What Responsibility Do Banks and Crypto Exchanges Have Towards Victims of Fraud?

By Michael B. Cohen

Vice President of Global Operations 

When we think about fiduciary responsibility that banks and other financial services have regarding their customers, some of our assumptions can be thrown out the window when it comes to the reality of fraud, especially with cryptocurrency.

What should happen, in an ideal world is that the customer who has been cheated approaches the bank or the crypto exchange, makes a claim that a fellow account holder either stole their money or is operating a fraud, shows what evidence they have, and the exchange or bank will freeze the suspicious account. 

However, in the real world, it often doesn’t happen like this. Banks and crypto exchanges seem to be dropping the ball so much so that the U.S. government is taking actions against crypto exchanges that turn a blind eye to illegal activities. 

This may seem too little too late, but it could be a sign of progress. 

Different Definitions of Fraud 

Why do so many exchanges act like it isn’t their problem when a customer complains about suspected fraud? You would think that these financial services care about their customers or at least want to keep their business from a financial standpoint. 

For one thing, they are operating on a definition of “fraud” than the one we use in ordinary conversation. 

When we talk about “fraud,” we often mean not just stealing, but causing someone to buy something under false pretenses. However, regulated financial institutions often have a narrow definition of fraud that is confined to just  unauthorized transactions, meaning those that were hacked or stolen. 

In other words, if your Paypal account is hacked and someone steals your money, you are a victim of fraud, according to Paypal. On the other hand, if an unregulated broker asks for a huge deposit and then disappears with your money, you authorized the transaction, so in the world of Paypal and many other financial services, this isn’t fraud.  

In fact, according to the laws in many countries, if money has been taken in a scam, the bank does not have to compensate the customer. This is especially true with crypto exchanges, which are less regulated than banks, 

Victims can ask the bank or exchange to freeze a suspicious account. However, how does the bank know this person isn’t just trying to get revenge against someone and claiming they are operating a fraud to get their account shut down? People can forge and fake information. The banks often want to be 100% sure before they take action against an account, because they don’t want to lose their business either. 

When Lack of Action Reflects Badly on a Bank or a Crypto Exchange

It may be shocking to many customers how little fiduciary responsibility, at least from a legal standpoint, not just crypto exchanges, but even regulated banks have when there is suspected fraud. 

The question they have to deal with is whether or not the transaction was authorized by the customer, not whether or not the other party is telling the truth. It is often taking one customer’s word against another, and financial institutions often don’t want to get in the middle of those conflicts. 

What could turn the tide and lead to greater regulations and oversight to protect customers is if financial services feel they are losing more than they are gaining by remaining aloof. If more people leave their services because of the risk of getting cheated than leave after getting fed up with tight security measures, they may decide to work with investigators and take fraud claims seriously. 

It does look like customers are getting mad as hell and are not going to take it anymore. This is more news about governments talking about tightening regulations regarding crypto exchanges. British and Spanish banks are blocking payments to Binance over suspicions, for instance, and more countries are doing the same thing. 

When banks and exchanges realize it is not worth it for them to do business with dodgy players and start prioritizing their regular customers by putting in more safeguards and freezing suspicious accounts, financial services will be safe and more profitable for everyone.