Argentina’s central bank halts cryptocurrencies from payment apps How will you implement a fraud prevention rule of this rule?

Let us understand more about this decision by the central bank of Argentina

In May 2023, Argentina’s Central Bank introduced a new regulation prohibiting payment apps from offering cryptocurrency transactions. This decisive action was implemented in response to growing concerns over the use of cryptocurrencies in illegal activities, including money laundering, tax evasion, and fraud. The Central Bank aims to reduce the financial risks associated with the volatile nature of cryptocurrencies and to strengthen the country’s control over its monetary system by restricting the integration of digital currencies into mainstream payment platforms.

This regulation comes at a time when cryptocurrencies have been gaining popularity in Argentina as a hedge against inflation and economic instability. However, the Central Bank’s move signals a strong stance against the unregulated use of cryptocurrencies within the formal financial sector, particularly on platforms widely used by the general public.

So now you are an Analyst working in the Fraud Analytics team, how will you go about implementing this Fraud rule in a Financial Institution (FI): What will this fraud rule consist of?

To comply with this regulation, banks and FI’s must implement a robust fraud detection rule within their systems that automatically detects and blocks any transactions involving cryptocurrencies on payment apps. This rule must be precise and adaptable to prevent any breach of the regulation while ensuring that legitimate transactions are not unnecessarily disrupted.

Key Components or features required for this Rule: 

1. Merchant Category Codes (MCC):

• Definition: MCCs are four-digit codes used to classify businesses by the type of goods or services they provide. Payment apps that facilitate cryptocurrency transactions will have specific MCCs. 
• Example/Sample: A few merchant category codes for gambling establishments are 

• 6050 – QUASI CASH-MEMBER FINANCIAL INSTITUTION
• 6501 – QUASI CASH

• Usage: The rule should identify, and block transactions associated with MCCs linked to cryptocurrency exchanges and related services.  

     2. Transfer Description:

• Definition: This refers to the details provided in the transaction description field, which may include references to cryptocurrencies or exchanges. 
• Example/Sample: Free text Description in a Transfer may include Coinbase, Swyftx, Binance or other crypto exchanges which local demographics use.
• Usage: The fraud rule should analyse transaction descriptions for keywords such as “crypto,” “bitcoin,” “BTC,” “Ethereum,” or specific exchange names. Transactions with these terms should be flagged and blocked.

     3. Address Details:

• Definition: Address details in transactions, such as wallet addresses, or IP addresses linked to known cryptocurrency networks.
• Example/Sample: Bitcoin (BTC) addresses start with “1” (Legacy), “3” (P2SH), or “bc1” (SegWit). Ethereum (ETH) addresses start with “0x”, indicating they are on the Ethereum blockchain.
• Usage: The system should monitor for wallet addresses or IPs associated with cryptocurrency transactions. If detected, these should trigger the fraud rule to block the transaction.

     4. Transaction Decline Codes:

• Definition: Decline codes indicate why a transaction was blocked or rejected. 
• Example/Sample: A few sample decline codes are 

• 05 / Do not honor 
• 93 / Violation, cannot complete 
• 57 / Transaction not permitted, card

• Usage: A specific decline code should be generated for any transactions blocked due to attempted cryptocurrency payments. This will help in tracking and auditing such transactions.

Additional Features to Ensure Compliance

• Regular System Updates:
  • The system should be regularly updated with new MCC codes, keywords, and wallet addresses associated with emerging cryptocurrency platforms to keep up with evolving threats.
• Customer Education and Communication:

• Customers should be informed about the ban on cryptocurrency transactions and the reasons for declined transactions to avoid confusion and improve transparency.

• Real-Time Alerts and Reporting:

• Implementing a real-time alert system that notifies the bank’s compliance team immediately when a transaction is blocked due to cryptocurrency involvement. This ensures prompt action and thorough documentation.

Addressing False Positives

• Are merchants intentionally using a Crypto Exchange MCC such as 4829 (MONEY ORDERS — WIRE TRANSFER) or 6012 (Financial Institutions – Merchandise and Services) to evade detection, are additional controls required to prevent this?
• Are there any Merchants incorrectly classified into the Cryptocurrency category? How to identify them

Argentina’s Central Bank’s regulation on halting cryptocurrencies from payment apps is a significant step towards maintaining control over the financial system and preventing the risks associated with digital currencies. For banks, implementing a comprehensive fraud rule that identifies and blocks cryptocurrency transactions is crucial to comply with this regulation. By leveraging MCC codes, transaction descriptions, address details, and derived signals, banks can effectively enforce this ban and protect the integrity of the financial system.

Furthermore, regular updates, real-time monitoring, and clear communication with customers will ensure that the bank remains compliant with the regulatory requirements and can quickly adapt to any changes in the regulatory landscape.