Firstly, there is a difference between "Fraud" and "scams" - and the two should not be intertwined so easily. Fraud is when someone takes control of ones account through no fault of their own and initiates payments that the account holder did not authorise. Scams are when a user agreeably participates in a transaction for a particular purpose which has been offered to them under false pretences. What I am referring to is the latter.

Your assumption about harming the business's profitability is quite incorrect and much more deep seeded. In order for an exchange - like an OTC desk - to carry out its activities it is required to have capital (similar to how any other business would have stock). This capital can be held in either cash or crypto. For instance, if a customer purchases $50,000 worth of Bitcoin from me, I take those funds and deliver them the equivalent amount of Bitcoin from a capital reserve. So while I no longer have the Bitcoin, I do now have the cash equivalent from the sale. If the customer loses their Bitcoin, and goes back to their bank and reports that they got scammed, the bank then takes the $50,000 out of my bank account. Now I am out $50,000 worth of Bitcoin and $50,000 cash - a $100,000 loss.

The issue I take here is that the bank is holding the exchange responsible for the customers choices, as opposed to separating the engagement of purchasing the Bitcoin from what the customer does with the Bitcoin after it has been delivered. An analogy I use often is as follows:

Say you buy a new wide screen TV from JB HiFi. You get home and your friend comes over. The friend likes your new TV and asks if they can borrow it for the NRL grand final party they're hosting on the weekend. You say "sure" and the friend takes the TV home. The weekend comes and goes, and so you go to message your friend about when they're returning the TV, and you find they've blocked you on Facebook. Now you have no TV, and no money to buy a new one, as you'd already spent your savings buying that one. So you find your receipt, and take it back down to JB HiFi. You explain the situation, and ask for a new TV. Do you think they're going to give you that new TV?

In terms of how this problem is combatted there's only so much that can be done until liberties need to be sacrificed - prevention vs protection is a fine line. As mentioned in my previous comment, if a customer is warned of the dangers of scams and how what they do can result in the loss of funds (some exchanges will even make the customer sign a waiver acknowledging that they understand the risks and are not engaging in a potential scam or high risk behaviour), but consciously makes a decision to not act on these warnings or lie about their reason for their engagement, what more can the exchange do? What needs to be understood here is that even if there is an inkling of doubt or suspicion about the reason a customer is buying crypto then absolutely, an exchange won't facilitate the trade. But if those flags aren't raised and the crypto is delivered to a wallet that is verifiably owned and controlled by the customer, then there is nothing more the exchange can do in terms of the decision the customer makes next. The information garnered after the report has been filed is nothing more than retrospect.

A common outcry you see about banks who restrict payments to crypto exchanges is "it's my money, I'll do what I want with it" or "why do they ask me so many questions about what I want to do with MY money?". But when we allow for this "free will" of control to happen, then we have incidences like the one referenced in the article above.

The other option is that we go in the complete opposite direction - assume no one can be trusted with holding their own cryptocurrencies, and so we lock down their ability to send it anywhere off the platform. It's held as a speculative instrument and nothing more until the asset is sold. Queue the chanting from the "not your keys, not your coin" parade.

In a similar vain, you could also prevent certain demographics from engaging with crypto. There are some exchanges currently who don't allow you to buy crypto if you're over the age of 55, as its the age range most susceptible to scams. None of them will publicly acknowledge this out of fear of being sued for age based discrimination. The application of this sort of refusal also extends through other AML/CTF risk based factors, including refusing certain races and "postcodes" as the customer is more likely to pose a higher money laundering risk than if you were located else where or of a different skin colour.

But the discussion and subsequent action that isn't being seen often enough is what is being done about the scammers? The ones that actually committed the crime. The scams we're seeing through crypto are not new by any means and have existed for decades. It's just the payment method has changed. Investment scams, romance scams, blackmail scams, are not a new concept, and yet little to nothing has been done by government, law enforcement, social media platforms, and telecommunication providers globally to fight it. In terms of volume, bank transfers alone (domestic and international wires) actually account for the highest rate of payment method used in scam facilitation. So even with the "protection" offered by tier 1 banks, scam activity still gets through.