Unpacking the Anatomy of Cryptocurrency Scams

Importantly, this figure does not include attempted fraud. Total fraud attempts rack up to a number well into the billions and reflect the excellent preventative work that the U.K. financial institutions (FIs) are doing to keep consumers and their money safe.

However, the most interesting takeaway from the UK Finance update is the continued growth of Authorized Push Payment (APP) scams. APP scams surpassed the amount of money stolen through card fraud (£355 million vs. £262 million) for the first time ever. A simple explanation for this shift is that fraudsters will always follow the path of least resistance to monetization. With the increasing effectiveness of fraud solutions that focus on device, location, and behavioral insights, the weakest link in the chain is no longer a bank’s fraud prevention methodology; it’s the customers themselves. 

As the APP phenomenon rolls on, scams have shifted, morphed, and diversified to reflect current consumer and industry motivations. Consequently, one specific scam type is gaining a disproportionately large amount of momentum: cryptocurrency scams. 

The Alluring Hook of Cryptocurrency: Why Consumer Affection Makes It a Prime Target for Scams

Public interest in cryptocurrencies such as Bitcoin has exploded. A gain in market share, credibility, and media coverage has resulted in an estimated 2 million U.K. adults now owning some form of crypto investments. 

This popularity has been predominantly fueled by the potential to make fast, sizable gains from the volatility of crypto. Despite hefty falls, it has also had moments of exponential growth, attracting investors keen to accept the risks for potentially big rewards. Some consumers are even taking their personal finances into the red to fund their investments. Endorsements of crypto by high profile individuals such as Apple CEO Tim Cook have only added to consumer optimism.

Ironically, it is this consumer desire to make money quickly, combined with the fear of missing out on growth opportunities, that fraudsters are now using to their advantage. 

How Cryptocurrency Scams Work 

The intricacies of crypto investment scams can vary wildly, from fraudsters posing as Elon Musk to the promise of free sign-up bonuses. Despite the micro-level details, the macro-level convincer is always the same – the promise of something for free. 

All humans have emotional and psychological vulnerabilities, it’s just who we are. For example, consider consumers who worry about their financial stability. Fraudsters recognize this, and act on it.

Cryptocurrency Scams Result in Three Pillars of Harm

• The victims: The consequences of crypto scams can be devastating. Stories of lost house deposits and life savings are all too common. One of the most compelling statistics  is that anyone can fall victim to a crypto scam, not just the elderly consumer. Young people have grown up in a culture where it’s simply more normal to share their data online. They also desire to generate quick wealth and are perhaps less risk averse than previous generations. They, therefore, typically display less reticence to share personal details or respond to someone on social media. These traits make younger consumers a massive and appealing target opportunity to fraudsters.
• The banks: The APP scourge has resulted in most U.K. banks signing onto the Contingent Reimbursement Model. This code reduces the impact of APP scams by refunding scam victims (if they have acted appropriately). However, all victims will not receive refunds all of the time. And the Contingent Reimbursement Model often puts banks in a difficult position. If the bank chooses to refund a victim, they’ll suffer bottom-line fraud losses. If they decide not to refund the victim, they risk a media backlash and reputational damage. 
• The crypto platforms: Cryptocurrency platforms themselves are not victimless in scams. They are essentially the mule accounts and, while unregulated, do not want to find themselves in constant receipt of fraudulent funds. Equally, legitimate users of their services do not want to hear news of their platform being used as a vehicle for money laundering. The repercussions of these actions will be reputational damage and a perceived lack of security. With so many emerging platforms bursting onto the crypto market, these scandals could prove catastrophic for a crypto platform’s future business.

How Do You Solve a Problem Like Crypto Scams?

The problem then is quite clear. Crypto scams create undesirable consequences for banks and crypto platforms, but most importantly, victims. What can these parties do to tackle the crypto scam phenomenon? 

The bank primarily has a responsibility to protect its customers and keep them safe. A layered approach is critical to successful scam prevention. The following measures form the foundations of a solid strategy:

• Transaction monitoring: Understand your individual users’ digital habits and use that baseline to spot a future anomaly. Additionally, understanding patterns in the scam data at a collective level will offer further invaluable insights. Learning from large volumes of past data is an ideal use case for AI and advanced machine learning techniques. 
• Technology adoption: In all types of fraud, the ability to identify inconsistencies in user behavior is critical. Following the latest technological advancements can play a critical role in that. Just a couple of examples are:
  • Adopting behavioral biometrics – behavioral biometrics can detect distress signals within the user’s behavior. This includes hesitancy prior to a payment or “page doodling” when receiving instructions from fraudsters. 
  • Active call detection – This is a simple but effective insight. If a user is on the phone, potentially with the scammer, the transaction risk could be heightened. 
• Data collaboration – Financial institutions and crypto platforms have many reasons to work closely together. Real-time data collaboration is just one of them. If a bank understands that their user has recently opened a crypto account prior to making a payment, this is an extremely useful layer of data for making a risk decision.
• Education and awareness – This is arguably the most important step banks can take to stop scams before they start. Banks have recently ramped up their game, but more can be done. A good education and awareness strategy should include online content and be analytically targeted at potential victims as real-time payments are transacted. These vital messages should be shared on social media and other mainstream media channels.

The crypto platforms have obligations here as well. As they facilitate the fund’s transfer by acting as the mule, strong account opening controls should be in place to ensure they are fully aware of with whom they conduct business. Many experts in the industry are pushing for receiving banks to assume liability for scams in the future. Should this ever materialize, this game-changing notion could send ripples across the industry and set a precedent for a major rethink on managing scams risk.

Failure to up their game will put crypto platforms on a knife’s edge, and continuing to enable large volumes of fraud will result in severe business restrictions such as those imposed on Binance by HSBC and others. Banks do not enjoy blocking payments as it creates operational overheads and customer inconvenience, but they have no choice if certain beneficiaries become a hotbed for fraud.

The collaboration opportunity for crypto platforms and banks is genuinely exciting and offers two-way benefits. Ultimately crypto platforms should seek “bank standard” controls to give trust and confidence to both the banks they receiving payments from, as well as their consumer base.

Prevention Can Lead to 3 Pillars of Benefit

Fraudsters remain in offense mode and won’t let up unless they meet worthy resistance. All three parties must work together to create a triple-layered defense to build that resistance. If this is achieved, the fraudsters are forced to rethink their approach. The benefits for the banks, the crypto platforms, and the consumers are clear:

3 Pillars of Benefit for 3 Parties

Banks

• Gain additional layers of data to better protect the victim’s outbound transactions;
• Improve scam detection rates, resulting in fewer false positives and lower operational overhead;
• Open opportunities to expand relationships with emerging crypto platforms.

Crypto Platforms

• Improve their reputations in the eyes of both consumers and the banks;
• Become more trustworthy and banks flag fewer false positives, resulting in more successful deposits and happier customers;
• Implement bank-level controls enabling continued growth and wider acceptance.

Consumers

• Reduce chances of being deceived by scams, resulting in less material loss and distress;
• Gain confidence in their bank’s ability to protect their assets;
• Increase confidence in the crypto platform’s scam prevention ability.

Banks, consumers, and cryptocurrency platforms all have a stake in the game. Collaboration is the most important first step to keep this emerging market secure for all sides.

A rise in digital interactions means more targets for fraudsters. Watch our on-demand webinar What’s in store for financial risk in 2022? to learn how banks can prepare for new fraud challenges.