By some, blockchain technology is considered a strong means of combatting rising cases of chargebacks, which come hand-in-hand with financial fraud.

Indeed, it can be extremely difficult for fraudsters to extract customers’ information from a blockchain system, since it is decentralised, and distributed across a network of computers that form digital ledger. As such, blockchain technology can maintain a highly accurate and robust record of payments transactions.

This is an excerpt from Finextra Research report 'The Future of Payments 2021', which is exclusively available on the EBAday digital platform. Register here for EBAday to access the full report.

The true colours of crypto

While blockchain-enabled currencies are seen by some as guarantors of data security – with their inherent traceability and immutability – others view them with scepticism.

“Cryptocurrencies are a wonderful gift to scammers,” points out Salter. “They’re something you can’t see, and the man in the street doesn't fully understand it – yet he's scared of missing out. It’s the perfect scam.”
This questions what unique security challenges, if any, come with cryptocurrencies like Bitcoin, Ethereum, Ripple’s XRP and Tether. As with any new financial asset, particularly one as volatile as a virtual coin, there are opportunities for criminals to defraud investors. As such, cryptocurrency fraud has become a dominant topic of discussion in the media – with NatWest launching an urgent cryptocurrency scam alert in May 2021.

But how exactly can criminals defraud the supposedly impenetrable system of blockchain? Once again, cryptocurrency scams often involve coercing members of the public, via phone or social media, to, for instance, join crypto-related Ponzi schemes; drop their virtual coins into fake digital wallets and phony crypto exchanges; or even invest in bogus Initial Coin Offerings – for which the Financial Conduct Authority (FCA) issued a consumer warning in 2017.

“As a result of the internet,” says Salter, “you can be offered cryptocurrencies which aren’t regulated in your own country. People think – just because they're buying virtual coins sat in their own home – they’re covered by UK Advertising Standards and the FCA, but these don’t apply if you’re buying from a crypto exchange in another jurisdiction. Investors have little protection unless buying from a mainstream vendor in the UK.”

“The problem with bitcoin is, once you lose the key, you lose ownership of your assets,” adds Benz. “And, since the system is largely unregulated, it will be very hard to get your money back.”

The call for regulation

In response to the crypto boom, governments are increasingly lobbying for tighter regulations. Currently, the UK looks to bodies such as the FCA to monitor cryptocurrency's anti-money laundering (AML) and counter-terrorism financing (CTF) activities. The regulatory body uses know your customer (KYC) and customer due diligence (CDD) procedures to vet buyers and sellers of cryptocurrencies, and limit illegal activities surrounding crypto businesses.

In the meantime, other organisations continue to ramp up the sector’s regulation, such as the Cryptoasset Taskforce, the Financial Action Task Force (FATF), and Global Digital Finance (GDF).

“The extent of crypto regulation differs from jurisdiction to jurisdiction,” says Salter. “There are some Baltic states where regulation seems to be on the light side. China, on the other hand, is cracking down on its crypto exchanges.”

Despite the various initiatives around the world that have been launched to protect cryptocurrency investors, more needs to be done to pierce the anonymity of cryptocurrency transactions, and tougher licensing requirements for those processing cryptocurrencies need to be implemented.

The Coming Bank-Bitcoin Boom

As the regulatory space starts to catch up with the cryptocurrency trend, financial institutions are beginning to test the water.

Metro Bank, for its part, is currently working to build out its relationship with several cryptocurrencies, in order to “better understand the business models, and thereby to stop the associated cases of fraud quicker,” comments Speakman. “By doing this we can support customers in their genuine activity.”

Indeed, the consumer demand is here. According to Forbes, 60% of crypto owners would use their bank to invest in cryptocurrencies today. The job for financial institutions now is to determine where they will sit
in this new fraud-fraught paradigm.

Change is here to stay

With a 159% increase in banking fraud attacks in the wake of the pandemic, financial institutions have been forced to reassess their scam detection and prevention measures, and implement cutting-edge techniques, such as rules-based logic and ML technologies, in order to protect themselves and their customers from online attacks.

However, shifts in how and where customers spend their money are set to continue. Arguably, as the global roll-out of Covid-19 vaccines continues, banking customers’ spending habits will soon change as dramatically as they did going into the pandemic – with card-present transactions (and the associated scam trends) expected to spike again in the short-to-medium term. Once again, financial institutions will be forced to adapt to the change in volume, and devise new ways to stay ahead of fraudsters.

As we have seen, banks will also have to manage increasing security threats from the bourgeoning cryptocurrency frontier. Time will tell how effectively the payments ecosystem-at-large can respond to these new assets; how successfully the associated ransomware and security threats are managed; and whether the efforts of regulators and governments can indeed secure the future of DLT-based virtual coins.

With these considerations in mind, financial institutions must go into the future armed with cutting-edge fraud controls, and braced for not only a spike in card-present transactions, but the increasing uptake of cryptographic assets.

As ever, when consumers move, so do the fraudsters, and so too do the banks.