Digital pound can help in the fight against financial fraud.

Explore how the digital pound and blockchain technologies could offer a unique solution to counter growing fraud concerns in the UK, highlighting insights from experts on how to incorporate fraud protection into central bank digital currencies

30 July 2023 | 05:23

The digital pound could become a valuable tool in the fight against the growing wave of fraud, experts say. Thoughtful blockchain technologies and central bank digital currency (CBDC) systems could be the key to turning the tide on this alarming trend.

A new strategy to combat fraud

In the face of widespread fraud in the UK, Quant CEO Gilbert Verdian argues that “we need a complete reset.” Quant develops blockchain technologies, including those underpinning central bank digital currencies (CBDCs).

According to UK Finance data, £1.2 billion was lost to fraudsters in 2022. The scale of fraud has been described as an “epidemic.” In response, the government recently announced plans to tackle the growing fraud, including the creation of a specialized fraud-fighting unit.

Building fraud protection into CBDCs

Verdian suggests that fraud protection can be built into the architecture of CBDCs like the digital pound, allowing for much greater protection than is currently possible.

“When we look at CBDCs, this is an opportunity to build fraud protection at a network-wide level, and then fraud prevention can be done by the network itself,” Verdian says.

By using CBDCs, regulators will be able to observe the “fraud pattern” across the entire payment network. This can help identify suspicious activity, which can then be detected directly.

Utilizing CBDCs to counter fraud

Rules can be embedded in the network to prevent payments to these suspicious accounts. Verdian says the network “has built-in logic… built-in logic can be a fraud check before the payment is even initiated.”

While many have concerns about the potential privacy threat from CBDCs, especially in relation to combating financial crime, Verdian claims that the CBDC network is “no different from today’s perspective on reporting and compliance.”

“The government doesn’t need CBDCs to monitor and control criminal activities. They can do that today. CBDCs don’t give them anything extra that they don’t have today.”

Prospects for the digital pound

Combating fraud is an important aspect of the Bank of England’s consultation on the digital pound. In its consultation document, the Bank states that “fraud prevention is a critical aspect of the digital pound.”

Keith Bear from the Cambridge Centre for Alternative Finance said that a key aspect of fraud is how the digital pound will interact with other forms of money, such as cash and bank accounts.

“Designing a fraud security system must take these aspects into consideration,” he says, which could potentially pose a challenge.