Mastercard Is Launching a Crypto Fraud Identification Tool

https://www.cnbc.com/2022/10/04/mastercard-deepens-crypto-push-with-tool-for-preventing-fraud.html

Mastercard will on Tuesday debut a new piece of software that helps banks identify and cut off transactions from fraud-prone crypto exchanges, the company told CNBC exclusively.

Called Crypto Secure, the system uses “sophisticated” artificial intelligence algorithms to determine the risk of crime associated with crypto exchanges on the Mastercard payment network. The system relies on data from the blockchain, a public record of crypto transactions, as well as other sources.

The service is powered by CipherTrace, a blockchain security startup Mastercard acquired last year. Based in Menlo Park, California, CipherTrace helps businesses and government agencies investigate illicit transactions involving cryptocurrencies. Its main rivals are New York firm Chainalysis and Elliptic, which is based in London.

Mastercard is launching the service against a backdrop of growing crime in the nascent digital asset market. The amount of crypto entering wallets with known criminal connections surged to a record $14 billion last year, according to data from blockchain analytics firm Chainalysis. And 2022 has seen a spate of high-profile hacks and scams targeting crypto investors.

On the Crypto Secure platform, banks and other card issuers are shown a dashboard with color-coded ratings representing the risk of suspicious activity, with severity of risk ranging from red for “high” to green for “low.”

Crypto Secure doesn’t make a judgment call on whether to turn away a specific crypto merchant. That decision is down to the card issuers themselves.

Mastercard already uses similar technology to prevent fraud in fiat currency transactions. With Crypto Secure, it’s expanding such functionality to bitcoin and other virtual currencies.

Ajay Bhalla, Mastercard’s president of cyber and intelligence business, said the move was about ensuring its partners can “stay compliant with the complex regulatory landscape.”

“The whole digital asset market is now a pretty large, substantial market,” he told CNBC in an exclusive interview ahead of the product launch.

“The idea is that the kind of trust we provide for digital commerce transactions, we want to be able to provide the same kind of trust to digital asset transactions for consumers, banks and merchants.”

Compliance has become an important focus in crypto lately as more banks and payment companies enter the fray with their own services for trading and storing digital assets. Last month, Nasdaq became the latest established financial firm to join Wall Street’s embrace of crypto, launching custody services for institutional clients.

Meanwhile, governments on either side of the Atlantic are looking to implement fresh curbs on the crypto sector, which so far been mostly lacking in regulation. Last month, the Biden administration released its first-ever framework on regulation of the crypto industry in the U.S., while the European Union has approved landmark crypto laws of its own.

The payments giant is doubling down on crypto at a time when prices of digital currencies are falling and volumes have dried up. The entire market has shed roughly $2 trillion in value since the peak of a huge rally in November 2021.

Bitcoin is now worth less than $20,000 a coin — a roughly 70% plunge from its near-$69,000 all-time high — and in recent weeks has struggled to climb meaningfully above that level.

Asked about the impact of the declines in crypto prices on Mastercard’s digital asset strategy, Bhalla said the company was “focused on providing solutions to the stakeholders for the long term.”

“These are market cycles, they will come and they will go,” he said. “I think you’ve got to take the longer view that this is a big marketplace now and evolving and is probably going to be much, much bigger in the future.”

Despite the slump in digital token prices, crime in the industry has shown no signs of abating. A particularly popular method of swindling crypto investors of their funds this year has been to exploit blockchain bridges, tools used to exchange assets from one crypto network to another. Around $1.4 billion has been lost to breaches on these cross-chain bridges since the start of 2022, according to Chainalysis data.

Against that backdrop, major financial services firms and crypto platforms are investing in ways of lowering the risk of ill-gotten gains being transferred through their systems. Cryptocurrencies are often criticized for their use in money laundering and other forms of illicit activity — an issue that stems in part from the pseudonymous nature of participants on blockchain networks.

But the development of new software tools has made it easier to trace crypto criminals’ ill-gotten gains. Companies are employing sophisticated data science and machine learning techniques to analyze data on public blockchains.

Mastercard is also seeking to keep pace with its main rival Visa, which has made notable investments of its own in the crypto arena. In its first fiscal quarter of 2022, Visa said it facilitated $2.5 billion in transactions from cards linked to an account at a crypto platform.

Last year, Visa launched a crypto advisory practice to offer advice to clients on everything from rolling out crypto features to exploring non-fungible tokens.

Mastercard declined to disclose the overall dollar value of fiat-to-crypto volumes from its network of 2,400 crypto exchanges. However, Bhalla said the number of transactions the credit card giant facilitates per minute now runs into the “thousands.”