By Ranjan R Reddy
The crypto winter is thawing, breathing life into the once-frozen market and melting away the icy grip of uncertainty that plagued the industry throughout 2022. From the depths of despair, a glimmer of hope has emerged as the revitalized crypto landscape experiences a remarkable upswing , captivating enthusiasts and igniting a renewed sense of excitement and potential for the future. With global macroeconomic headwinds easing and inflation cooling down, the crypto market is seeing a surge in trading volume, propelling its market capitalization beyond the $1.20 trillion mark, which is welcome news for those who invested in crypto and watched the market’s fortunes wane over the past year. Experts predict this bullish trend to continue well into the latter half of the year, with Indian crypto exchanges poised for a major resurgence.
Crypto Fraud on the Rise
The surge of cryptocurrencies to new heights has brought a corresponding increase in fraudulent activities within the industry. Reports indicate that in 2022 alone, approximately $23.8 billion worth of cryptocurrency was sent to illicit addresses, posing a significant challenge to investors, businesses, and governments globally. Fraudsters are exploiting the decentralised and unregulated nature of cryptocurrencies by devising new tactics to deceive unsuspecting investors. Some common types of crypto fraud include:
Synthetic/Stolen IDs: Fraudsters use fake or synthetic identities built from stolen credentials to register on crypto platforms.
Account Takeover: Bad actors illegally gain access to users’ accounts, leading to a risk of loss of funds.
Fiat Penny Drop Frauds: Scammers use crypto companies depositing a penny to validate connected fiat accounts by registering and deregistering multiple times.
Social Engineering, Phishing, and Fishing: Sophisticated methods like phishing and fishing are used to commit identity theft and access users’ accounts.
Cryptojacking: Hackers use someone else’s computer to mine cryptocurrency by getting the victim to click on a malicious link.
Money Laundering: Cryptocurrencies are used to launder unsolicited money due to anonymity and lack of regulation.
In the world of cryptocurrencies, the words ‘regulation’ and ‘compliance’ can sometimes feel like the antithesis of the industry’s ethos due to the industry’s emphasis on decentralization and privacy. However, the tides seem to be turning, with more and more governments realizing the importance of protecting investors and fighting financial crimes being perpetrated on the blockchain. India, in particular, is taking a big step forward by including crypto businesses under the Prevention of Money-laundering Act, 2002 (PMAL). Regulators and governments worldwide are already recognizing the importance of crypto regulations and implementing KYC and AML guidelines to increase trust by reducing the chances of fraud. This move signals the government’s commitment to ensuring the crypto industry operates within the same anti-money laundering (AML) standards as other regulated entities. But India is not alone in this endeavour. The EU, the US, and Singapore have also implemented similar laws and regulations, proving that global cooperation is essential in combating financial crimes.
The inclusion of crypto businesses under PMLA regulations is a massive win for the industry as it helps to weed out bad actors and reduce the risk of money laundering and identity theft. Implementing robust KYC procedures can safeguard businesses from legal disputes or regulatory fines, increase user confidence and loyalty, and defend their reputations in the event of a hack or data breach. While the crypto space thrives on its decentralised nature, it is imperative to recognize the significance of implementing appropriate regulations. The implementation of robust security measures and compliance procedures will not only help detect and prevent illegal activities but also boost investor confidence in the long run.
How can FDP players tackle crypto scams?
That said, crypto businesses need updated risk mitigation solutions to protect themselves from fraudsters, as they function in a digital realm vulnerable to evolving cyber threats and fraud. Cybercriminals have employed diverse tactics such as phishing scams, ransomware attacks, and advanced malware that can seize private keys to siphon off funds from crypto accounts. To safeguard themselves and their customers against these dangers, crypto companies must take proactive measures. That’s where the role of Fraud Detection and Prevention (FDP) players comes into play.
In the crypto industry, fraud detection and prevention solutions (FDP) play a crucial role in ensuring the safety and security of digital assets. With the increasing incidence of cyber threats and fraud, crypto businesses must take proactive measures to protect themselves and their clients. FDP solutions leverage decisioning technologies as well as next-generation orchestration techniques to identify potentially fraudulent actions and investigate suspicious behaviors and inconsistent data elements. Let’s look at how crypto platforms can combat money laundering.
Can FDP solutions tackle money laundering in crypto platforms?
Cryptocurrency exchanges have gained a notorious reputation for being a hot bed for illegal activities, including money laundering. Of all the illegal activities, money laundering remains a crucial problem and forms the backbone of most financially-motivated crimes. It’s the secret sauce that allows criminals to profit from their illegitimate activities without getting caught.
And just like in the traditional financial world, cryptocurrency is no exception. Money laundering in the crypto world is like a game of hide and seek, but instead of hiding behind a tree, criminals hide their dirty funds behind multiple layers of transactions and complex addresses. The end goal is always the same – to eventually cash out those dirty digital coins for crisp notes. Without the ability to launder their ill-gotten gains, the motivation to engage in cryptocurrency-related crime would evaporate faster than a puddle in the desert.
Cryptocurrency transactions pose a challenge for AML compliance teams, as they involve unique public addresses that lack mandatory proof of identity. This makes it difficult to connect addresses to real-world identities, and AML regulations that depend on identity information become ineffective. While transactions are publicly visible, investigations are complex and time-intensive, requiring open-source intelligence, collaborations with regulated crypto exchanges and financial service providers, and dark web research to detect illicit activity.
One effective strategy to mitigate the problem of crypto fraud is to implement a risk-based approach to (AML) and (CFT) compliance. This approach involves understanding and prioritizing the highest level of compliance risk a company faces and abating those risks first. By verifying customer information and using AI and ML algorithms, risk profiles that can detect patterns of suspicious behavior and potentially fraudulent activity can be created. For example, FDP solutions can analyze user input and other data to create risk-gauged profiles for each user and identify any fraud attempts atulent account creation in a crypto platform.
Let’s look at it a little more closely. A large part of money laundering and other illicit activities are perpetrated by crime syndicates. FDP features such as location intelligence can help identify malicious behavior of syndicated crypto crime rings, which are usually prevalent in specific high-risk geographies. FDP players can leverage advanced solutions such as device intelligence and behavioral biometrics to check for money laundering. Device intelligence can help identify patterns of fraudulent behavior associated with particular devices or locations, which can aid in detecting and preventing fraud associated with syndicated crime rings.
Similarly, behavioral biometrics can analyze user behavior on web or mobile devices and create a unique user signature that serves as a secure authentication mechanism. It analyzes keystroke movements, typing speed, copy-paste behaviour, and other data to identify patterns associated with individual users and prevent fraudulent activities. For instance, take the case of securing hot wallets. Crypto businesses that offer custodial services or exchanges hosting users’ hot wallets run the risk of Account Takeover. With the increasing number of scams and phishing attacks, users may unknowingly share their private keys with hackers, losing funds. Behavioral Biometrics can aid businesses in adding an extra layer of security while authenticating access to crypto funds managed by any business to ensure that only authorized users can access their wallets.
However, the real power lies in combining Device Intelligence and Behavioral Biometrics. By integrating these two technologies, organizations can create a more robust and accurate fraud detection system. The synergy between Device Intelligence and Behavioral Biometrics allows for a comprehensive view of user activity, encompassing device-related information and individual behavioral patterns. This combination enables organizations to identify fraudsters with greater accuracy, as it becomes harder for fraudsters to mimic both the device attributes and the unique behavioral characteristics of legitimate users. Device Intelligence and Behavioral Biometrics create a powerful combination that delivers a one-two punch, effectively thwarting fraudsters and providing robust security measures.
As the crypto industry gains momentum, it attracts not only legitimate investors but also fraudsters and scammers looking to exploit the growing interest. It’s becoming a critical issue affecting investors, companies, and governments globally. However, simply being compliant is not enough to protect businesses from the ever-evolving and increasingly sophisticated methods of cyber criminals. FDP solutions that leverage orchestration and decisioning technologies can help businesses detect and prevent fraud more effectively. With the right tools and strategies in place, businesses can build a solid foundation for growth and success in the evolving crypto landscape.
The author is Founder and CEO, Bureau