How Cryptocurrency Exchanges Prevent and Combat Fraud

Crypto Exchange Security: Navigating a High-Risk Landscape

It’s 3 a.m., and suddenly, my phone blew up with notifications. There was an attempt to steal Bitcoins from my crypto exchange account. If I had to imagine, the theft could have maybe gone through, but then again, my powerful security system considered the incoming login suspicious.

This led me to pursue more research on security measures concerning crypto exchanges. From talking to industry people, I had the revelation that the best exchanges are constantly fighting against criminals-modern methods of detecting cryptocurrency fraud are used, comprising AI, human intelligence, and even the human ear-to protect cryptocurrency assets.

Understanding Why Crypto Exchanges Face Constant Security Threats 

I first discovered crypto back in 2017 (yes, it was near the peak, fail). What intrigued me more than any investment thesis was the tech.

The blockchains that legitimize cryptocurrency are annoyingly non-centralized ledgers, which aren’t manipulable. If you pull money out of your account, after you’re done and over the crypto, you’re done, and over. The bottom line is, you’re not getting customer service to get your exchange, so this presents a perfect opportunity for criminals.

A person who works at a large platform (Dave) says the company can block 40,000 fraudulent transactions a day. What is their main target cohort? Believe it or not, the digital reserves at the company are not their main concern. This, however, is the case for their customers, especially at their “on-ramps,” where fiat money converts to cryptocurrency.

Inside a Typical Crypto Fraud Scheme: How It Happens 

• The fraudster purchases credit-card data stolen from people ($10-$20 per card) on the dark internet.

• Using the stolen identities, bogus accounts are created ($30-$50 for each ID).

• The card is used to buy cryptocurrencies.

• The crypto is then sent from the exchange to a private wallet.

• The funds then disappear before the cardholder realizes it.

• Once the fraud is detected, the exchange is forced to compensate for the losses.

The Role of Data Science in Preventing Crypto Scams 

“We’re a financial crime prevention unit that has disguised itself as a tech company,” said a Data scientist working for an exchange that is in the middle category. She works in detecting crypto-related frauds that analyse hundreds of behavioural attributes to produce a risk score.

• Key Factors That Influence a User’s Trust Score in Crypto Platforms

• Keystroke dynamics: how you type.

• Device fingerprinting: the hardware and software you are using.

• Login Behaviour: typical times of accessing and location.

• Motion of your mouse: how you move it throughout the game.

• History of transactions: spending and withdrawal behaviour.

Every transaction helps with improving the system; therefore, it gets better at detecting fraud over time.

She said, “The hardest part is not building the models. It is finding the sweet spot of security and user satisfaction. If you make the sensitivity too high, the real user gets blocked. If it is too low, fraud passes.”

Key Takeaways from a Failed Crypto Fraud Detection Model 

Another one of my friends, Miguel, reported a case that his bank encountered when they launched a brand-new fraud detection system.

The results of the model, trained on 200 factors fixed in testing, and stating that it covered 200 factors, were provided by the researcher. “It was a different story when we went live, and all of a sudden, 20,000 Japanese users became fraudsters for no reason,” the presenter expressed. Why? The training data did not include Japanese users, so their behaviour came to know as new.

So, what is the answer? Shadow deployments – new models run in conjunction with legacy models (pre-live).

Fraud Detection Strategies Beyond Algorithms in Crypto Security 

1. Pattern Recognition 

A few years ago, the exchange spotted a surge in new accounts created in Florida, where all the new accounts were associated with a local bank. Because this behaviour change was out of line with “normal” behaviours, the fraud team discovered a fraud group affiliated with that local bank utilizing stolen credentials.

2. Human Intelligence 

Despite advancements in AI, human analysts remain invaluable in detecting fraud. A team of analysts uncovered fraud when they observed multiple fake accounts with similar profile photos.

3. Guilt by Association 

When they discover a suspect account, the exchange will look closely at the account’s IP Address, device, and transaction history to see if there are any other suspect accounts, connections. The flagged scammer can also expose dozens of.

Real-Life Cases of Cryptocurrency Fraud Throughout History 

• The Valentine Massacre

The price of $2 million underwent the scheme, with an exchange forcibly shut down on February 14th. They had made an inordinate number of fake accounts, complete with forged IDs. What was the mistake? The hacker went into multiple accounts using one device. The exchanges froze the dollar funds and reported to the FBI.

• The SIM Swap Attack

SIM swap has become lethal. The impostors trick the mobile providers into transferring the victim’s mobile number to a new SIM card, allowing the codes to be exploited. A victim was lost with an amount of more than $100,000 before the exchange caught up with the scam.

Nowadays, to prevent such incidents, safe crypto exchanges check if a given number has been ported recently before they allow SMS-based verification.

How Crypto Exchanges Can Prioritize User Protection Beyond Self-Interest 

It is an irony of sorts that a good chunk of security is invested in protecting users from themselves.

• Best Practices of Top Secure Crypto Exchanges:

• Cold storage: Most of the money is kept in offline storage and split into several locations.

• Advanced authentication SMS verification: slowly disappearing in favour of authenticator app-based verifications.

• Withdrawal monitoring: Foreign withdrawals from new devices raise alarms for further verification.

• The exchange can have withdrawal limits for new accounts to limit possible fraud.

• Choosing the Best Secure Crypto Exchange

• If you really care about security, select an account with true 2-factor authentication (nothing to do with just SMS). -Introduces a delay in withdrawal on new accounts.

• Some teams respond quickly to fraudulent incidents.

• Cold storage is used for most resources.

The Future of Crypto Security 

If I asked an industry insider to name his or her reason for staying up all night, they would say it was being genuine.

“The holy grail is verifying a user’s identity with absolute certainty-without making the process frustrating,” Dave said. “We’re not there yet, but we’re getting closer.”

Options that can be considered include:

• Biometrics: fingerprint and face recognition.

• Behaviour authentication: identifying users by typing and navigation.

• Multi-layered security: employing different security verification techniques to effectively block fraud.

If these technologies aren’t fully developed, fraud prevention in crypto is a cat-and-mouse game played by criminal experts and security professionals. One thing is that the fight for safe trading in crypto is far from an end.

If you ever get an email from your exchange requesting some confirmation, remember, it is not red tape; that is security.