Interivew: Crypto scams on the rise

2023-04-14 06:10:12 ET

The underlying blockchain technology of cryptocurrencies offers payment anonymity on a scale not really seen before.

The cryptography of this technical innovation allows for a more clandestine movement of money. There can be huge advantages to this – lack of censorship, greater accessibility and the ability for oppressed people to gain easier access to financial networks, to name a few – but there are also disadvantages.

According to the Federal Trade Commission (FTC), more than 46,000 consumers reported losing more than $1 billion in crypto to fraud between January 1, 2021 and March 31, 2022. Americans alone lost $329 million to cryptocurrency scams in first quarter of 2022.

This is a frequent discourse around the industry – what is

good

what is

bad

, and does the good outweigh the bad? There are downsides to every new technology – see, for example, smartphones, the Internet and cars – but often the good greatly outweighs the bad.

And how much is blockchain to blame for the negative, or should we point to the lack of regulation in the space?

We interviewed Monica Eaton about how widespread fraud is in the space, and how blockchain technology affects all of this. Eaton provides an interesting perspective on the matter, as the founder of Chargebacks911, the chargeback management company.

Invezz (IZ):

How much easier does blockchain make it easier to scam people?

Monica Eaton (ME):

Blockchain technology in itself does not make it easier to defraud people. However, the anonymity and lack of regulation in the crypto space has made it a utopia for fraudsters, who can use crypto to avoid traditional financial regulations and operate across borders.

This makes it difficult for the authorities to track them down. A whopping $3.8 billion was stolen from cryptocurrency businesses in 2022 alone, according to a new report from Chainalysis. This is a number that will continue to grow if rules and regulations are not implemented to protect consumers.

From:

Some argue that blockchain is more transparent and can thus help combat illegal activity. On the other hand, there are ways around this, such as mixers for washing agents. What is your view on this?

ME:

While blockchain is transparent, it does not reveal the identity of the people involved in the transactions. This anonymity can be a blessing and a burden. On the one hand, it can protect the privacy of users, but on the other hand, it can be exploited by criminals to carry out illegal activities. Mixers or tumblers, which are services that mix coins from different users to break the link between sender and receiver, can be used to launder money and cover up the source of the funds.

Although identity theft disputes can be avoided through blockchain, without additional safeguards to protect consumers from failed delivery, defective goods, or other related issues, widespread adoption of crypto as a commodity is unlikely. This is why credit and debit cards are still the preferred method of payment; it is the only method that effectively protects consumers in the transaction process.

From:

How widespread is fraud within traditional finance compared to crypto, and has it increased in recent years outside of crypto as well?

ME:

Fraud is rife in both traditional finance and crypto. However, the lack of regulation and the anonymous nature of crypto transactions have made it easier for fraudsters to operate in the crypto space. Fraud in traditional finance has also increased in recent years, with phishing attacks and fake investment schemes becoming more common, but the frequency of crypto scams is quickly surpassing those seen in traditional finance.

What the crypto industry should do now is learn from the vulnerabilities the traditional financial world has faced to keep up with today’s fraudsters. There is no reason for companies with digital assets to wait for problems to arise before solving them, and while cryptocurrency is a newer concept, most fraud strategies and tactics mimic those in traditional payment areas.

Companies in the crypto industry should take it upon themselves to protect investors from scams and fraud, especially after transactions, and they don’t have to look far to find viable solutions. For example, chargebacks are consumer protections that have existed for nearly 50 years, but digital asset companies have no basis to support mechanisms for transaction disputes. In 2015, New York required crypto companies to apply for a “bit license” to show they were reputable, but many states have not followed their lead. Until cryptocurrency has more rules and regulations like these, it will take a long time for crypto to become a mainstream commodity, and many investors and consumers will suffer during that time.

From:

Can regulation help limit fraud?

ME:

Of course. Regulation can help limit fraud by providing a framework for oversight and enforcement. By implementing Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, regulators can help identify and prevent fraudulent activity in the crypto space. In addition, regulations can provide legal recourse for victims of fraud, which can deter fraudsters from operating in the first place.

The greatest need for regulation concerns filling the void in consumer protection. The rollback mechanism was designed in 1974 and today is a necessary safeguard to protect consumers from fraud or malicious sellers. This is something that is needed in crypto, even if it begins as a building block for the protection of digital assets. Consumers should have some remedies for post-transaction disputes, such as claims where products were not received or having received a product that was not as advertised. The US government is even developing a “wholesale” digital currency for central banks, which will surely require effective regulations and consumer protection, and we can work with them to develop technology to make crypto safer for consumers. Effective regulation requires collaboration between key stakeholders, not operating in a silo. Card networks, merchants and regulators should work together to protect new payment methods in the digital age.

From:

How much of a dark touch to crypto is the prevalence of fraud? Do you think the good outweighs the bad?

ME:

The prevalence of fraud in crypto is definitely a dark mark on the industry. That undermines confidence in the technology and could deter new investors from entering the space. However, it is worth noting that fraud is not unique to crypto and occurs in traditional finance as well. The benefits of blockchain technology, such as decentralization and transparency, could potentially outweigh the negatives if the industry takes steps to address the problem of fraud and improve customer security measures.

The reason why this is a difficult item to balance is due to the absence of any kind of consumer protection scheme and lack of standards and exchange methods to safeguard consumers, making it very difficult to balance good and bad. Having said that, it is important that a foundation is built to create the right protection for consumers, which will undoubtedly lead to stability and sustainability, which is always welcome with a new resource.

From:

Do even “conventional” scammers (ie non-crypto-native scams) demand to be paid in crypto, even for scams that have nothing to do with blockchain?

ME:

Yes, some conventional scammers demand to be paid in crypto. This is because crypto transactions are irreversible and anonymous, making it difficult for victims to reclaim their money or identify the fraudsters. Consumer protections like chargebacks are virtually non-existent in the realm of digital assets. If your cryptocurrency has been given to someone else under false pretenses, there is currently no recourse a victim can take to reverse a transaction or get their money back.

Crypto is also becoming more widely accepted as a means of payment, so fraudsters may see it as a convenient way to receive money that they can use down the road. To help reduce the prevalence of crypto used to fund fraudsters, we also need to address changes to security processes related to AML and KYC; both of these areas need to be re-addressed and adapted to how things work in crypto.

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