During its first year, a good day for Ethereum involved about 45,000 transactions. Six years later, Ethereum is averaging 45,000 transactions an hour. And most predict the activity will continue to increase.
The dramatic rise in transaction volume, which has generally tracked with the cryptocurrency industry at large, presents a wide range of administrative challenges for those who facilitate crypto transactions, not the least of which is developing systems that can detect illegitimate or fraudulent transaction activity. To meet the challenge, many platforms are turning to financial technology to find the needle in the haystack that is fraudulent crypto activity.
How Does the Tech Work?
To effectively identify transactions or other activity that is illegitimate, technology needs to establish what legitimate looks like. What is “suspicious” will not be evident until what is normal is identified.
This method can be applied in any phase of user interaction. For example, users establishing an account on a platform typically follow a pattern of behavior. There is a certain amount of time that it takes to establish the account. There are certain steps that may be challenging, especially if the user is new to the world of crypto. There is certain activity that takes place in the early days of a newly established account. When these patterns are violated, the account can be flagged or tagged as suspicious and be subject to a higher degree of scrutiny.
When evaluating the transactions carried out by an established user, there are a number of behaviors that can be compared to benchmarks to identify suspicious activity. These include the amount of crypto being deposited into accounts, how long the crypto remains in accounts, and what types of transactions are conducted with the crypto.
What Does the Tech Find?
Wash trading is one example of the type of activity that this technology can identify. The activity is known to be used in the non-fungible token (NFT) market to artificially inflate the value of an NFT. It involves the owner of the NFT “selling” it to another account that he or she also controls. Doing this through a series of transactions over a period of time can make it look like the value of the NFT is going up while actually no funds are changing hands. It is done with the hope of eventually selling to an outside party who believes the value of the NFT is on the rise.
Technology identifies wash trading by tracking the movement of funds between the accounts involved in the transactions. When the wallet that ultimately receives the proceeds from the sale of the NFT is seen to have sent funds to the wallet that purchased the NFT, wash trading is detected. Once accounts involved in wash trading are identified, they can be banned from conducting activity in NFT marketplaces.
Behavioral biometrics are another tool that can be used to detect fraudulent activity, especially in the phase where user accounts are being established. This method assumes that legitimate and illegitimate users behave differently when providing information.
For example, legitimate users typically enter information one key at a time, whereas those attempting to establish fraudulent accounts typically use “copy and paste” methods to provide information. Fraud detection programs can identify this type of activity and flag associated accounts as suspicious.
Why Does the Tech Matter?
In the early days of the Russia/Ukraine War, cryptocurrency made headlines when it was identified as a tool that could be used by Russian oligarchs to circumvent economic sanctions. While crypto supporters value the anonymity and freedom that the medium provides, clearly no one wants to see it being used as a tool of criminals or others seeking to thwart laws or avoid international sanctions. Technology that can be used to identify such transactions and allow crypto markets to act on them accordingly should be welcomed.
In addition, those familiar with the crypto industry know that gaining mainstream acceptance means proving to the public at large that crypto and NFTs are a secure, reliable investment that poses no more risk than the stock market or the art market. If fraud is permitted to run rampant, the public’s trust may never be earned.
Digital Assets are highly speculative and volatile, can become illiquid at any time, and purchasing digital assets can result in losing some or all of the asset value. None of this should be construed as financial advice. I am not a financial advisor.
Adam Carlton is the CEO and Founder of Pink Panda Holdings, Inc. Adam’s vision is for Pink Panda to solve many of the problems currently facing the industry, including difficulty in mainstream adoption, distrust in centralized exchanges and institutions, disdain of regulations, scams and “anonymous” founders, and high complexities of existing tools. Adam believes that we can have a profound social impact by truly democratizing finance globally, while also giving back substantially to cancer and other charitable causes.
