Making cryptocurrencies mainstream requires greater efforts to prevent fraud.
We tend to talk about the benefits of the digital economy, whether it’s the Internet or digital assets, but the costs are often overlooked. Whether it’s the surge in human trafficking on social media platforms or the rise in cybersecurity vulnerabilities, the expansion of the digital economy brings with it new risks that must be managed.
The digital asset community is no different, and to scale and become sustainable, it must combat the prevalence of fraud. And it’s not hard. Distributed ledger technology is already proving its worth by solving specific use cases. This week in Vienna, Austria, the Austrian National Bank, together with Complexity Science Hub and other sponsors, is hosting a conference on advances in financial technology, featuring a range of speakers exploring the value-enhancing uses of blockchain technology.
Thanks to the pioneering work of the Federal Trade Commission’s Consumer Watchdog, we now have basic statistics on the incidence of fraud, the perpetrators, and the countries with the highest levels of violations. The FTC’s Michelle Gross and Devesh Laval show that these complaint data can be used to identify countries with excessive levels of fraud based on the level of exports and the destinations of their exports. This level of data and the processes for collecting it are needed to combat fraud.
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Unfortunately, cryptocurrencies have not had a great reputation in this space. The FTC reported that $114 million in fraud was reported on Bitcoin ATMs (BTMs) in 2023, and the number of cryptocurrency frauds has skyrocketed in recent years. Of course, we need to put these statistics into perspective. Fiat currencies are the most used currency for fraud worldwide, so we shouldn’t compare the worst cryptocurrencies to the best fiat currencies. It’s not apples to apples. Nevertheless, we should strive to establish the right incentives and processes within the digital asset ecosystem to combat fraud as much as possible.
Fraud reports from around the world, as tracked by the Consumer Sentinel Network, a database maintained by the FTC. Source: “Fraud Across Borders,” by the Consumer Sentinel Network and FTC Commissioners Michel Grosz and Devesh Raval.
Fortunately, there are already a number of blockchain use cases that are proliferating to combat fraud. For example, consider the role of financial auditing in helping to ensure the integrity and transparency of an organization. Currently, auditors lack the ability to cross-verify transactions across different organizations, which can lead to multi-million-dollar misreporting scandals and many cryptocurrency audits that are just for show. To address this, new protocols that leverage blockchain, Cross Ledger Consistency with Smart Contracts (CLOSC) and Cross Ledger Consistency with Linear Combinations (CLOLC), have emerged to allow auditors to more efficiently verify cross-ledger transactions with built-in privacy and security properties such as transaction amount privacy and organization-auditor disconnection.
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Similarly, let’s take another example of scalability that is perceived as necessary for institutional adoption. Layer 2 (L2) solutions like rollups help solve L1 scalability issues by processing transactions on the main blockchain and then publishing the results back to the main blockchain. However, a major concern is ensuring the security of these rollups, especially ensuring that the published data is accurate.
A recent study proposed a “watchtower” system where independent actors (watchtowers) are compensated for monitoring transactions and raising alarms when something goes wrong. These watchtowers would have to prove that they were diligent in their work through a system called “proof of diligence,” which ensures that they properly monitored transactions. They would also be able to challenge false data and receive a reward for finding errors. A key part of the solution is not just the technology, but also the economics of designing the right incentives to prevent misconduct and promote trust.
The blockchain ecosystem is full of value-adding use cases, which we will be showcasing at the AFT conference in Vienna. But we need to do a better job of quantifying the benefits of real-world use cases and amplifying the essential role they play in enabling economic and social activity. Indeed, one of the biggest use cases for blockchain technology, which originated from cryptography, is its ability to improve security and counter malicious actors. But we need to be more serious about how we talk about and promote blockchain as a solution.
Christos Makridis is a guest columnist for Cointelegraph, an associate research professor at Arizona State University, an adjunct assistant professor at the University of Nicosia, and the founder/CEO of Dainamic Banking. He holds a PhD in economics and management science and engineering from Stanford University.
This article is for general information purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
