What comes to mind when you hear the word cryptocurrency? For many people around the world, cryptocurrency is a still unknown concept. Something like an online game played by young people. But more and more we’re realizing that cryptocurrencies are a valid form of currency. There is evidence to show that cryptocurrencies can help prevent fraudulent transactions. Before we get into that, let’s talk about how they work.
The heart and soul of cryptocurrencies are a technology called blockchain. Blockchain is a digital record of all cryptocurrency transactions that is available for viewing by the public. It’s similar to your personal financial ledger but with a few important differences. Your personal or business finances are all housed in one centralized place and that information is disseminated out to anyone who needs to see it like a bookkeeper or an accountant. Blockchain is held in a distributed database and is not managed by one, or even several, entities. Because of the decentralized nature of the blockchain, there is no easy way to take down the whole system.
The distributed database is a network of different nodes. Each node contains the complete blockchain record including unique reference codes and time stamps of every transaction. If an individual with nefarious intentions tried to defraud the system by changing the blockchain in one node there are tens of thousands of other nodes that carry the correct blockchain.
Another aspect of cryptocurrencies that protects business owners from fraud is how transactions are processed. In a normal credit card transaction, the credit card owner can dispute a transaction after the sale has taken place. Imagine you owned a car repair shop and after processing a credit card for work you already completed, the customer disputes the payment and then you have to prove you did the work to the owner of the card. Unfortunately, things like this happen all the time.
Cryptocurrency transactions are processed differently. Once a customer makes a payment using a currency like Bitcoin, it cannot be reversed. In the case that a mistake is made or an item needs to be returned, the payee can refund the money, but once a transaction is made the power is no longer in the hands of the buyer. You can imagine how a system like this would eliminate this common type of fraud for many businesses.
Cryptocurrency isn’t a perfect solution to fraud, but it is a good one. As long as there is an opportunity, people will look for ways to commit crimes like fraud. The benefit of new digital currencies is that there are safety mechanisms baked in to protect their users. If you’re interested in learning more about how Surety Bank is engaging with cryptocurrencies, send me a note. I’m happy to discuss the subject.
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