For many, Bitcoin is the de facto face of blockchain. The cryptocurrency Bitcoin has gained a sullied reputation for its nefarious use in criminal or black market transactions.
However, Bitcoin and Blockchain are not one and the same. Bitcoin is a digital asset and payment system that runs on a public distributed ledger called a blockchain.
But Blockchain can be used for cryptocurrencies other than Bitcoin, and can be used for more than just cryptocurrencies. A Blockchain is a list of transactional records on a distributed ledger technology. Blockchain can be used to record real estate transactions, testing records, health care record storage and more.
The latest buzz among blockchain and alt-currency aficionados is blockchain’s capacity to potentially eliminate much of the fraud commonly associated with traditional electronic currency transactions, like credit cards and P2P payments.
Another interesting discussion around blockchain and associated transactions is where the liability will lie in a transaction. Historically, for online transactions, consumers and merchants have operated in an electronic payments ecosystem where liability for fraudulent transactions was borne by the merchant. Alt-currencies transacted via the blockchain may irrevocably change that— perhaps presenting both its greatest threat and opportunity for widespread adoption.
In an article written for The Paypers, Arthur Baxter from ExpressVPN, makes the argument that consumers will face the brunt of liability for payments and merchant fraud in alt-currency-driven transactions. According to Baxter, “…the risk of fraud for the merchant is non-existent after the transaction is confirmed. There is no way for the fraudster to “charge back” the Bitcoins.” Customer-merchant disputes are handled solely between the transacting parties.
While merchants have seen and understand the benefits of reduced chargeback abuse, it will most likely give consumers greater pause when deciding to conduct transactions via a blockchain-based platform if this same liability pattern follows on future blockchains, since they will have no recourse against merchant fraud.
Baxter indicates one way in which merchants are trying to make cryptocurrency transactions more appealing to consumers is by offering discounts on transactions. He then goes on to pose the question whether merchants will be able to offset the risk borne by the consumer through such discounts.
Securing the consumer transaction
As acceptance and use of crypto-currencies and the blockchain continues to gain traction, the industry can only speculate as to its ability to reduce— or even eliminate— fraud. But one thing remains certain: As long as financial transactions continue to be conducted digitally, regardless if by traditional or alt-currencies, authentication must remain at the fore of an enterprise’s digital and mobile strategy.
For a transaction to be trusted—whether the person is accessing the blockchain to make a transaction in the ledger, or making an online purchase paid for using Bitcoins—there needs to be a strong understanding that the person involved in the transaction is the person authorized to perform it. There also must be validation that the device itself is “clean” and doesn’t contain malware or crimeware.
Current non-blockchain chargeback procedures mean consumers who experience payments or merchant fraud need only log on to their payment processor’s website or call a support line to be absolved of liability or loss.
In the face of increasing consumer liability that may come in a blockchain-based system, firms should ensure transactional trust by implementing sophisticated device intelligence solutions that leverage multi-factor authentication (MFA) to determine the riskiness or trustworthiness of the device.
Multi-factor authentication leverages various identifying elements to prove that the person doing the transaction is who they claim to be. These forms of proof can be something the person knows (password), something the person possesses (private key and device), or is intrinsic to them (fingerprint). Combining at least two or more of these elements is considered MFA, but more factors can be incorporated to lower the risk of fraud. By instituting MFA as part of an enterprise’s consumer trust and risk mitigation strategy, the enterprise can reduce the likelihood of fraudulent access to the ledger by means of stolen identity.
To summarize, for any digital transaction, any device (mobile phone, PC, tablet, etc.) being used as the access point to enter the blockchain to conduct legitimate – or fraudulent – business is critical to reducing/eliminating fraud and securing the consumer’s trust and comfort with blockchain.
The bottom line
While the financial services industry, merchants and consumers remain in a wait-and-see pattern regarding blockchain’s acceptance and ability to reduce or eliminate fraud, one thing is certain. In order to be widely accepted and used by consumers, it must offer assurances and protections akin to what consumers expect with current forms of electronic currency.
Blockchain’s future is inextricably tied to its ability to offer all parties involved in the payments ecosystem benefits beyond what can be ascertained in the current intermediary-driven financial system. As with any emerging financial technology, you can be assured that fraudsters are hard at work looking for ways to capitalize on security loophole using techniques like identity compromise, as well as ways to bypass authentication using fraud tools, malware and malicious apps.