Stopping fraud on crypto, FOREX and online trading platforms

The world of cryptocurrency, forex and online stock trading moves so quickly that by the time anything can be written about it the opposite will most likely be true. At time of writing, the price of cryptocurrencies has crashed by almost $1.3 trillion, with Bitcoin, the most popular cryptocurrency, losing almost half of its value in April. Despite some investors buying at the dip, it has not recovered. The case of Gamestop’s stock ($GME) early in the year showed that ‘traders’ on smart phone apps could shake the core of the financial world.

Despite this, more people than ever are hoping to strike it rich investing in cryptocurrencies, trading currency or buying stocks online, and wherever there is money changing hands there are people looking to take it. Cryptocurrency exchanges have been hit particularly hard by fraud, with $12.6 billion stolen since 2011 (adjusted for inflation). The average value of a hack on a crypto exchange is $24 million, making them extremely lucrative. Although there are supposedly ‘major flaws’ in the security of desktop and app-based trading apps, they are not the targets of nearly as many hacking attempts, though low-level fraud like multi-accounting to get sign-up bonuses is still an issue.

We found out from experience that digital fraud in online trading, particularly in the crypto space, needs more active security, and machine learning (ML) was the only way to create security protocols that work as fast and efficiently as modern fraudsters.

Fraud and money laundering in crypto, stocks and FOREX

Multi-million dollar hacks of exchanges will make the news, but for fraud and compliance professionals working in online trading, particularly in crypto, every day means putting out fires and wondering whether the fraud attempts you prevented are only the tip of the iceberg.

Multi-accounting, the practice of opening multiple accounts to either get sign-up bonuses or move funds between accounts for the purpose of money laundering (which we’ll discuss later) is always going to be prevalent on online trading platforms. Although they are rare in crypto, many FOREX trading sites offer free trades as a sign-up bonus and it can potentially be lucrative to create accounts en masse to harvest them.

Account takeover is similarly common, and rarely discussed in the press. In stock and FOREX trading platforms an account takeover is relatively simple: find an account’s login details, change their payment details to that of a bank account that you can use but which cannot be traced to you, then empty their account. With cryptocurrency exchanges this is more complicated since, theoretically, every transaction can be traced through the blockchain that underpins the technology and simply ‘cashing out’ one’s holdings is usually more complicated and time-consuming than it is on fiat-currency based platforms.

However, it still happens. There are less-used altcoins that make traceability much more difficult, and proceeds from account takeovers can be laundered through them to get rid of any traces of their origin before being returned to more easily used currencies. Although the use of cryptocurrency for actual purchases is becoming rare as it becomes seen as more of a speculative asset than a currency, there are still online retailers who will accept it as payment, allowing criminals to convert their gains into re-sellable goods, and dark web markets like the Russian site Hydra that would allow stolen cryptocurrency to be converted into narcotics, gift vouchers, pre-paid credit cards or just cash through specialised money launderers.

Hot and cold security

Despite its reputation as the ‘wild west’ of financial assets, cryptocurrency is becoming more legitimate by the day, with more and more exchanges utilising Know Your Customer (KYC) verification, two-factor authentication for logins and bank-grade security protecting their servers. Sophisticated and security-conscious users are increasingly moving to keep their coins in places other than on major trading apps, such as ‘cold’ wallets and even USB keys.

In security terms, a ‘hot wallet’ is an account on an internet-connected device, such as the servers powering cryptocurrency exchanges. Being connected to the internet, it can be hacked, and since cryptocurrency exchanges don’t provide the same insurance as banks, in the event of a hack a trader could potentially lose everything. Some exchanges will work to compensate customers in the event of a major security breach, but they are not obligated to, and some will simply lack the funds to do so in the event of a multi-million dollar loss.

However, in some ways, cryptocurrency could be seen as even safer than traditional stock trading and FOREX sites – if you were to buy a stock, for instance, you would have to continue to have a ‘hot’ online account with a trading site, which could be hacked. If you cashed out your account, you wouldn’t be able to benefit from any growth of that particular stock. In the cryptocurrency space, ‘cold’ wallets exist that are not connected to the internet, storing an individual private key on a USB stick or even a paper print-out rather than allowing access to an account through much more easily hackable usernames and passwords. The benefit here is that even when stored in a cold wallet, one bitcoin is still one bitcoin, and can grow accordingly until such time as you want to trade it or convert it to fiat currency. If anything, the security on these cold wallets can prove to be too good, causing users to lose thousands or even millions because of lost passwords.

Balancing ease of use and safety

While in the previous decade the technical challenge of setting up a cryptocurrency wallet and the sheer difficulty of trading equities and foreign currency online (or at least doing so profitably) kept many people out of potentially risky online trading. This is no longer the case – even as recently as earlier this year the Gamestop affair showed millions of people that there was potential for incredible profits from easily available apps, and even before that black swan event online brokers were already seeing huge growth as US citizens invested their stimulus cheques. The record-breaking price of bitcoin caused similar growth in cryptocurrency investments, though because of the nature of the crypto space it is difficult, perhaps impossible, to know how many individuals own cryptocurrency (though there are some estimates).

As cryptocurrency becomes more commonly accepted and trading stocks and FOREX online continue to grow security and compliance measures will of course become standardised, but so will the number of unsophisticated users and fraudsters looking to exploit them. While the massive hacks of exchanges are conducted by highly sophisticated groups and may be impossible to fully prevent, the equally damaging but less headline-worthy daily account hijackings and multi-accounting scams tend to operate on a ‘quantity, not quality’ basis, firing off hundreds or thousands of attempts and hoping that some stick. Artificial intelligence (AI)-enabled fraud prevention allows the companies behind online trading platforms to keep up with the sheer quantity of attacks. Machine learning allows systems to keep themselves up to date with the ways in which fraudsters are trying to access accounts, and for the secure sharing of huge amounts of data from companies around the world to make anti-fraud systems even more powerful.

Modern trading platforms need modern fraud solutions, and the only solution that can keep up with fraud on the scale and level of sophistication of the fraud problem that they experience is equally sophisticated artificial intelligence. By using the very latest technology it is fully possible for companies in the crypto, FOREX and online stock trading field to balance growth, ease of use and safety.