By Fergal Parkinson
Since the pandemic forced almost all aspects of our society online, there has been rising fraud – figures from the UK Office for National Statistics (ONS) show that since September 2021, overall fraud is up 36%. Consumer champions Which? estimate that fraud costs UK consumers £9.3bn a year. Clearly, it’s an issue that should be of growing concern across all areas of financial services.
The crypto industry is no different. There has been a much-publicised spike in cryptocurrency investment across the board with corporates joining retail investors plunging into crypto. During 2021, Coinbase surpassed $1 trillion in transaction volume, over eight times its volume for 2020, while Google invested $6bn in crypto over the last 12 months.
This rise in investment is partly down to the volatility and lower returns of other assets and markets and a hedge against rising global inflation. However, a range of factors including minimal regulation, a lack of protections such as Confirmation of Payee alongside huge investment also make the crypto market a prime target for fraud and has led many investors to perceive the market as unsecure. In fact, research from Chainalysis scammers stole over $6bn from crypto investors last year.
Amongst this backdrop, how can the crypto industry fulfil its potential? Our research suggests that the UK’s crypto market is missing out on 13 million potential new customers who are put off from investing in crypto. The main factor behind this is the perception of a lack of security across the market, partly driven by minimal regulation but also by widespread media coverage whenever a security issue does occur – if you’re not convinced, just read the press coverage around the Lazarus Group’s $500m+ hacking of Ronin Network earlier this year. With this in mind, it’s perhaps not surprising that 41% of UK consumers believe there is more fraud in the crypto industry than anywhere else in financial services.
Our recent research suggests that these misconceptions around cryptocurrencies are actually preventing many consumers from investing – over half (54%) of UK adults distrust cryptocurrencies as they don’t believe the security processes in place are robust enough to protect investors. These potential investors are shunning crypto assets specifically because they believe crypto assets pose security risks.
Is crypto security secure enough?
When it comes to investing in crypto a primary concern amongst consumers is identity theft, with 52% of people noting this as a worry. Unfortunately, this is increasingly common across all areas of financial services, as identity theft reached an all-time high in 2021, increasing significantly by 11%.
The perceived lack of effective security measures could also be impacting the regulatory process for many crypto firms. In the first year of crypto firms needing to seek FCA approval under money laundering regulations, just 12% of all applications were approved by the regulator. No doubt there will be many individual factors behind this high rejection rate but the fact remains that introducing more stringent security measures would likely appease both potential investors and regulators.
Engaging investors
The industry must alter public perceptions. Enhancing awareness and understanding surrounding fraud and crypto is key, but there is also a need to tackle both the real and perceived security risks at play here too.
Our research shows that almost half (45%) of UK adults believe that crypto will never become mainstream unless security and regulation are improved. Clearly the crypto industry needs to ensure its not only implementing strong security measures, but is also communicating these effectively.
Investors need to be reassured that their data, identity and finances are secure when investing or trading crypto assets. The crypto industry must be more proactive not only in its attempts to tackle security risks but also to communicate to investors that there are effective security measures in place. Without this shift in narrative, crypto may struggle to reach its full potential as a truly viable, global alternative to the current monetary system.
Mobile identity verification – the future of security?
Our research revealed that nearly half of consumers do not believe that financial service providers have strong enough identification measures in place to protect them. There is an opportunity for the sector to recognise this issue and address it.
Mobile phones play a huge role in our everyday lives with 85% market penetration amongst those aged over 16 in the UK. The fact that mobiles are so integral to our lives means they are a vital tool for financial services firms to protect customers, fight fraud and boost security. But despite this, our phones are not used effectively as an identity verification tool by firms. Confirming a customer’s identity via their mobile phone is an effective way to mitigate fraud, especially as almost half (46%) of people have had the same phone number for over a decade so have a much more reliable digital footprint than other communication channels.
Consumers’ mobile phone number longevity also means that organisations can obtain rich and actionable data to strengthen and validate the user verification process, reduce fake accounts, give risk insights, improve conversations, and determine the optimal channel for message delivery.
Mobile phones can also be further utilised by crypto firms, as they allow notifications to be sent directly to a customers’ pocket. We’ve already seen the success of Strong Customer Authentication (SCA) introduced this year to check IDs before payments are processed. By using a push notification to a mobile phone containing a code or asking a customer to visit a banking app to prove their identity, consumer protection is greatly enhanced. This is an approach that more crypto firms should consider implementing as standard.
There is global appetite for alternative investing but there are also significant concerns holding millions back from entering the crypto market. Many firms will already have introduced measures and have effective anti-fraud solutions in place to protect investors – but they need to shout about it more. As with many new technologies, mass adoption can be hesitant, so crypto firms need to ensure they’re engaging with potential investors about security measures more than ever if they want to attract new customers and fulfil its potential.
About the Author
Fergal Parkinson is a co-founder and the Director of TMT Analysis, one of the world’s leading mobile intelligence companies. Starting his careers as a BBC Correspondent, Fergal co-founded TMT in 2016, and now helps organisations around the world to obtain rich and actionable intelligence to strengthen and validate the user verification process and reduce fake accounts.
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