Fraud’s Impact on Crypto Is About More Than Money

Compared to other financial industries, the cryptocurrency market is disproportionately subject to fraud, with a net fraud rate of 7.4% last year.

The most common type of crypto-related fraud is identify fraud, accounting for 44% of fraud cases in the sector. There are dozens of variations of this fraud, but a large number involve leveraging stolen or synthetic identities.

There are also several different objectives, such as money laundering, confidence scams and brute force attacks on other users’ wallets, all of them made possible by cryptocurrency’s fragmented regulatory framework.

Many cryptocurrency exchanges lack the know your customer (KYC) procedures that prevent bad actors from targeting more established financial institutions. A study in 2020 found that 56% of crypto exchanges had weak KYC processes or no KYC measures in place at all.

The impact of fraud on the crypto industry goes beyond just stolen money and data — it also presents the opportunity cost of lost customers.

A recent Visa study found that one of the key factors limiting cryptocurrency use is consumers’ fear of losing their money, something mentioned by 46% of respondents. Among the people afraid of losing their money, 28% mentioned the limited recourse in event of hacking or theft, as the lack of federal insurance or oversight means stolen crypto is likely gone for good.

This is why crypto exchanges and merchants have powerful incentives to minimize fraud by implementing robust customer authentication. Fortunately, there are effective verification methods at the ready. Many cryptocurrency exchanges already use multifactor authentication (MFA) for verification of users and purchases, but security breaches still happen.

For example, Coinbase recently suffered a major breach when hackers exploited a flaw in its MFA system, allowing fraudsters to infiltrate more than 6,000 accounts and steal an unknown quantity of cryptocurrency and customer data.

Sensing the weakness in MFA systems, many exchanges and merchants have begun leaning on biometrics as a more secure alternative. One option is selfie biometrics, which requires users to take pictures of themselves before making online purchases to confirm their identities. An artificial intelligence system then compares these pictures to images already on file to ensure users’ authenticity.

To learn more about the security challenges facing the crypto world, download the Alternative Payments Tracker, a PYMNTS and Socure collaboration.