Why Crypto Must Change to Go Mainstream

Peer-to-peer decentralised finance (known as DeFi) is fast becoming a mainstay in cryptocurrency trading, offering consumers an easy way to get onto the crypto ladder, diversify their portfolios, and earn high-interest levels.  

As DeFi has become more popular, it’s no coincidence that cryptocurrency-related scams have increased dramatically. According to the City of London Police, crypto fraud accounted for losses of more than £146 million in the UK in 2021 – up 30% from the previous year.

It’s not that DeFi is inherently insecure. Rather, cryptocurrency is inherently complex. It is all too easy for newcomers and seasoned retail investors to make an error when balancing numerous private keys, ledgers, and seed phrases.

At the same time, today’s malicious actors are using social engineering tactics to entice retail investors into falling for scams. In this environment, it’s easy to see why fraud is at an all-time high.

However, worryingly, it’s unlikely that fraud losses have reached a peak. If last year’s data is anything to go by, we could see another increase this year. This spells trouble for the industry. Fear and a lack of trust will hinder long-term growth, meaning crypto will never enter the mainstream.

Regulation Is a Cat and Mouse Game 

It can be tempting for crypto players to shirk responsibility for fraud and, instead, wait for regulators to mandate action. This approach is unwise. Regulation is somewhat of a cat and mouse game. Regulators are racing to catch up, but the pace of innovation is simply too fast for the slow legislative process.

While we can look forward to legislation in the future, we cannot rely on it in the present. Immediate action is needed.

Hypothetically, we have the means to reduce the success rates of malicious actors. The innate transparency of cryptocurrency means transactions are traceable. Centralised exchanges could collaborate, utilising machine learning and artificial intelligence to monitor transactions across the marketplace.

Together, we could create a unified database that tracks scams in real-time and shows where bad actors are putting stolen funds. These funds could then be extracted directly from malicious actors’ accounts and flagged to the authorities, no matter how many exchanges the funds moved through.

While this is the future of fraud prevention in the industry, it is a faraway land. The opacity between different exchanges means that unification isn’t possible right now. But with collaboration, communication and commitment between providers, it could be soon.

Education Is Crucial to the Future of the Industry  

Another critical component of fraud prevention is education. In the same way that traditional finance institutions inform their customers about fraud risks and incorporate fraud prevention into their offers, exchanges should integrate fraud education and prevention into their overarching approach. While some organisations are leading in this space, many are yet to take responsibility.

Exchanges can, for example, put resources and instructions in place that help retail investors understand the common types of crypto scams – like what a ‘rug pull’ is – and how to navigate the marketplace safely.

However, education needs to go beyond passive content. In mainstream finance, when a consumer sets up a traditional trading account, they’re put through a series of steps. They need to test their knowledge of trading, learn terminology, and receive frequent reminders that their activities can be high-risk.

These processes can be transferred to the world of crypto. Exchanges can take an active role in ensuring that retail investors have the appropriate amount of knowledge to trade safely. At the same time, in-app nudges could be used to remind users about common or new types of scams – and how to stay safe.

New Industry Bodies and Standards Are Needed

The industry must collaborate to create go-to standards for education, fraud protection and prevention. This is the only way to tackle the scale of fraud that is harming our industry.

If cryptocurrency is to reach the mainstream and fulfil its promise of a more transparent, secure financial system, new industry bodies are needed. These new bodies need to enforce transparency, responsibility, and safety.

Crypto may have been around for a long time, but will need to adapt in order to become more responsible and secure.

By taking a unified, industry-wide approach to fraud prevention, we can better catch fraudsters – and build trust in the marketplace for the long term.

This must be combined with ongoing education. We need to demonstrate that we are committed to keeping our users safe. Only by doing this will our industry achieve the same levels of adoption and trust as historical financial players.

By Luke Watson, Senior Software Engineer at Centralex.