Fraud — and the lack of transparency that enables it — is a growing problem for businesses around the world. In a list published on Risk.net, fraud ranked as one of the top 10 operational risks of 2017. But a cutting-edge technology called blockchain could provide the fraud prevention capabilities these businesses are looking for.
Blockchain is a shared ledger that is decentralized and resistant to tampering. It allows verified contributors to store, view and share digital information in a security-rich environment, which helps to foster trust, accountability and transparency in business relationships. Seeking to capitalize on these benefits, companies have been exploring ways to use blockchain technology to prevent fraud in industries such as finance, identity management and supply chain.
Preventing fraud in finance
There are many factors that complicate financial transactions: need for collateral, time required for settlements, differences in currency denominations, third-party mediation and more. Multi-step processes, especially ones that require human interaction, are prime targets for fraudsters. With blockchain, information can be shared in real time, and the ledger can only be updated when all parties agree. This can reduce time, costs and opportunities to commit fraud. And with lessened time to completion, it is less likely a party won’t be paid.
Chile’s Santiago Exchange plans to introduce blockchain technology across the country’s financial sector. The Latin American stock market will use blockchain to help reduce errors, possible fraud and transaction processing times in its short selling system for securities lending.
Bank-to-bank financial transactions are also vulnerable to fraudulent attacks from bank cards and mobile payments. According to Constantin von Altrock, Director of Counter Fraud Management at IBM, payment fraud is a $20 billion-a-year problem. Watch the demo below to see how immediate payments can be made with a financial transaction manager built on blockchain.
Last year, identity theft and fraud cost consumers $16 billion. The threat of online fraud has spurred many credit card companies and financial institutions to alert consumers when potentially fraudulent transactions are made. However, that hasn’t stopped criminals from stealing identifying information and using it without permission. In fact, of the banks polled in an IBM Institute for Business global study, only 16 percent said they can detect fraud as it is attempted.
What if a person’s digital identity could be secured in a way that prevented it from being tampered with or used in an unsanctioned way? Blockchain could make this possible. If identifying information is placed on a permissioned blockchain framework, authorized parties will have access to one version of the truth, and only known participants can verify transactions and ensure records are valid.
In Canada, SecureKey Technologies is working on a new digital identity management and attribute sharing network based on blockchain. The network will allow individual consumers to control what information they share, while organizations can efficiently validate a customer’s identity and arrange new services. By reducing redundant verification processes and the amount of paperwork needed to execute them, there would be fewer vulnerabilities for criminals to exploit.
Though fraud related to financial institutions tends to get more media attention, fraud in supply chains is just as much of an issue, if not a greater one. Because supply chains are complex and usually involve many people and moving parts, there are a lot of holes in which fraud can be committed and go undetected.
Blockchain can help to reduce and even prevent fraud in the supply chain through greater transparency and improved traceability of products. It’s very difficult to manipulate the blockchain, which is an immutable record that can only be updated and validated through consensus among network participants. And if a product is digitized on blockchain, it can easily be traced back to its origin because the information is on shared, distributed ledger.
Determined to stop the spread of conflict diamonds, Everledger has been using blockchain to track the provenance of these luxury items. Through an inscribed serial number that is linked to a diamond’s myriad attributes — which are recorded on blockchain — Everledger helps banks, insurers, open marketplaces and consumers to ensure a stone is authentic and has been obtained through reputable means. Watch the video below to see how it’s done.
Traditional paper tracking and manual inspection systems can leave supply chains vulnerable to inaccuracies, which can be deadly when the product is food. As an alternative, Walmart has been exploring how to use blockchain to improve food traceability, authenticity and safety. In the recent annual investor meeting, Frank Yiannas, VP of food safety for Walmart, revealed how blockchain makes it possible to call up tracking information of a product in just 2.2 seconds — a process that previously took almost seven days. Being able to access data so quickly could help to reduce food frauds such as substitution and misrepresentation as well as improve response time when contamination is discovered.
No, blockchain doesn’t eliminate all types of fraud. Even with blockchain in place, thefts can still occur. However, those thefts are due in large part to attempts to layer services on top of blockchain, and not because of the core technology. And while blockchain networks are built on the notion of decentralized control, the infrastructure can leave back doors open to vulnerabilities that allow tampering and unauthorized access. That is why it is so important for enterprises to use a blockchain designed for business, on the right infrastructure and with the right services. Stay tuned for my next blog post, where I will discuss specific features of blockchain that can help prevent fraud.