Blockchain advances can help prevent a variety of scams from illegal money transfers to fake COACH purses.
What is Money Remittance?
According to Investopedia, money remittance operations are:
“a payment of money that is transferred to another party. Broadly speaking, any payment of an invoice or a bill can be called a remittance. However, the term is most often used nowadays to describe a sum of money sent by someone working abroad to his or her family back home.”
So remittances often involve transferring money across borders and thus may be subject to money laundering or simply part of an effort to scam individuals or even companies or governments. We’ve all heard about the various scams such as: Eight Indicted in Nationwide Grandparent Fraud Scam, and San Diego Pension Scandals.
Money Scams
It’s not uncommon to hear the stories of vulnerable people falling for online dating scams, where someone abroad befriends a stranger online and convinces them they need money. Then there are shopping scams where a site will pretend to be a legitimate seller but never actually deliver the goods you order. You’ve also probably had an email telling you that you’ve won the lottery in another country when you’ve never applied. And, of course, there is the legendary Nigerian Prince scam.
On the surface, these scams sound amateurish, but these operations are much more complex than you might think with large-scale cooperation. There were 2.2 million reports of fraud in the United States in 2020. The actual number is likely to be much higher since some people are too embarrassed to admit scammers tricked them. Money remittance operations are particularly at risk because the differences between various country’s financial systems leave space for malicious actors to manipulate.
In the future, blockchain technology could be a vital barrier to preventing fraudsters from stealing innocent people’s savings. Blockchain includes a few critical features that make it work. Simultaneously, there is a conflict with privacy laws. How they intersect is a fascinating battle for cybersecurity.
How Blockchain Technology Can Stop Scams
At the core of any blockchain technology is the “ledger”. A blockchain ledger records every transaction in the chain and distributes it among multiple nodes. Distribution means that everything in the blockchain is known and in the public domain, making it a nightmare for scammers.
If someone were to try to manipulate a particular block, the rest of the chain would reject it because it doesn’t match their copies. One potential vulnerability is a 51% attack, which, although theoretically possible, is virtually impossible to carry out in practice on any established blockchain technology.
Compare this to traditional transactions. It’s easy to make use of a corrupt official at a bank or financial institution to hide what’s going on. Movies love to feature money transferred to an unknown offshore bank account. In the blockchain, the record of that transaction stays forever. For most places, in order to exchange fiat currency, an ID is required, making the transaction traceable.
Blockchain Immutability
The other key aspect of blockchain technology is immutability. Blockchain’s unchangeable record ensures its authenticity. This feature is driving the growth of the Non-Fungible Token market. Non-fungible means unique, i.e., “one of a kind”, and this is only possible because the blockchain is immutable. Otherwise, people could spoof certificates, rendering the scarcity obsolete.
For fraud prevention, this has exciting implications. For instance, Coach could issue an NFT for each specific handbag to ensure its authenticity, so you could verify it was the real deal before buying it from a foreign website. NFT use can increase trust across borders. NFTs could ensure real estate transactions, allowing buyers to verify that they got an authentic deed without worrying about complex escrow.
Smart contracts can make money remittance operations far more secure. Smart contract rules can prevent ownership (and funds) transfer until both parties agree. Current systems that rely on human validators are far from perfect, but “smart contracts” remove the need for intermediary firms, thus reducing overall costs.
Blockchain Privacy Debate
The features which make the blockchain perfect for fraud prevention are the same ones that make privacy regulators nervous.
By definition, regulators are always a step behind the innovation of the web, but GDPR was a significant win for European consumer protection. The law could extend to other regions, as concern about sensitive data use rises. There was a period where the WEB was the wild west, and tech giants exploited the leniency to grow their empires.
GDPR Article 17, guarantees people the right to be forgotten but this creates Blockchain’s most significant conflict. As the blockchain must be immutable to function, this is quite simply impossible. Since blockchain is decentralized, who is responsible in a case against Bitcoin, for example?
Technology must resolve the issue of responsibility for blockchain to prevail. It’s likely to be something worldwide courts will need to deal with shortly.
Zero-Knowledge Technology
The solution could be using zero-knowledge technology (ZKT) in blockchain applications. “Zero-knowledge technology is the missing part of the privacy puzzle. We do not need to have all our information transparent for the world to see. Instead, we could use a verification system to make sure that information is available to others without knowing what that information is via a zero-knowledge proof.” Through ZKT, the overall chain will still contain the information, but at an individual level, ZKT would ensure privacy.
At a high level, zero-knowledge is where a party can prove a statement true without giving any more detail than absolutely necessary. Imagine a door protected by a code, for instance. Someone can prove they know the code by typing it in and the door opening, even if they don’t tell another person the actual code itself. This protects a person’s privacy but shows others that they have access to the other side of the door.
Let’s say a user wanted to prove they had owned an asset at some stage, but they don’t want to reveal when or how much they paid for it. This would be impossible to hide in a normal blockchain usage, but in zero-knowledge, someone could see that the person was an owner without any corresponding information.
Zero-knowledge applications in the blockchain can give both sellers and buyers confidence in a deal, making it more likely to happen. This way, it doesn’t fall foul of privacy laws but can still prevent fraud.
Blockchain Prevents Scams and Restores Trust
Scams based on money remittance operations have triggered many issues for the unfortunate victims beyond just the money they lose. It can severely damage their trust, and the blockchain can help restore that trust. Immutability with transparency is a potent combination. Zero-knowledge technology can help restore privacy.
It will be fascinating to see how blockchain applications evolve in the future to be even more robust and private than it currently is.
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