When you think about the risks of crypto-related fraud, improper chargebacks might not be the first thing that comes to mind. In fact, precisely because transactions in crypto are irreversible, accepting crypto generally shields merchants from the risk of improper chargebacks.
However, crypto chargebacks can be a big deal for exchanges that manage the purchase of crypto using fiat currencies. In fact, friendly fraud is increasingly placing real strain on exchanges’ operations and impeding their ability to build trusting relationships with merchants, financial institutions, and regulators.
In response, Visa has now implemented new rules governing fiat-to-crypto transactions—a promising sign, but also a reminder that crypto stakeholders need to get serious about managing friendly fraud. Indeed, companies’ ability to put effective processes in place to manage and mitigate friendly fraud will be a key test of the crypto space’s ability to mature in the months and years to come.
How friendly fraud impacts the crypto world
Crypto has gone well and truly mainstream: today, a staggering 580 million people—7% of the world population—own crypto, with global ownership surging by a third in the past year alone.
The rapid adoption of crypto presents vast opportunities for economic growth, financial inclusion, and technological innovation. But it also brings challenges: while there are plenty of legitimate reasons to love crypto, bad actors are also increasingly drawn to digital currencies. In fact, the very features that make crypto so appealing—its anonymity, flexibility, transaction speed, and irreversibility—also make it a magnet for friendly fraudsters.
Think about it this way: if someone buys a couch using a credit card and then uses a bogus chargeback to reverse the transaction, they’re left with a couch they didn’t pay for. But if they buy Bitcoin (BTC) or Ethereum (ETH) using a credit card and then reverse that transaction, they’re left holding what is effectively pre-laundered cash that can be transferred or spent easily, untraceably, and at scale.
As a result, friendly fraud transactions are on the rise. So are social engineering scams, with criminals becoming increasingly adept at manipulating users into authorizing fraudulent transactions—often leading to transaction reversals as scammed consumers try to recover their money.
The crypto market’s sheer volatility, meanwhile, adds another layer of complexity to chargeback management. Most buyers see crypto not simply as a store of value but as a speculative play. When crypto prices soar, the buyer wins—but 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
Inevitably, the rise of friendly fraud is leading to significant losses for crypto exchanges as they shoulder the cost of reversed transactions and work to manage the increased administrative burden of contesting chargeback disputes. The impact goes beyond just financial losses, though. Chargebacks also strain exchanges’ relationships with consumers, forcing them to exercise a new degree of scrutiny and due diligence that some see as antithetical to crypto culture.
Behind the scenes, meanwhile, bogus chargebacks can leave exchanges facing a flood of disputes that skews their chargeback-to-transaction ratios, potentially pushing the exchange into payment networks’ high-risk monitoring programs. Once in these programs, companies face higher fees, significant penalties, and, ultimately, the risk of losing card processing privileges altogether if ratios aren’t brought back in line.
And of course, amidst the fallout from the FTX collapse, crypto exchanges are now facing increased scrutiny from global regulators. A slew of rule changes and licensing requirements will leave exchanges scrambling to keep pace—and leave them with even less time and fewer resources with which to tackle the chargeback problem.
Visa’s new rulebook
Regulatory changes aren’t the only policy consideration for crypto operators, though. Visa’s updated rulebook for fiat-to-crypto transactions also 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. Merchants will need to provide more transparency to customers at the point of sale, with clear disclosures about fees, volatility risks, and refund policies.
Notably, 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, which can impact everything from approval rates to interchange fees.
For exchanges, navigating these changes will require a combination of agility, technical savvy, and strong fraud prevention solutions. Partnerships with experienced payment experts who deeply understand the intricacies of card network rules will also be critical.
Prevention and mitigation
To effectively combat crypto chargebacks, exchanges will need a multi-pronged approach that encompasses both preventative measures and effective dispute management.
On the prevention side, operators should focus on increasing customer confidence through clear communication and around-the-clock support. This includes having unambiguous terms and conditions, transparent refund and return policies, and responsive customer service. Clear billing descriptors on credit card statements can also help prevent confusion or unintentional chargebacks.
When it comes to managing disputes, exchanges need systems that can handle the unique chargeback reason codes and evidentiary requirements associated with crypto transactions. This is where leveraging the power of artificial intelligence and machine learning can be a game-changer for chargeback mitigation. AI/ML tools can be used to optimize the evidence-creation process by discovering weak spots and running tests to improve the win rates on those weak spots across merchants. This allows for a more tailored response per case, and continues to improve over time.
On the other hand, for fraud prevention, AI and ML can analyze vast troves of transactional data to identify patterns and red flags. These tools adapt in real time to evolving fraud tactics, offering a proactive approach to detecting and preventing fraudulent activities before they escalate. By continuously learning from new data, AI/ML systems enhance their ability to safeguard exchanges against sophisticated fraud schemes.
By tapping these cutting-edge technologies, businesses can maximize their win rates and keep chargeback ratios below thresholds that would trigger increased scrutiny from card networks.
Building a trusted crypto ecosystem
Ultimately, the continued success of the crypto industry hinges on its ability to build trust—with users, with regulators, and with the broader financial system. Effective friendly fraud mitigation will be a critical component of building that trust.
By investing in robust infrastructure and staying abreast of evolving regulatory requirements, exchanges can not only protect their own businesses but also contribute to a safer, more secure ecosystem for all participants.
Tổng hợp và chỉnh sửa: ThS Phạm Mạnh Cường
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