Why We Need to Embed Fraud Checks into Blockchain to Drive Trust

By embedding risk evaluation data into each blockchain transaction, enterprises can take advantage of the huge potential in the ledger technology without exposing themselves to unnecessary fraud risk.


There’s a great deal of talk right now about blockchain. Much of this has been driven by its use in pioneering crypto-currency platform Bitcoin, although there are many more use cases emerging, especially in the enterprise. Some companies are even starting to herald its use in fraud prevention scenarios.

However, before we start adopting blockchain en masse there are some important limitations which must be addressed. In short, we need to find ways of driving greater trust in the technology.

Beyond Bitcoin

Blockchain has up until now largely been discussed in terms of crypto-currencies like Bitcoin. Yes, these were the first major systems to popularize the technology, but in reality there’s way more to it than that. At its heart, blockchain is a decentralized ledger: an immutable record of transactions dating right back to the first. This chain of sequentially grouped, consensually verified blocks of transactions establishes a certain degree of trust among participating parties.

Blockchain is a popular choice for enterprise ledgers because it’s:

  • Durable, with a high level of integrity
  • Difficult to change after the event
  • Easy to share and cross-link hashed data securely. Hashing ensures mutual agreement between enterprises about the sanctity of data without needing to share sensitive details
  • Useful for building smart contracts

The Limitations of Blockchain

However, when we talk about enterprise ledgers and smart contracts, there are several aspects to blockchain which may be holding back adoption. Fundamentally, in a blockchain the important data is hashed to maintain security. This is great on one hand, but unfortunately it also means that you’re severely limited in what extra details you can add within individual blocks or chains. According to this approach, the blockchain can only be valid or invalid. So everyone either agrees that it’s true and valid or that it has been tampered with and is invalid.

This is problematic when we consider that fraudulent transactions could be covertly recorded into the blockchain before it is sealed and hashed. What happens if an enterprise is hacked and certain transactions are altered? Once they’re recorded in the blockchain they could still be considered as valid as all the others. Earlier this year, researchers warned of the risks of unlawful or malicious data being added to Bitcoin’s blockchain, for example.

The Value of Fraud Prevention

This is why we need to add a greater level of granularity regarding trust on blockchain. We need to go beyond a basic binary assurance of integrity towards assessing how risky specific transactions are before they’re codified into the distributed ledger.

So how do we do it?

The key is to inject risk evaluation data into the heart of each transaction that’s codified. Thus, once a fraud evaluation has been completed and a risk score calculated by a trusted third party, it is coded directly on the transaction block. This preserves the integrity of the risk evaluation and gives an implicit level of confidence to all parties involved in that distributed blockchain ledger. While enterprises might be averse to storing highly sensitive raw data, they’d be far readier to share anonymized risk scores via smart contracts. In this way a particular transaction could be flagged because the account it came from was also involved in other high velocity transactions given a high risk score.

Applying risk data to blockchain transactions could also help in the chargeback process by making it easier to identify the transaction that had a high-risk score, plus the entity responsible for reconciliation.

The Future

In the future we could evolve the functionality even further by enabling key stores to dynamically link to relevant raw data for more info on risk. For example, if the risk score is above a certain threshold it could trigger the organization to request more details which otherwise would not be codified in the smart contract.

This is all to come. For now, let’s focus on establishing more granular levels of trust in the blockchain process. It’s the only way enterprises can take advantage of the huge potential in the ledger technology without exposing themselves to unnecessary fraud risk.

With its Data lake based Adaptive Decisioning Platform, Simility can help secure each blockchain transaction. Contact us to know more. 

Kedar Samant

Kedar Samant

Kedar Samant is a seasoned technologist and a fraud and risk management expert. Kedar co-founded Simility and crafted the vision for Simility’s disruptive approach to fraud management. He has been key in establishing Similty’s product superiority and driving innovations. Kedar brings a wealth of experience from his prior stint at Google where he built the platform for fighting fraud and abuse across Google’s products. Prior to Google, he held technology leadership positions across industries including banking and online services.
Kedar Samant