Mastercard deepens crypto push with tools to prevent fraud

MasterCard will on Tuesday debut a new piece of software that helps banks identify and cut transactions from fraud-prone crypto exchanges, the company told CNBC exclusively.

The system is called Crypto Secure and uses “sophisticated” artificial intelligence algorithms to determine the risk of crime related to crypto exchanges on Mastercard’s payment network. The system relies on data from the blockchain, a public record of crypto transactions, as well as other sources.

The service is powered by CipherTrace, a blockchain security startup Mastercard acquired last year. Based in Menlo Park, California, CipherTrace helps businesses and government agencies investigate illegal transactions involving cryptocurrency. Its main rivals are New York firm Chainalysis and Elliptic, which is based in London.

Mastercard is launching the service against a backdrop of rising crime in the emerging market for digital assets. The amount of crypto-containing wallets with known criminal connections rose to a record $14 billion last year, according to data from blockchain analytics firm Chainalysis. And 2022 has seen a wave of high-profile hacks and scams targeting crypto investors.

On the Crypto Secure platform, banks and other card issuers are shown a dashboard of color-coded ratings representing the risk of suspicious activity, with the severity of the risk ranging from red for “high” to green for “low.”

Crypto Secure does not decide whether to reject a particular crypto dealer. That decision is up to the card issuers themselves.

Mastercard already uses similar technology to prevent fraud in fiat currency transactions. With Crypto Secure, it extends such functionality to bitcoin and other virtual currencies.

Ajay Bhalla, Mastercard’s president of cyber and intelligence, said the move was about ensuring its partners can “stay compliant with the complex regulatory landscape.”

“The whole digital asset market is now a pretty big, significant market,” he told CNBC in an exclusive interview ahead of the product launch.

“The idea is that the kind of trust we provide for digital commerce transactions, we want to be able to provide the same kind of trust for digital asset transactions for consumers, banks and merchants.”

Compliance has become an important focus in crypto lately as more banks and payment companies enter the fray with their own services for trading and storing digital assets. Last month, Nasdaq became the latest established financial firm to join Wall Street’s embrace of crypto, launching custody services for institutional clients.

Meanwhile, governments on either side of the Atlantic appear to be implementing new curbs on the crypto sector, which has so far largely lacked regulation. Last month, the Biden administration released its first-ever framework for regulating the crypto industry in the United States, while the European Union has approved its own landmark crypto laws.

The payments giant is doubling down on crypto at a time when digital currency prices are falling and volumes have dried up. The entire market has lost about $2 trillion in value since the peak of a huge rally in November 2021.

Bitcoin is now worth less than $20,000 per coin — a roughly 70% drop from its peak of nearly $69,000 — and has struggled in recent weeks to climb meaningfully above that level.

Asked about the impact of the decline in crypto prices on Mastercard’s digital asset strategy, Bhalla said the company was “focused on providing solutions to stakeholders for the long term.”

“These are market cycles, they will come and they will go,” he said. “I think you have to look at the fact that this is a big marketplace now and developing and probably going to be much, much bigger in the future.”

Despite the decline in digital token prices, crime in the industry has shown no signs of abating. A particularly popular method of defrauding crypto investors of their funds this year has been to exploit blockchain bridges, tools used to exchange assets from one crypto network to another. Around $1.4 billion has been lost due to breaches of these cross-chain bridges since the start of 2022, according to Chainalysis data.

Against this backdrop, major financial services firms and crypto platforms are investing in ways to reduce the risk of ill-gotten gains being transferred through their systems. Cryptocurrencies are often criticized for their use in money laundering and other forms of illegal activity—a problem that stems in part from the pseudonymous nature of participants on blockchain networks.

But the development of new software tools has made it easier to trace cryptocriminals’ ill-gotten gains. Companies use sophisticated data science and machine learning techniques to analyze data on public blockchains.

Mastercard is also trying to keep up with its main rival Visa, which has made notable investments of its own in the crypto arena. In its first fiscal quarter of 2022, Visa said it facilitated $2.5 billion in transactions from cards linked to an account on a crypto platform.

Last year, Visa launched a crypto advisory practice to advise clients on everything from rolling out crypto features to exploring non-fungible tokens.

Mastercard declined to disclose the total dollar value of fiat-to-crypto volumes from its network of 2,400 crypto exchanges. However, Bhalla said the number of transactions the credit card giant facilitates per minute now runs into the “thousands”.