🌎 Friendly Fraud Threatens Crypto Exchanges Amid Rapid Adoption

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When considering the risks of crypto-related fraud, improper chargebacks might not be the first concern that comes to mind. Generally, because transactions in crypto are irreversible, accepting crypto often shields merchants from improper chargebacks.

How Friendly Fraud Impacts the Crypto World

Crypto has become mainstream: today, approximately 580 million people—7% of the global population—own crypto, with ownership surging by a third over the past year.

This rapid adoption presents vast opportunities for economic growth, financial inclusion, and technological innovation. However, it also brings challenges. The features that make crypto appealing—anonymity, flexibility, transaction speed, and irreversibility—also attract friendly fraudsters.

Consider this: if someone purchases Bitcoin or Ethereum using a credit card and then reverses that transaction, they effectively hold pre-laundered cash that can be transferred or spent easily and untraceably.

Consequently, friendly fraud transactions are on the rise. Social engineering scams are also increasing, with criminals manipulating users into authorizing fraudulent transactions, leading to transaction reversals as scammed consumers attempt to recover their money.

The crypto market’s volatility adds another layer of complexity to chargeback management. Most buyers view crypto as a speculative play. When crypto prices soar, the buyer wins. However, when crypto falls, exchanges often see a surge in friendly fraud as buyers use the chargeback process to reverse unlucky trades and recoup their losses.

The Risk to Exchanges

The rise of friendly fraud leads to significant losses for crypto exchanges, which bear the cost of reversed transactions and the increased administrative burden of contesting chargeback disputes. Beyond financial losses, chargebacks strain exchanges’ relationships with consumers, forcing them to exercise heightened scrutiny and due diligence.

Behind the scenes, bogus chargebacks can flood exchanges with disputes, skewing their chargeback-to-transaction ratios and potentially pushing them into payment networks’ high-risk monitoring programs. Once in these programs, companies face higher fees, significant penalties, and the risk of losing card processing privileges if ratios aren’t corrected.

Amidst increased scrutiny from global regulators, crypto exchanges face new rule changes and licensing requirements, leaving them with less time and fewer resources to tackle the chargeback problem.

Visa’s New Rulebook

Visa’s updated rulebook for fiat-to-crypto transactions signals a major shift in how the payments giant approaches fraud prevention in the crypto space. Under the new scheme, crypto exchanges and onramp providers will face increased scrutiny and obligations around transaction monitoring, risk management, and chargeback liability.

Transactions involving multiple digital assets or a mix of crypto and non-crypto products will need to be processed separately, adding operational complexity for platform operators. The rules also introduce new requirements around merchant category codes (MCCs) and other technical processing details, impacting everything from approval rates to interchange fees.

Navigating these changes will require a combination of agility, technical savvy, and strong fraud prevention solutions. Partnerships with experienced payment experts who understand the intricacies of card network rules will also be critical.

Prevention and Mitigation

To combat crypto chargebacks effectively, exchanges need a multi-pronged approach that includes preventative measures and effective dispute management.

Prevention Tips:

Increase customer confidence through clear communication and around-the-clock support.
Provide unambiguous terms and conditions, transparent refund and return policies, and responsive customer service.
Use clear billing descriptors on credit card statements to prevent confusion or unintentional chargebacks.

Dispute Management Tips:

Implement systems that handle unique chargeback reason codes and evidentiary requirements associated with crypto transactions.
Leverage artificial intelligence (AI) and machine learning (ML) to optimize the evidence-creation process and improve win rates.
Use AI/ML to analyze transactional data and identify patterns and red flags, adapting in real time to evolving fraud tactics.

By tapping into these technologies, businesses can maximize their win rates and keep chargeback ratios below thresholds that trigger increased scrutiny from card networks.

Building a Trusted Crypto Ecosystem

The continued success of the crypto industry hinges on building trust with users, regulators, and the broader financial system. Effective friendly fraud mitigation is crucial for building that trust.

By investing in robust infrastructure and staying abreast of evolving regulatory requirements, exchanges can protect their own businesses and contribute to a safer, more secure ecosystem for all participants.