Experts have argued that the digital pound could be an important weapon in regulators’ fight against a rising tide of fraud.
With scandals rampant in the UK, Gilbert Vardien, Quant’s chief executive, said “we need a complete reset”. Quant builds the technology for blockchain, which includes the underlying central bank digital currencies (CBDCs).
According to UK finance figures, fraudsters could lose £1.2 billion in 2022. The scale of the fraud has been dubbed an “epidemic”. In response, the government recently announced plans to tackle the rise in fraud, including the creation of a specialist fraud squad.
However, the plans have been criticized for failing to compel large tech firms to reimburse victims when scams occur online. Many have called for more cooperation between the companies involved in the fraud series.
But Verdien suggested that like the digital pound, fraud protections could be built into the architecture of CBDCs, providing far more protection than is currently possible.
“When you look at CBDCs, it is an opportunity to be able to embed fraud protection at the entire network level and then have fraud prevention done by the network itself,” Verdien said.
Using a CBDC, regulators will be able to spot “fraud patterns” in payment networks. This will help identify suspicious activity that can be directly targeted.
Rules can be embedded in the network to block payments to these suspicious accounts.
Verdian said the network has “logic built in … embedded logic that can check for fraud before payments can even begin.”
While many have raised concerns over the potential threat to privacy from CBDCs, especially with regard to preventing financial crime, Verdien said that CBDC networks are really “no different from today’s reporting and compliance perspective”.
“The government doesn’t need a CBDC to monitor crime and have a law enforcement act on it. They can do that today. A CBDC isn’t going to give them anything extra that they don’t have today.”
He also pointed out that consumers actually give far more personal data to social media companies than to financial institutions.
Fraud prevention is an important aspect of the Bank of England’s advice for the digital pound. In the consultation paper the bank says “fraud protection is a material consideration for the digital pound”.
It suggests “fraud monitoring” as a potential benefit for the private sector. Verdian concurred, saying, “There isn’t a commercial bank that hasn’t noticed this”.
Keith Bear of the Cambridge Center for Alternative Finance said a key consideration regarding fraud is how the digital pound will interact with other forms of money, such as cash and bank accounts.
“The design for fraud prevention has to cater for it,” he said, which could potentially be a challenge.