud is justifiably also high; recent data revealed that crypto fraud in the UK rose by a third in the last year alone.

The rise of payments fraud in both crypto and traditional rails pose major threats to businesses such as lost revenues, poor customer experiences, failure to maintain acceptable fraud levels and lack of compliance with necessary regulation, to name a few. The lesson for businesses is that a one-size-fits-all fraud solution is no longer sufficient.

The first step to combating fraud is to understand what and how it is being committed. To get a better idea, we asked four industry experts to weigh in on the current state of payments fraud in crypto, and what security innovations are needed to help more consumers and merchants overcome this culture of fear.

Soups Ranjan, CEO & co-founder, Sardine

Faster payments often means faster fraud. With the growing use of real-time payments, the threat of fraud is also quickly on the rise.

Real-time payments need real-time fraud detection, which sounds simple but isn’t happening yet. Luckily, our industry is moving in the right direction, developing solutions that better detect and prevent fraud. To me, there are three keys to catching fraud detection up to real-time payments:

  • Real-time Authorized Push Payment (APP) fraud detection and prevention
  • Industry collaboration to solve fraud data gaps
  • Adopt global best practices

The goal is to proactively stop fraud, even before it happens by using device intelligence and behavioral data to prevent fraud, to detect and flag social engineering and to stop fraudulent transactions before money moves. The risk of inaction when it comes to fraud prevention has become clear over the last year with slowed industry growth. The public must trust crypto as a financial ecosystem before we cross that gap. Fraud detection and prevention are a huge part of building trust.

I also think we have an opportunity emerging to develop an industry-wide consortium to tackle these scams across groups who didn’t historically collaborate like TradFi, crypto and regulators. The visibility gaps between parallel financial systems (like TradFi and DeFi) make it difficult to prevent fraud and provide real-time experiences. As an industry, we need to share data about fraud patterns, which is common practice in traditional finance but not yet for fintech and crypto companies. Sardine intends to bridge this knowledge gap. By sharing data, we can spot common fraud patterns and how they change over time to build more accurate and sophisticated fraud prevention techniques. The goal is to forever alter the industry's perception from one seen as fraught with scams, hacks and fraud to a field that sets the standard in data-driven fraud prevention.

There is an aversion to data sharing and a culture of “my fraud is my problem.” But there are good precedents for sharing data from the banking and telco sectors. This can be done if we’re mindful of privacy, and do so with the right frameworks, consumer protections and regulatory engagement. If we want higher conversion, higher order values and less fraud, we need to share data. APP fraud is already one of the most significant issues facing our industry and if we don’t get our act together, it will cripple innovation and growth. The time for action is now.

Ana Maria Anic, Head of Financial Crime, MoonPay

One case I’ve recently used to describe the current state of payments fraud in crypto is this: A few months ago, I was in the process of placing a bet on an upcoming sports match.

I had input all my debit card information, confirmed the transaction, and then my phone rang. It was the bank, calling to verify that it was indeed me that had initiated the purchase.

I understood the red flags they saw, as a woman with no history of gambling on my account. I recognized why it seemed suspicious to them, regardless of the fact that it wasn’t a large amount of money, and I asked them to release the payment. To avoid another verification process in the future, I also asked the bank to ensure they put a note in my account that indicates that I may make another purchase on the gambling platform in the future. In this way, I increased their approval rates while helping them create a better customer experience.

If scenarios like these were more common in crypto, I think we’d be in a much better position; it reveals just how much still needs to be done for us to collaborate better. I recognize that the traditional financial world still labels cryptocurrency and blockchain as “high-risk” industries, because they remain relatively unknown. What is essential is for crypto leaders to collaborate with and help traditional players better understand the industry on a deeper level.

In order to break barriers to widespread adoption, education is key. When we can show that crypto isn’t as high-risk as currently deemed, we’ll be much better positioned to push this innovative and life-changing technology forward.

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Tony Petrov, Head of Legal, Sumsub

Crypto is no more or less risky than fiat or other investment instruments—just think of money laundering risks, fraud, volatility or other factors to which both crypto and fiat are equally exposed.

A big advantage of cryptocurrency is that it works on the blockchain, and the network allows us to track each coin as they are uniquely coded, unlike digital dollars or euros. Blockchain technology also enables us to determine if coins from any incoming transaction in the network have ever passed through blockchain addresses associated with money laundering, drugs or arms trafficking and terrorist financing, among other illicit activities. Firms like Elliptic, Chainalysis or Crystal are some of the ones focused on enabling this level of transparency for blockchain users.

However, blockchain is anonymous by design, which is why most claim it to be scam-prone and riddled with fraud. But standard “Know your customer” (KYC) tools, as well as new requirements to pass through KYC data specifically with payments—like the travel rule—are used to deanonymize its users.

On a technical level, there are continuously more instruments made available to help users stay safe when dealing with crypto, and all major crypto service providers employ these tools already. These blockchain-based solutions streamline information better and make monitoring of transactions much easier so, in my opinion, statements like “crypto is risky” are not entirely true. Soon, they will be false.

Ashley Paulus, Senior Director, Customer Success,

As commerce and payments continue to move online, it is important that payments professionals maintain a top-of-mind approach when it comes to understanding online fraud. What most people still don’t grasp is that the technology underpinning cryptocurrencies isn’t limited to serving crypto-only businesses. Instead, it provides an added layer of transparency and security for all online payments—for web3-native businesses and traditional ones, too.

Fraud management has traditionally been more of a catch-up game, with fraudsters finding innovative ways to be one step ahead of risk teams. However, thanks to blockchain technology and innovative solutions, both crypto and non-crypto merchants are increasingly equipped with the right tools to stop any potential threat in its tracks. On-chain analytics and machine learning solutions are just a few examples that give risk professionals a real-time look into customer funds and interactions, allowing for better transaction monitoring without interruptions. In other words, better protection of sensitive information and customer funds without compromising on the overall user experience.

Fraud detection and protection: A path forward

Whether large or small, payments fraud in crypto should be a key focus in 2023 to protect the interests of both consumers and merchants that can benefit from cryptocurrency payments.

Experts from leading fintechs agree that education is the catalyst to building a safer space in crypto and web3; it’s about bridging the existing knowledge gaps, strengthening data sharing among industry players and harnessing the power of blockchain technology to enhance fraud detection and protection for the digital economy⁠—sooner rather than later.

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December 23, 2022 3:01
March 22, 2023 7:25