The development of blockchain technology is increasingly proving to be an important role in enhancing security and combating fraud, especially in the context of the booming digital economy. Although current statistics show that fraud is still a concern, the technology promises to bring effective solutions, requiring further discussions on how to apply blockchain.
The growing role of blockchain
Blockchain is a promising technology in enhancing security and preventing fraud. However, to maximize its potential, stronger efforts from stakeholders are needed.
While we often celebrate the benefits of the digital economy â such as the growth of the internet and cryptoassets â the risks involved cannot be overlooked. The rapid expansion of the digital space has created significant challenges, from human trafficking on social platforms to cybersecurity vulnerabilities. The cryptoasset industry faces similar concerns, particularly the rise of fraud.
Despite the challenges, blockchain has begun to demonstrate its value in solving security issues. A prime example is a conference organized by the Austrian National Bank in Vienna, in collaboration with the Complexity Science Hub and other partners, where research on practical applications of blockchain in the financial sector, including fraud prevention, was presented.
Information from data on fraud prevention
One important source of data on fraud patterns is the US Federal Trade Commission (FTC) Consumer Network. Research by Michel Grosz and Devesh Raval has identified countries with unusually high fraud rates based on export data. This information is important in combating fraud and points to the need for better data collection in the cryptoasset ecosystem.
Despite the progress, the cryptocurrency industry still faces a number of reputational challenges when it comes to fraud prevention. FTC data shows that Bitcoin ATMs (BTMs) were responsible for $114 million in reported fraud in 2023, and the number of cryptocurrency-related scams has increased significantly in recent years.
However, it is important to maintain a holistic perspective â fiat currencies remain the primary vehicle for fraud globally, so it is not fair to compare the worst aspects of cryptocurrencies with the best aspects of fiat currencies. That said, the cryptoasset industry still needs to work hard to build strong incentives and processes to mitigate the risk of fraud.
Fortunately, blockchain has been making great strides in the field of fraud prevention, especially in the area of ââfinancial auditing. Currently, auditors have difficulty reconciling transactions between organizations, leading to financial scandals and false reporting. Blockchain protocols such as Cross Ledger Consistency with Smart Contracts (CLOSC) and Cross Ledger Consistency with Linear Combinations (CLOLC) are emerging as effective solutions, allowing auditors to verify transactions between ledgers in a safe and secure manner.
Scalability of blockchain in organizations
Scalability remains a major challenge in implementing blockchain at the institutional scale. Layer-2 (L2) solutions such as rollups help to address this issue by processing transactions off-chain and then posting the results back on-chain. However, to ensure accuracy and security, a âwatchtowerâ system is introduced to monitor and detect transaction anomalies, incentivizing caution through a reward mechanism.
To address this problem, recent research has introduced âwatchtowerâ systems, in which independent parties are incentivized to monitor transactions and detect anomalies. These watchtowers must provide âproof of vigilant monitoringâ to demonstrate that they have monitored transactions accurately. If they detect errors or fraudulent behavior, they are rewarded, ensuring that incentives are properly aligned to prevent fraudulent behavior.
The Next Step: Maximizing Blockchain's Potential
Blockchain use cases in fraud prevention, as highlighted at the Vienna conference, are gradually proving effective. However, much work remains to be done to more clearly quantify the benefits and promote the role of blockchain in supporting economic and social development.
With its cryptographic foundation, blockchain has the potential to be a powerful tool in enhancing security and reducing fraud. However, to achieve this, it requires long-term focus and strategy to fully exploit the potential of this technology in the digital economy.
