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Peering into black holes: Solving the visibility gap between TradFi and DeFi

Summary: Decentralized finance (DeFi) has emerged as a parallel financial system to traditional finance (TradFi). The future success of financial services requires both systems to work together to protect their shared customers and improve the delivery of products and services. Yet, today, they remain siloed, neither side offering much visibility into the other and creating data gaps that fraudsters have exploited. As a result, this has led to a vicious cycle where financial institutions block or limit connectivity to crypto and fintech companies, hampering their growth and preventing legitimate entities from transacting or moving money into services they want. To address this, Sardine is launching a new product — Insights — that solves the visibility gap by sharing counterparty risk insights to strengthen fraud prevention and remove friction.

The emergence of parallel financial systems

Though the recent market downturn has spurred another crypto winter, decentralized finance (DeFi) is here to stay. By the end of this year, 34 million US adults will own crypto assets, and more businesses and financial institutions are migrating to blockchain to hold deposits, make payments, and buy digital assets.

As a result, two parallel financial systems now underpin the global economy: traditional finance (TradFi) and decentralized finance (DeFi).

Individuals and other entities can now directly link their checking and savings accounts to digital wallets connected to crypto exchanges, NFT marketplaces, and lending protocols built on various blockchains.

While this creates an enormous opportunity for innovation and value creation, it only works if the two systems can work well together. Unfortunately, today, DeFi and TradFi largely remain siloed, limiting visibility and creating gaps that increase risk and harm the user experience.

A growing visibility problem

One significant consequence is the rapid increase in scammers and hackers who have exploited this visibility gap to commit fraud, particularly in DeFi.

There were $680 million in crypto fraud losses in 2021, a 520% increase from 2020.

Unlike in TradFi, banks, card networks, and other financial institutions cannot view what customers do after connecting their deposit or credit card accounts to a crypto wallet or exchange. While a bank may know a customer moved money into a crypto account, they do not know if it was fraudulent until after the money is gone. Compounded by the irreversible nature of crypto assets, fraudsters can get away with quickly sending stolen money to their wallets from the newly funded account.

With such high rates of fraud and no option for chargebacks, financial institutions see crypto transactions as substantially risky. They have no choice but to hold the transaction for several days or block them outright to protect their customers from potential fraud, which creates substantial friction when moving money between the two systems.

For example:

  • Users of crypto exchanges face transaction decline rates of 20% when purchasing tokens or NFTs through bank transfers.
  • Sardine data shows that transaction decline rates jump to over 50% if a consumer uses a credit card to purchase an asset on an exchange.

If all players could have greater visibility into an entity’s financial actions and history across both systems, financial services would have better fraud and risk controls that would limit bad actors from taking advantage of this information gap. Improved visibility would lead to higher conversion rates when making payments and lessen friction for the end user when moving money.

Most importantly, legitimate entities who want to transact between both systems will have a better experience and access appropriate products and services.

Filling the (visibility) void

Sardine supports fintechs, crypto companies, and financial institutions with fraud prevention and compliance. As a critical infrastructure provider enabling safer, faster payments across both systems, it gives us a unique ability to bridge TradFi and DeFi by exchanging risk-related information so the two systems can prevent fraud together with increased visibility.

As part of this effort, we are launching a new product: Insights offers a real-time, comprehensive view of an entity’s risk based on its history with cryptocurrencies, digital assets, as well as conventional bank products and services.

“Insights offers a real-time, comprehensive view of an entity’s risk based on its history with cryptocurrencies, digital assets, and conventional bank products and services.”

Insights’ users can call an API about any entity and receive our proprietary risk and reputation scores within our network. Any company with appropriate authorization can use these signals to upgrade its existing fraud detection models and risk assessment processes by enriching existing datasets. Sardine has built this product within frameworks of applicable privacy laws and regulations.

Participating organizations will provide feedback including identification of fraudsters, accounts, and devices compromised in transactions. This will ensure a stolen or fraudulent account discovered by one bank or merchant is flagged for others; similar to what consortium models do today within TradFi.

We will soon release additional data packs for use cases related to credit risk, including verifying an entity’s crypto holdings and other emerging assets for credit decisioning, and money laundering risk.

Creating a new kind of utility

Insights aims to remove the visibility gap between financial institutions, fintechs, and crypto companies with timely insights to strengthen risk management and remove friction to a wide array of financial products and services. This technology is the first step in overcoming this growing industry challenge.

The next step is to bring people together to accelerate cooperation on insights, risk, and data to help these two systems better manage risk. At Money20/20 this year, Sardine will launch a working group to do just this. Topics high on our agenda include first-party fraud (a.k.a. friendly fraud), where an entity knowingly commits fraud but acts as a victim, and authorized push payment fraud conducted via social engineering.

In tandem, we believe our Insights product and working group can help address these fraud vectors and enable the industry to begin to share information effectively. Our mission is to create an inclusive utility that facilitates the discussion of issues and challenges relating to fraud prevention, the collective identification of fraudsters in the financial industry, and the development of tools to address common challenges.

Contact us if you want access to our first data pack from Insights or our working group.

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About the author
Ravi Loganathan
Head of Financial Institution Services at