Are Blockchain and AI key to fighting financial crime?
Jun 14, 2019
Businesses are looking to new technologies in their efforts to combat the evolving threats on their finances
It is estimated that 3.8 billion people are now accessing the internet, and this connectivity is generating data at a rapidly increasing rate. According to Forbes, 90% of all data in existence was generated in the past two years; if this exponential increase in the rate of data generation continues then in two years ten times the volume of data will exist, and in four years 100x the current volume of data will have been generated.
This data is not only valuable and insightful, it is also increasingly difficult to keep secure.
The growing threat of financial crime
As the volume of data online increases, and financial services become increasingly digitised, there is huge pressure on banks and payments companies to protect financial data from criminal activity. Because whilst the generation of enormous volumes of data is an asset for businesses as they strive to deliver better and more personalised digital services, there is also more sensitive information that can potentially fall into the wrong hands.
Today, the threat from financial crime comes from multiple bad actors, including rogue nations, organised crime, and cause-motivated hacktivists, as well as more traditional hackers and rogue company employees.
And the incentives for these groups in incredibly appealing. A 2018 study from Refinitiv stated that only 0.5% of all transactions reviewed by bank compliance officers lead to a criminal investigation, and consequently only 1% of criminal proceeds in the EU are confiscated by authorities. In other words, 99% of all financial crimes in the EU are successful.
This is because, due to fallacies in existing financial technology, financial criminals have some significant advantages over the agencies trying to enforce the law and protect financial data. The siloed nature of banks’ data infrastructure, non-adaptive systems, and the reactive nature of cybersecurity as it tries to keep pace with the changing modus operandi of very skilful criminals mean that financial services companies constantly face an uphill battle keeping systems secure.
A further unintended consequence of current approaches is the high volume of false positives generated by legacy systems. Far from catching more criminal activity by casting a wider net, high numbers of false positives makes it easier from criminal activity to be successful; criminal attacks are able to ‘hide in plain sight’ amongst so many false positive reports that they remain undetected.
Blockchain: a new tool in fighting cyber crime
So new technology is clearly needed in the battle to protect all this new data from financial crime, and two emerging technologies that could make a real difference on the front line here are blockchain and AI.
Cryptocurrencies, particularly Bitcoin, already have a negative reputation when it comes to financial crime, because of their association with criminal activity. Critics have pointed to the anonymity of crypto payments, the difficulty in monitoring payment flows, and the unregulated nature of many cryptocurrency exchanges of Bitcoin, but when combined with strong Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols blockchain technology itself has great potential to be a vital tool in fighting financial crime in the future.
Some of the benefits of blockchain technology in enabling financial services provider to better protect data than current systems include:
- Data is accessible from a single location in real time and so is easier to monitor and report on than siloed systems
- Data is immutable
- Data is chronologically stacked and stamped
- Data is encrypted
- Data is transparent for regulators and law enforcement
A shared ledger as a single source of truth, that is immutable, secure, traceable, and auditable would be a significant upgrade over existing digital infrastructure. In addition, the nature of blockchain enables the technology to also be the facilitator of federated digital identity, while capturing and logging consumer consent for any transaction involving the collection, sharing or storing of data. In other words, nothing happens without consent.
Nurturing trust: a role for AI
Analysing newly available data to acquire a better understand of behaviours will play an extremely important role in combatting the threat of cybercrime, but human monitoring alone is an inefficient way to manage this. This is where AI technology has a huge role to play.
One example of this the new 3D Secure 2.0 card scheme protocol for card-not-present (CNP) payment authentication. Through enriched data (200 separate data points are shared with the issuer for every transaction, a 20x increase on the current standard), as much as 95% of all CNP payments verified by 3DS 2.0 will not need to be manually authenticated through passwords or other verification tools such as biometrics. This is expected to have a significant impact of reducing cart abandonment, as well as speeding up transaction times.
AI systems by definition are adaptive, learning and stopping the attempted fraud patterns. AI can also be used in behavioural analysis, which provides valuable data on the consumer we’re dealing with (for example, we’ve learned that the overwhelming majority of online applications where the consumer cuts-and-pastes his/her first and last name, are fraudulent).
Fighting financial crime is an imperative for companies, governments, and citizens, especially as the value of available data increases and criminals continue to engage in illegal activity in more sophisticated ways. To do this effectively will require both better human understanding of best practices and the harnessing the powerful technology tools that are becoming available.
Blockchain and AI offer two such tools; when leveraged alongside deep internal expertise and more integrated industry collaboration they could make a real difference in the fight against the increasing cybercrime threat.
And companies are beginning to embrace this innovation. Refinitiv’s latest research report Innovation and the fight against financial crime states that 97% of the enterprises it surveyed believe that technology can significantly help with financial crime prevention, including blockchain and AI. 56% of respondents believe that AI and machine learning can significantly help with financial crime prevention and 40% are convinced of the significant benefits of blockchain.
86% of companies are also prepared to share data with bodies such as the regulator and other industry players in order to combat financial crime.
44% of businesses stated that they currently used AI to prevent financial crime and 51% said that they would like to in the future; 44% of companies said that blockchain technology was already part of their crime prevention strategy, and 47% said that they would like to use blockchain in the future. With this level of adoption and predicted adoption in the near future, AI and blockchain appear to be a cornerstone in financial services’ security defences moving forward.