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January 5, 2022

The Importance of Blockchain Technology in Fraud Prevention: How Does Blockchain Prevent Fraud?

Talking of digitalization, there is a technology that will change business life profoundly: blockchain. Along with its various advantages, let's focus on "how does blockchain prevent fraud?" this time.

First, we should take a look at the definition and the benefits of blockchain technology. Blockchain is a database where data, transaction records and assets in a business network are recorded. In other words, it's a big digital notebook.  

Blockchain’s main difference from the typical databases is that it stores the data in groups called blocks. When one of the blocks that storing data is full, then automatically it links to another block. Thus, blockchain has a chain structure system. Only authorized network members can view the data in the blockchain. Furthermore, nobody can change the recorded data, and the data is always transparent. These features can help a lot to businesses with various tasks and fraud detection and prevention is one of them.  

Benefits of Blockchain Technology:  

We mentioned that blockchain technology provides some benefits to companies. We can list them as:

  • With high security measurements, it can prevent hacks and fraud.
  • It can reduce the need for centralized platforms or intermediary institutions, as well as cutting costs.
  • It restricts or blocks access to the company system and information.
  • Transactions get faster.  
  • You can track everything easily thanks to the transparent transactions.

So how exactly does blockchain prevent fraud? Is it wise to use blockchain in fraud detection and prevention?  

How Does Blockchain Prevent Fraud?

Blockchain may be a good asset in fraud prevention. While blockchain has many useful features, there are a few specific features that are important for fraud detection and prevention.  

key features of bockchain to prevent fraud

Distributed networks

As we mentioned earlier, blockchain is a distributed digital ledger where data is recorded. All allowed members can monitor the data and the transactions in network and can share between computers. The management and authorization of data are carried out transparently. In the network, authorized people from different departments such as supply chain management or sales can access and control current and previous data. This enables any authorized team member to detect faulty or suspicious transactions without needing a central authority. Thus, blockchain in fraud detection prevents possible human mistakes and wastes of time.  

Immutability

Once a transaction or data has been recorded in a chain, this data cannot be changed. Also, before adding the data to the chain, all people in the network need to verify the data and each block added to the chain receives a timestamp. Then, after the entry process, the place where the assets come from and the process they go through are determined.  

Permissibility

Blockchain networks can be established based on a request for permission. This means that not everyone can access the data. Hence, blockchain technology provides secure access to data and can prevent fraud.  

Which Fraud Types Can Blockchain Detect?

types of fraud that blockchain can detect

  1. Financial Fraud:  

Financial transactions are generally complex transactions. Some aspects such as the collateral requirement between the parties, the time required for reconciliation or settlement, currency differences cause the complexity. Some of these processes may require multiple human interactions at certain steps. Thus, the risk of fraud in financial transactions is high. Thanks to blockchain technology, it becomes much easier to detect suspicious behaviours. Because using blockchain, you share the recorded data in real-time and update the data with the approval of all parties who have access to the data.  

  1. Identity Fraud:  

Identity theft is one of the most common fraud methods in e-commerce. Especially in recent years, the prevalence of identity fraud has been increasing rapidly. In the blockchain structure, which works with strong authentication systems, only the people with permission can access the real data as the unique, original version. Also, only a certain party can handle the verification of the transactions to be made. Personal data is safe, and the risk of identity fraud is very low thanks to the secure infrastructure of blockchain.  

  1. Supply Chain Frauds:  

Supply chain fraud is a big problem for companies. Due to the network created with the supplier companies, too many people involve in the process and the rate of access to data increases from time to time. Blockchain provides businesses with transparent and easy tracking of products. To update the products, a participant needs verification from all authorized participants. This means that participants are not able to manipulate the products easily.

Introduction to fraud detection ebook

In this post, we have explained what blockchain is, what benefits it may provide to your business, its features, and how blockchain prevents different types of fraud.

If you liked this article, then don’t miss our other blog posts that you may like. We specifically recommend for you the articles below:  

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