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Friendly Fraud: The Hidden Enemy of the Cryptocurrency World
Disclosure: The views and opinions expressed here are solely those of the author and do not represent the views and opinions of the crypto.news editorial team.
When you think about cryptocurrency fraud risks, improper chargebacks may not be the first thing that comes to mind. In fact, because cryptocurrency transactions are irreversible, accepting cryptocurrency generally protects merchants from the risk of improper chargebacks.
However, cryptocurrency chargebacks can be a major problem for exchanges that handle cryptocurrency purchases using fiat currencies. In fact, friendly fraud is increasingly straining exchanges’ operations and hindering their ability to build trust with merchants, financial institutions, and regulators.
In response, Visa has now implemented new rules governing fiat-to-crypto transactions: a promising sign, but also a reminder that crypto stakeholders need to take friendly fraud management seriously. Indeed, companies’ ability to put effective processes in place to manage and mitigate friendly fraud will be a key test of the cryptocurrency space’s ability to mature in the months and years ahead.
How Friendly Fraud Impacts the Cryptocurrency World
Cryptocurrencies have truly gone mainstream: today, a staggering figure 580 million people (7% of the world’s population) own cryptocurrencies, with their ownership growing by a third globally in the last year alone.
The rapid adoption of cryptocurrencies offers great opportunities for economic growth, financial inclusion, and technological innovation. But it also brings challenges: while there are many legitimate reasons to love cryptocurrencies, bad actors are also increasingly attracted to digital currencies. In fact, the same characteristics that make cryptocurrencies so attractive—anonymity, flexibility, transaction speed, and irreversibility—also make them a magnet for friendly scammers.
Think of it this way: if someone buys a couch using a credit card and then uses a fake chargeback to reverse the transaction, they end up with a couch they didn’t pay for. But if they buy Bitcoin (BTC) or Ethereum (ETH) using a credit card and then canceling the transaction, they find themselves in possession of pre-laundered cash that can be transferred or spent easily, untraceably and on a large scale.
As a result, friendly fraudulent transactions are on the rise. So are social engineering scams, with criminals becoming increasingly skilled at manipulating users into authorizing fraudulent transactions, often leading to transaction reversals as scammed consumers try to get their money back.
The sheer volatility of the cryptocurrency market, meanwhile, adds another layer of complexity to handling chargebacks. Most buyers see cryptocurrency not simply as a store of value, but as a speculative play. When cryptocurrency prices rise, the buyer wins, but when cryptocurrency falls, exchanges often see a wave of friendly fraud as buyers use the chargeback process to reverse ill-fated trades and recoup losses.
The risk for trade
Inevitably, the rise in friendly fraud is leading to significant losses for cryptocurrency exchanges as they shoulder the cost of reversed transactions and work to manage the increased administrative burden of contesting chargeback disputes. The impact goes beyond financial losses, however. Chargebacks also strain exchanges’ relationships with consumers, forcing them to exercise a new level of scrutiny and due diligence that some consider antithetical to cryptocurrency culture.
Meanwhile, behind the scenes, false chargebacks can leave exchanges facing a wave of disputes that distort their chargeback-to-transaction ratios, potentially pushing the exchange into high-risk payment network monitoring programs. Once in these programs, companies face higher fees, significant penalties, and ultimately the risk of losing card processing privileges altogether if the ratios aren’t brought back in line.
And of course, in the middle of the Fallout from the FTX Crashcryptocurrency exchanges are now in front of increased scrutiny from global regulators. A series of rule changes and licensing requirements will leave exchanges struggling to keep up, and leave them with even less time and fewer resources with which to address chargebacks.
Visa’s new regulation
Regulatory changes aren’t the only political consideration for cryptocurrency operators, however. Visa’s updated rules for fiat-to-crypto transactions also signal a major shift in how the payments giant approaches fraud prevention in the cryptocurrency space.
Under the new scheme, cryptocurrency exchanges and onramp providers will face increased scrutiny and obligations around transaction monitoring, risk management, and chargeback liability. Merchants will have to provide greater transparency to customers at the point of sale, with clear disclosures about fees, volatility risks, and refund policies.
In particular, transactions involving multiple digital assets or a mix of crypto and non-crypto products will have to be processed separately, adding operational complexity for platform operators. The rules also introduce new requirements on merchant category codes (MCC) and other technical processing details, which can impact everything from approval rates to interchange fees.
For exchanges, navigating these changes will require a combination of agility, technical expertise, and robust fraud prevention solutions. Partnerships with experienced payments experts who deeply understand the complexities of card network rules will also be key.
Prevention and mitigation
To effectively combat cryptocurrency chargebacks, exchanges will need to adopt a multifaceted approach that includes both preventative measures and effective dispute management.
In terms of prevention, operators should focus on increasing customer trust through clear communication and 24-hour support. This includes unambiguous terms and conditions, transparent refund and return policies, and responsive customer service. Clear billing descriptors on credit card statements can also help prevent confusion or unintended charges.
When it comes to handling disputes, exchanges need systems that can handle the unique chargeback reason codes and evidentiary requirements associated with cryptocurrency transactions. Here’s where to leverage the power of artificial intelligence and machine learning can be a game changer for chargeback mitigation. AI/ML tools can be used to optimize the proofing process by uncovering weaknesses and running tests to improve win rates on those weaknesses across merchants. This allows for a more personalized response per case and continues to improve over time.
On the other hand, for fraud prevention, AI and ML can analyze vast amounts of transactional data to identify patterns and warning signs. These tools adapt in real time to evolving fraud tactics, providing a proactive approach to detect and prevent fraudulent activity before it escalates. By continuously learning from new data, AI/ML systems improve their ability to protect exchanges from sophisticated fraud schemes.
By leveraging these cutting-edge technologies, businesses can maximize win rates and keep chargeback rates below thresholds that would trigger increased scrutiny from card networks.
Building a Trusted Crypto Ecosystem
Ultimately, the cryptocurrency industry’s continued success depends on its ability to build trust—with users, regulators, and the broader financial system. Effective, user-friendly fraud mitigation will be a critical component in building that trust.
By investing in solid infrastructure and staying abreast of evolving regulatory requirements, exchanges can not only protect their operations, but also help create a safer and more secure ecosystem for all participants.
Roenen Ben-Ami
Roenen Ben-Amico-founder and Chief Risk Officer of Rightis an expert in the field of payments and chargeback mitigation. Together with co-founder and CEO Ofir Tahor, he has shaped the company’s product and vision since its founding in 2020. Previously, Roenen led the Chargeback and Merchant Risk teams at payment service provider Simplex, which successfully recovered millions of dollars annually.