Yotam Dar Explains: How Blockchain Can Aid Financial Regulations Against Scams

Scams are much more common than many people might think. In fact, in the US alone, there were 2.2 million fraud reports in 2020. The true number is likely to be far higher as many will not report out of fear of looking stupid or believing, often correctly, nothing is able to be done.

Financial regulations struggle to keep up with all the various forms of fraud, and it would be almost impossible, too. Even in the cases where the law the clear, it’s still difficult to gain enough evidence to lead to a prosecution. So as someone worried about fraud and your own personal savings, what can be done?

The blockchain could well hold the key to protecting hard-earned money in the future. Many people associate blockchain to just cryptocurrency, but it’s far wider than that, and the technology itself could host fascinating innovations that make life much harder for fraudsters. At a high level, blockchain is a method of decentralization that means integrity is maintained by a community rather than a single entity. 

Here are three ways this can help stop scams and aid, financial regulators.

The ledger

One of the defining aspects of the blockchain is that there is a shared ledger that contains the entire transaction history. This complete transparency means that it’s impossible for something to go awry without anyone noticing. As no single person can exert overall control, then no one is able to unilaterally change a transaction.

In traditional finance, a bank worker could simply overwrite the record or turn a blind eye, and it would be incredibly difficult for anyone to prove what had happened. In the traditional blockchain, every transaction is validated by multiple nodes of the blockchain, which ensures everything goes ahead smoothly. The ledger can only be updated when verified by both parties or users.

The fact that a buying party is able to see the exact history of what they are buying adds immensely to the trust factor and empowers them with greater information than would be typically available for other types of transactions.

Immutability

The immutable nature of the blockchain is great for combatting fraud. What this means is once a transaction is recorded, it is impossible to delete and remains as part of the blockchain. There is no back door button that can be clicked to undo it or pretend it never happened. The record is written and shared, then more blocks are added on top.

This feature of the blockchain is what has led to the entire NFT industry. NFT stands for Non-Fungible Token, which essentially means an item is irreplaceable because the blockchain history is unique. It serves as a permanent record of creation and ownership. If you think about art fraud in physical goods, it’s very difficult to prove if an item is truly the original. For an NFT, it’s instant and inarguable. 

In the future, this technology will be used for all manner of goods. Imagine property deeds being NFTs rather than their current form. Whoever owns the NFT has ownership of the house, which is easy to prove and transfer. There are still remarkably horror stories of people buying houses from people who didn’t actually even own the property! This kind of problem would disappear using the blockchain.

It’s also great for preventing fraud in luxury goods. Imagine when buying a second-hand luxury item such as a Rolex or a car. The current owner could instantly prove the item is authentic through the use of an NFT, then transfer the item to the new owner once the sale is complete. The new owner would know exactly who had previously owned the item and all of its history. 

No one could change the records to try to commit fraud. Imagine the annual car check-up details being written to the NFT, for example. It’s simple to see why immutability is so important in the battle against scams.

Permissioned blockchain

One of the concerns about blockchain is the clash with GDPR laws. This gives people the right to be forgotten, but if the blockchain is immutable, then it’s impossible to enact!

A potential solution to this issue which can also help with reducing fraud is through the permissioned blockchain. A permissioned blockchain is where only specific people can access information that is specific to a particular organization without their knowledge and agreement. Members of the blockchain can set specific access rights for individual users who need to be invited to see sensitive information. For example, some people may only have read access and others will be able to write information. 

Individual properties can be shared such that a supplier can see the volume and geographical location of other suppliers but not the prices.

A permissioned blockchain allows all the benefits in terms of preventing scams whilst still allowing users control of access to their data. This anonymity addresses the concerns some governments might have. These are currently not as common as public blockchains, but they could have potentially far wider customizable use.

There are many companies currently building permissioned blockchains and as the market matures, these will gain even more features to protect against fraud. Already it is being used for Africa’s first centralized ID system and Abu Dhabi’s land registry. These are major uses that many observers will watch closely to understand how effective the permissioned blockchain is which will foster further innovation.

Final thoughts

In the future, we know cybersecurity will become increasingly important as our dependence on technology continues to increase. Many people aren’t aware of how exposed they are online and what a semi-trained fraudster is able to do with the information in the public domain. It’s alarmingly easy for malicious hackers to spoof something to a level that will convince even experienced web users.

Blockchain’s transparency and immutability make their lives far harder. As the systems evolve security plus privacy will be the two prongs that lead the blockchain to be instrumental in the fight against fraud. Finally, the individual will be empowered rather than beholden to the large organization.