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Blockchain As Both A Preventer And Perpetrator Of Fraud

Of all the purported benefits of blockchain, iron-clad security may be the most lauded, with much of the proliferation of blockchain experimentation being fueled by corporates’ and governments’ efforts to safeguard systems and processes.

But blockchain is often linked to instances of suspected and actual fraud, making the distributed ledger technology (DLT) market a double-edged sword that has the power to both prevent and perpetrate fraud.

This week’s Blockchain Tracker takes a look at some of the latest initiatives that deploy blockchain infrastructure in an effort to address fraud — as well as some of the most recent cases in which blockchain was linked to instances of fraud.


Faith in Fraud's Security

With security so often referenced as one of blockchain’s most promising traits, it’s no surprise innovators are flocking to the technology to develop solutions that promise enhanced anti-fraud capabilities. But with blockchain still in its early stages, the conversation around DLT’s anti-fraud ability is often discussed in hypotheticals.

New analysis from Forrester, for instance, suggests blockchain has the potential to overhaul institutions’ anti-money laundering (AML) and enterprise fraud efforts.

“Financial institutions globally find it increasingly difficult to meet tough anti-money laundering and enterprise fraud management requirements while also maintaining their edge to serve and retain customers,” Forrester wrote in its report, “Examining Blockchain In Anti-Money Laundering and Fraud Management.” “Blockchain will radically transform the anti-money laundering and the international financial management data provider ecosystem.”

IBM recently announced plans for a blockchain-powered crypto-anchor, which it described as “tamper-proof digital fingerprints ... that can extend the blockchain into the physical world,” as reported by Computing.co.uk. IBM said these anchors integrate into existing products to authenticate an item’s contents and origins based on information stored on blockchain systems.

In a statement, Arvind Krishna, head of IBM Research, identified “food safety, authenticity of manufactured components, genetically modified products, identification of counterfeit objects and provenance of luxury goods” as ways the solution might be used.

There is a lot of discussion of blockchain’s potential power to combat fraud, but working solutions with these capabilities are few and far between. IBM’s anchors were announced as part of the company’s “5 in 5” showcase — a technology expected to disrupt an industry in the next five years.

More immediate is MonetaGo’s latest solution, which has gone live in India. The company revealed its blockchain solution connects invoice financing firms to combat factoring fraud, which occurs when the same invoice is submitted for financing multiple times.


A Friend to Fraud

While analysts largely agree blockchain at least has the potential to aid in anti-fraud efforts, the technology is often linked to fraudulent activity.

Forrester’s aforementioned report acknowledged regulators have raised concerns over blockchain as a tool that can facilitate money laundering, terrorist financing and other fraudulent transactions.

Separately, China’s Chief of Beijing Municipal Bureau of Finance Xuewen Huo spoke at the Museum of FinTech recently to discuss blockchain’s role in initial coin offering (ICO) scams, noting the hype surrounding blockchain means investors may be too hasty to invest in the technology via ICOs — and scammers will take advantage.

“Blockchain is a very sophisticated technology. Con artists can take advantage of people’s innocence to scam common investors by picturing a very lucrative future, knowing that only a very few people who have advanced knowledge could understand how blockchain really operates,” Huo stated, according to reports in CapitalWatch.

He added that blockchain does not necessarily mean an impenetrable system, as demonstrated by stolen cryptocurrencies — data released from Lex Sokolin and reported in Bloomberg earlier this year said hackers have so far stolen $1.2 billion worth of bitcoin and Ether.

“The transaction of digital assets still depends on the identity authentication of the trading platform,” continued Huo. “So many cryptocurrencies were stolen in the past, which means the fancy blockchain technology cannot eliminate traditional threats. If the blockchain encryption keys to control asset security are lost, then digital assets on the blockchain are lost.”

Forrester concluded, however, that the tool enables investigators “to backtrack transactions on the blockchain more easily than with current anti-money laundering and financial management systems.”

In other words, while blockchain is often used to perpetrate fraud, it can also be wielded by institutions and regulators to identify and combat it too.



The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.