Explore how blockchain technologies can combat fraud in the digital asset space and what it takes to secure the future of cryptocurrency.
Blockchain technology offers one of the most promising solutions for improving security and preventing fraud, yet greater efforts are needed to make these technologies mainstream. While we often discuss the advantages of digital economies, whether through the internet or digital assets, the associated risks are frequently overlooked. For example, the rapid expansion of the digital economy has coincided with a rise in human trafficking on social media platforms and an increase in cybersecurity vulnerabilities, all of which demand attention.
The cryptocurrency sector faces similar challenges. For it to grow and become sustainable, it must actively address the rising tide of fraud within the space. Distributed ledger technologies (DLTs) are already demonstrating their potential by solving practical problems. For instance, an event in Vienna, Austria, brought together financial experts to discuss blockchain’s role in enhancing security and efficiency in the financial sector. Hosted by the Austrian National Bank and other partners, the conference highlighted the numerous ways blockchain can improve systems through real-world applications.
One critical aspect of fighting fraud is having access to comprehensive data. Researchers like Michel Grosz and Devesh Raval from the Federal Trade Commission (FTC) have shown how fraud trends can be mapped across countries based on their exports, offering valuable insights. This data-driven approach is something that the cryptocurrency sector must adopt if it aims to reduce fraud effectively. However, crypto’s reputation in this area remains tarnished, with the FTC reporting $114 million in fraud linked to Bitcoin ATMs (BTMs) in 2023. Though crypto-related fraud is on the rise, it’s important to compare it fairly with fiat currencies, which still dominate global fraud activities.
Despite these challenges, blockchain continues to offer innovative solutions to combat fraud. A prime example is the development of auditing protocols designed to ensure financial transparency. Cross-ledger auditing technologies like Cross Ledger cOnsistency with Smart Contracts (CLOSC) and Cross Ledger cOnsistency with Linear Combinations (CLOLC) are emerging, which allow auditors to verify cross-organization transactions more securely and efficiently. These protocols provide privacy and security features, ensuring that sensitive information remains protected during audits.
Scalability also plays a significant role in preventing fraud and ensuring the adoption of blockchain technologies. Layer-2 (L2) solutions, such as rollups, aim to solve the scalability issues by processing transactions off-chain before posting the results back to the main blockchain. Security is a major concern in this area, and one proposed solution involves a “watchtower” system. In this system, independent entities, known as watchtowers, are incentivized to monitor transactions, raising alarms when suspicious activity is detected. The “proof of diligence” mechanism ensures that watchtowers perform their tasks effectively and rewards them when they catch and report fraudulent activity.
The blockchain ecosystem is filled with value-enhancing solutions like these, but more must be done to quantify the impact of real-world applications and emphasize their critical role in enabling secure economic and social activities. While blockchain’s roots in cryptography make it ideal for improving security and countering bad actors, the industry must take its responsibilities more seriously if it wants to make cryptocurrency truly mainstream.
