Breaking the Myth: Payment Fraud Prevention in Crypto Isn’t as Hard as You Think


Staff Writer

 on August 8, 2022. 
Reviewed by 

Staff Editor

Picture of hand holding crypto coins behind headline: Breaking the myth: payment fraud prevention in crypto isn't as hard as you think

Let’s make one thing clear:

Payment fraud in the crypto space is a serious problem - no doubt about it.

From a digital merchant’s POV, on-ramp transactions are problematic because of the nature of cryptocurrencies. They are high-risk digital assets as payments usually don’t come with regulatory protection if something goes wrong, aren’t reversible, and offer a high level of privacy.

Hence, they represent a fertile ground for fraudsters to do their thing.

As weird as it sounds, crypto has it good compared to other, more traditional payment transactions - namely prepaid debit cards (more on that later on).

Payment fraud prevention in the crypto space isn't as complex as many industry players are led to believe. In this post, I’ll explain why and present what can be done to mitigate this issue.

Let’s get to it.

To begin with, it is important to realize that:

1. Crypto Payments Aren’t Anonymous - They’re Private

Cryptocurrency transactions are permanent and public, meaning there is some form of digital trail.

When creating a crypto wallet, an alphanumeric address is generated, allowing the user to send or receive crypto. That address is visible to everyone on the blockchain, enabling the user to conduct transactions under a pseudonymous identity (as opposed to an anonymous one).

Why is this significant? Because financial forensics on a given public address can be traced back to a real-world identity.

2. Prepaid Debit Card Fraud Is a Far Bigger Problem

While crypto is an attractive proposition for fraudsters, there is an even easier option in prepaid debit cards.

In this case, a fraudster either buys a prepaid debit card with stolen payment information or uses a stolen card to make a purchase. In short, there are three key reasons why fraudsters find this type of fraud more attractive, and therefore will more likely opt for it:

  • A prepaid debit card isn’t “just” private, it’s completely anonymous. It isn’t connected to a specific identity or banking account, making it easy for fraudsters to leverage it for simple financial fraud and money laundering.
  • It’s completely liquid and basically the same as cash as it can be used at an ATM, offering easy conversion of digital payment into cash. You can basically use it any way a credit card can be used.
  • The regulation typically doesn’t cover basic fraud protections for transactions under $10,000 and unregistered cards that don’t hold personal information such as a Social Security number.

If we compare all of this to cryptocurrencies, you’ll see that converting them to fiat is not easy.

Where it exists, regulation tends to differ from country to country, and in some instances, from bank to bank. Crypto-friendly countries such as Portugal and El Salvador have banks and services that make the process easy but, generally speaking, there is a lot of paperwork involved.

As crypto exchanges become progressively regulated, the registration process becomes more inconvenient, requiring users to provide all sorts of KYC documentation, origins of funds, transaction history, contract, proof that they are a miner, and so on.

Even when a crypto exchange is willing to part ways with its fiat, there’s the matter of user experience. Cashing out fees can be high (significantly higher than for buying crypto) and there can be all sorts of problems with withdrawal such as delays, sudden exchange rate swings, or in more extreme cases - loss of funds due to improper form filling.

The bottom line is that while technical capabilities are present, the entire process is very cumbersome and not quite user-friendly.

3. Prevention Tools Are Already Fighting Crypto Fraud Successfully

The rise in frequency and the volume of digital transactions, coupled with constant changes in technology means businesses are not always fully equipped to prevent fraud.

At a fundamental level, most fraud attempts are a variation of existing methods. Chargeback fraud is pretty much the same. Social engineering fraud has been around for years with essentially the same “catch”.

A great deal of these fraudulent activities can be nipped in the bud with already existing tools that link customer data to cryptocurrency transaction histories. There are platforms that specialize in digital goods fraud protection and can help automate and simplify KYC processes so businesses can learn more about their customers.

Thanks to an AI-driven approach, they can make accurate decisions in real time, all the while striking the optimal balance between a healthy fraud rate and a smooth customer experience. As a result, online merchants can uncover high-risk customers, remain AML compliant, and avoid the stigma associated with crypto money laundering.

Bottom Line, This Is a Problem That Can Be Solved

Crypto payments are in full swing as the number of use cases for cryptocurrencies keeps growing. But as much as the promise of fast, easy payments with typically lower fees continues to intrigue consumers, so it will attract more bad actors and consequently, more fraud.

Sure, fraudsters are relentless in coming up with novel ways to bypass security and exploit vulnerabilities, but technology is keeping up. Through training, algorithms continuously take feedback from humans and learn to become more accurate with time.

The key is to move swiftly and adopt these new standards so that there is tangible protection from predatory exploits.

After all, many digital merchants fail to realize that the collateral damage of digital payment fraud goes beyond the initial financial hit. Lost revenue is reflected through the entire lifetime value of a customer, plus all the damage your brand reputation and loyalty take as they become associated with fraud.

To come out on top and grow revenue instead of losing it, it’s a good idea to focus on adapting a safety strategy - one that emphasizes blocking fraud while streamlining the user experience.