Is Bitcoin the answer to fraud?

As Bitcoin grows in popularity, could the crypto-currency be the solution to online fraud, asks Akif Khan.

Akif Khan, Bitnet
Akif Khan, Bitnet

Last month, George Osborne announced new rules and regulations that could see digital currencies, such as Bitcoin, become a far more attractive form of payment for a variety of businesses. With the UK government set to invest £10 million into a research initiative, the news has been welcomed by those who are encouraging mainstream adoption of digital currencies.

The Bitcoin protocol, introduced to the world in 2009 by the enigmatically anonymous Satoshi Nakamoto, is an innovative breakthrough in the field of digital currencies and more than 80,000 merchants are accepting the currency. For the first time, it enables any type of digital property to be transferred between two parties without relying on a third party, such as a government or bank.

Bitcoin's role in preventing fraud

Fraud is still a huge threat for online merchants. In fact, between January 2014 and June 2014, fraud losses on UK cards alone totalled some £247.6 million, while losses on remote banking rose to £35.9 million – a 71 percent increase on the previous year. 

Screening for fraudulent transactions is costly for merchants, both in terms of managing the chargeback process with banks when transactions slip through the net and become fraudulent, and the cost in lost revenue by potentially turning away some good customers on suspicion of fraud. Since Bitcoin transactions are push payments, there is no chargeback model – so merchants can confidently accept transactions knowing that there is minimal risk of fraud. 

With the popularity of online shopping increasing, businesses are looking for a payment platform that they can trust. Bitcoin can provide just that, equipped with its in-built technology protocol that solves problems often associated with the contemporary payment ecosystem. Cost is a good example, with a payment in Bitcoin often being cheaper to accept than the equivalent payment made using a credit card.

Having less fraud exposure can also enable merchants to accept transactions that may have been refused in the past. For instance, a merchant may have fraud management rules in place that stop a first-time customer making a high value order that ships internationally. If that customer paid with bitcoin, the merchant would have no concerns in accepting it outright.

The blockchain

The key to understanding Bitcoin is the blockchain, which uses group consensus, mathematics and computational effort to verify the validity of transactions and provide an indisputable record of events. It is designed to verify the validity of all transactions and maintains a full audit trail of every transaction ever made in the currency. This indisputable record of events is essentially a database of watertight, incorruptible and irreversible information, leaving no room for security risks, or indeed errors.

In essence, the blockchain is a synchronised ledger, copies of which are stored locally around the world by nodes in the Bitcoin network. It relies on three vital ingredients for it to work:

  • Open source access – the protocol is open and free for anybody with internet access to use, either as a benign node in the network or as an active miner who validates transactions.
  • Open source distribution – the network is not controlled by a third party, but instead, is controlled by those using it.
  • Security – all transactions that are validated are permanent and cannot be changed for malicious gain. 

Due to the ingenious use of the ‘proof-of-work' concept, each block in the chain cannot be changed as doing so would require the entire blockchain to be modified – essentially history would have to be re-written, and the computational power required to do this would be prohibitive.

The future

Bitcoin payments are regularly hitting 100,000 transactions per day and last year's Black Friday and Cyber Monday saw almost £200 million in Bitcoin spent globally, only behind the likes of Visa, MasterCard and American Express in total daily volume. An impressive result for a ‘six year old' currency that's still in its infancy, proving that Bitcoin is breaking down the barriers of digital currency transactions. Clearly, Bitcoin can be used as a solution to card fraud but it'll be interesting to see how the currency moves from relative obscurity to one that online shoppers use to pay for goods around the world.

Contributed by Akif Khan, chief commercial officer, Bitnet.