Technologists have been promoting blockchain technology as a sort of panacea that could save the financial sector and protect everyday banking customers from fraud. Economists and journalists have painted a different picture. They’ve claimed that distributed ledgers are an easy way of obscuring illegal transactions and point to several high-profile cases where criminals used cryptocurrencies to cover smuggling and gambling debts.
Considering that some engineers have gone so far as to call blockchain technology nothing more than a passing fad, the truth may very well lie between these two extremes. There are, however, many organizations already deploying this technology to reduce the risk of fraudulent purchases.
Systems Currently in Place to Prevent Fraud
Since blockchain decentralizes the data structures used to govern economic transactions, it can define the concept of trust. Institutionalized trust providers like third-party banking authorities have long defined what a legitimate transaction is. However, this trust has been brought into question in a world filled with media manipulation and disinformation.
Auditors remain the main method of preventing fraud, but blockchain technology is often more trustworthy because it relies on a P2P network running consensus algorithms that ensure perfect data replication happens across all nodes. There’s no way an attacker could reasonably crack a 256-bit cryptographic hash.
Payment options from Bitcoin-enabled ATMs to virtual credit cards store each transaction automatically in nodes that feature even more sophisticated systems. Now some major international institutions are turning to this technology as well.
New Legislation in Growing Asian Economies
Several nations have recently enacted regulations regarding financial fraud insofar as blockchain transactions are concerned. Most legislative maneuvers have come from progressive Asian states who have experienced growth in the technology sector as a result of market-based reforms. Some legal agencies, like the Revenue Department of Thailand, have begun using cryptographic ledgers to monitor VAT invoices in the hopes of spotting illegal documents before they’re passed on.
Distributed ledgers can’t be altered once their data is synced to physical storage on a remote server. Ekniti Nitithanprapas, Thailand’s current revenue director, also plans to phase in machine learning algorithms to examine each tax payment entered into the official ledgers. While the algorithm itself is more than likely based on traditional binary trees, it leverages information stored on the blockchain to stop financial fraud.
SWIFT India is also attempting a similar implementation to store data in a way that’s functionally untouchable. SWIFT partnered with a US fintech company called MonetaGo to offer blockchain-driven fraud prevention solutions that leverage the technology to create a closed payment rail.
Possibilities for New Kinds of Fraud
Not all examples perceive blockchain technology in a positive light, however. Some technology journalists have referred to it as a fad. Consumer tech analyst John Koetsier once wrote that while Bitcoin and Ethereum have done their best to improve scalability to levels enjoyed by Visa and MasterCard, they’ve had a spotty level of success when it comes to shipping solutions.
Anyone can download the code for a public blockchain and begin running nodes on locally installed devices. While this has obviously slashed infrastructure costs, it’s also lead to a sort of Balkanization of protocols that parallels what’s happened to many Linux distributions. Since anyone can download and modify the code, countless developers create their own solutions designed to address problems no one seems to be having.
As a result, some engineers feel that all this effort should instead be spent on more traditional technologies. It’s probably telling that computer science FAQs still include instructions for deleting nodes from old-school b-trees instead of managing blockchain transactions.
In an absolute worst-case scenario, lending institutions could be spending billions on distributed ledgers that could be discontinued in just a few years.
Blockchain’s Financial Future
While no one denies that digital criminals use cryptocurrencies to hide illegitimate transactions, it’s also true that large centralized trust enforcers have their problems too. A recent New York Times editorial pointed to Experian’s leak of financial data as an example, and anyone in the banking industry can think of countless more.
The situation should improve immensely as blockchain technology continues to mature. While the first cryptographically secured data chain was developed in 1991, no one really used the technology until Satoshi Nakamoto’s infamous 2008 paper popularized it. Financial institutions can expect a few more growing pains before everything settles down. Once it does, though, fraud and data leaks could be far less common than they are today.
