The underlying blockchain technology of cryptocurrencies offers payment anonymity on a scale which has not really been seen before.
The cryptography of this technical innovation allows a more clandestine movement of money. There can be massive advantages to this – a lack of censorship, greater accessibility and the ability for oppressed peoples to access financial networks more easily, 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 scams between Jan. 1, 2021, and March 31, 2022. Americans alone lost $329 million to cryptocurrency scams in the 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 smartphones, the Internet, and cars, for example – but oftentimes, the good significantly outweighs the bad.
And how much is blockchain to blame for the negatives, or should we be pointing the finger at the lack of regulation in the space?
We interviewed Monica Eaton on how prevalent scams are in the space, and how blockchain technology is affecting all this. Eaton provides an interesting perspective on the matter, being 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 scam people. However, the anonymity and lack of regulation in the crypto space has made it a utopia for scammers, who can use crypto to evade traditional financial regulations and operate across borders.
This makes it difficult for authorities to track them down. A whopping $3.8 billion was stolen from cryptocurrency businesses alone in 2022, 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.
IZ: Some people argue that blockchain is more transparent and hence can help fight against illicit activity. On the other hand, there are ways around this such as mixers to wash funds. What is your take on this?
ME: While blockchain is transparent, it does not reveal the identities of the individuals 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 illicit activities. Mixers or tumblers, which are services that mix coins from different users to break the link between the sender and receiver, can be used to launder money and cover up the source of the funds.
While identity theft disputes may be avoided through blockchain, without additional protection to safeguard consumers from failed delivery, defective merchandise, or other related issues, widespread adoption of crypto as a common commodity is unlikely. This is why credit and debit cards remain the preferred method of payment; it is the only method that effectively protects consumers in the transaction process.
IZ: How prevalent are scams within traditional finance compared to crypto, and have they increased over the last few years outside of crypto, too?
ME: Scams are prevalent in both traditional finance and crypto. However, the lack of regulation and the anonymous nature of crypto transactions have made it easier for scammers to operate in the crypto space. Scams in traditional finance have also increased in recent years, with phishing attacks and fake investment schemes becoming more common, but the rate of crypto scams is quickly outpacing those seen in traditional finance.
What the crypto industry should be doing now is learning from the vulnerabilities the traditional finance world has faced to keep pace with today’s scammers. There’s no reason why digital asset companies should be waiting for problems to arise before solving them, and while cryptocurrency is a newer concept, most fraud strategies and tactics mimic those in traditional payment spaces.
Companies within the crypto industry should be taking it upon themselves to protect investors from fraud and scams, especially post-transaction, and they don’t have to look far to find viable solutions. For instance, chargebacks are consumer protection that have been around for nearly 50 years, but digital asset companies have no foundation to support transaction dispute mechanisms. In 2015, New York required crypto companies to apply for a “bitlicense” to show they were reputable, but many states have not followed their lead. Until cryptocurrency has more rules and regulations like these, it will be a long time before crypto can become a common commodity, and many investors and consumers will suffer during that time.
IZ: Can regulation help curtail scams?
ME: Of course. Regulation can help curtail scams 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 scams, which can deter scammers from operating in the first place.
The largest need for regulation revolves around filling the void of consumer protection. The chargeback mechanism was designed in 1974 and today is a necessary protection to help safeguard consumers from fraud or malicious merchants. This is something that is needed in crypto, even if it begins as a building block for digital asset protection. Consumers should have some recourse when it comes to post-transaction disputes, such as claims where products weren’t received or having received a product that wasn’t as advertised. The U.S. government is even developing a “wholesale” central bank digital currency, which is sure to require effective regulations and consumer protections, 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.
IZ: How much of a dark mark on crypto is the prevalence of scams? Do you believe the good outweighs the bad?
ME: The prevalence of scams in crypto is definitely a dark mark on the industry. It undermines trust in the technology and can deter new investors from entering the space. However, it’s worth noting that scams are not unique to crypto and occur in traditional finance as well. The benefits of blockchain technology, such as decentralization and transparency, can potentially outweigh the bad if the industry takes steps to address the issue of scams and improve customer security measures.
The reason why this is a difficult item to balance is due to the absence of any type of consumer protection scheme and lack of standards and exchange methods to safeguard consumers, which makes it very difficult to balance the good and bad. That said, it’s important that a foundation is built to create proper protections for consumers, which will undoubtedly lead to stability and sustainability, something that is always welcomed with an emerging asset.
IZ: Are even “conventional” scammers (i.e. non crypto-native scams) demanding to be paid in crypto, even for scams that have nothing to do with blockchain?
ME: Yes, some conventional scammers are demanding to be paid in crypto. This is because crypto transactions are irreversible and anonymous, making it difficult for victims to reclaim their funds or identify the scammers. Consumer protections like chargebacks are virtually nonexistent 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 scammers may see it as a convenient way to receive funds that they can spend down the road. In order to help reduce the prevalence of crypto being used to fund scammers, we also have to address changes in security processes related to AML and KYC; both of these areas need to be readdressed and adapted to how things work in crypto.
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