The use and implementation of cryptocurrencies has increased dramatically in recent years as crypto enters the mainstream. But with the proliferation of new currencies, comes the rise of illicit use and abuse.
CoinJournal analyzed a report from Chainalysis to determine how widespread crypto-crime is, which types are most prevalent, and in which years most money has been lost to crypto criminals.
Crypto Scams Grow 82% to $7.8 Billion in 2021
72% of $3.2 billion in stolen money was stolen from DeFi protocols
Scams as a percentage of total crypto transaction volume fell by 66%
And how bad is crypto really, compared to fraud in the trad-fi space? Is it all an exaggeration, or do the naysayers have a point – is crypto really a cesspool for the ill-intentioned?
Crypto Crime Trends for 2022
Let’s not beat around the bush here. The numbers here are pretty alarming, with crypto-based crime reaching $14 billion in 2021 according to the survey — that’s an (un)healthy increase from $7.8 billion in 2020.
But if we want to compare this to the trad-fi sector, we need to delete some categories. Terrorism financing, the equivalent of darknet stuff and many of the other categories are just too broad to quantify in the fiat world. I think we can all agree that the US dollar is not so pure that it is immune from being used to buy drugs, pay for stolen goods and countless other clandestine activities that fall under the above categories.
What we want to focus on here is whether crimes “specific” to cryptocurrency are as common as the mainstream media makes them appear, and how they compare to trad-fi. By that we mean fraud, hacks, scams and the like. While this will no doubt be a bit of an apples to oranges comparison, what is a bit of poetic freedom between friends?
Crypto Scams and Stolen Money
As the chart above shows, the two categories that mattered to us, in terms of year-on-year growth, were also the two biggest movers: scams and stolen funds. Scams grew 82% to $7.8 billion in 2021, while $3.2 billion worth of cryptocurrency was stolen in 2021 — a 516% increase from 2020.
So yeah, that’s not great. But let’s not be guilty of simply reading the headlines – that would make our job way too easy. Digging deeper, one thing stands out: the vast majority of this growth has taken place in DeFi, which also happens to be the newest “sub-industry” within the crypto space.
72% of the $3.2 billion in stolen money was stolen via DeFi protocols. As for scams, $2.8 billion of the $7.8 billion can be attributed solely to backstabbing – the classic (new) DeFi arena scam, where founders create a cryptocurrency before wiping out the liquidity and walking away with the money from investors.
In reality, the total loss is actually higher, as the $2.8 billion only includes the depleted liquidity – and not the subsequent devaluation of the native tokens, which invariably crater >90%.
Contextualizing the numbers
So can we give DeFi a pass while the nascent industry is starting itself up from nothing to taking over the entire monetary system? While the above numbers tell us that scams and stolen funds are up 129% cumulatively from $4.8 billion to $11 billion, transaction volume within DeFi grew 912% over the same period. Total cryptocurrency transaction volume grew 567% from 2020 to 2021. So viewed through a holistic lens, while certainly not pretty, it helps to give a little more color.
On the other hand, is this completely confused with what we see in the trad-fi world?
This UK Finance investigation finds that £1.28 billion ($1.67 billion) was stolen in 2019 from payment card fraud (credit, debit, credit and ATM cards). 2020, which equates to $160 million in 2020. Please note that this is UK banking only, not worldwide. However, the numbers pale in comparison to what we see in DeFi, even if the latter is global.
Fraud losses in UK online banking, data via Statista
But online banking is not new, while DeFi certainly is. While hysteria was fueled by meme-pumping, story-only stories about the Binance Smart Chain (Safemoon), Ethereum (Shiba Inu), and more, retail money poured in as investors (or should we say, gamblers) tried to catch the next one fast become rich.
The space was a year-round swamp of gambling, somewhat obscuring the underlying value built up through real projects. DeFi is too broad to just throw all these projects together, while some are focused on creating real utility and others are just copycat forks with no realistic hope of creating anything with added value. And if DeFi is too broad a term, then cryptocurrency certainly is.
We must be wary of applying the same brush to the entire DeFi industry, just as we would never tarnish the entire trad-fi industry with similar problems. The infamous Wirecard scam lasted ten years and resulted in a $2 billion hole in the balance sheet, but the accountants (KPMG) continue to work. Elsewhere, Bernie Madoff’s circus act resulted in an estimated $64.8 billion fraud.
Even Jordan Belfort was estimated to have single-handedly inflicted investor losses of $200 million, and he ended up with a reckless Leonardo Di Caprio immortalizing him.
In reality, traditional trade is far too large to attempt to quantify the magnitude of losses, the size of the industry, and the growth of crime. But let’s not pretend that DeFi, or crypto in general, is the first sector within the financial sector to be affected by malicious activity. The unfortunate reality is that with such rapid growth as crypto has experienced, there will always be leeches with bad intentions trying to manipulate change in their favor, especially when that change is happening too fast for regulators to catch up.
The real difference here is the size of the individual heists that are possible within DeFi. Breaking down the numbers further, we see that of the $2.8 billion in carpet pulls that took place in 2021, 90% came from one fraudulent exchange – Thodex – whose CEO Faruk Fatih Ozer fled after customers’ ability to withdraw money. taking was suspended. He now faces a prison sentence of 40,000 years (!) in Turkey if the authorities ever catch him.
Axie Infinity was recently hacked for $625 million when a hacker seized control of private security keys. Last year, Poly Network was the victim of a $600 million hack, though the story took a bizarre turn when the hacker returned the money and was eventually offered a job as Chief Security Advisor.
Indeed, the white hat hacker in the Poly Network case is far from the only benevolent computer prodigy, as SushiSwap was warned by a white-hat hacker of a massive $350 million vulnerability in their code, while Polygon actually paid a premium of Paid $2 million when they were recently tipped off about a bug that could have caused $850 million in losses.
However, the reality is, with a white hat or with bad intentions, the reality is that it is considerably easier to carry out heists of this magnitude – hundreds of millions of dollars – from your laptop, at home on the blockchain, rather than in the trad. -fi world . So while the aggregate numbers drop as crypto matures, including for these isolated incidents, the money in the space and the potential to trade anonymously presents a unique opportunity.
It’s challenging to imagine that robberies of this magnitude too often go unnoticed in the trad-fi world, but again, they do happen – as we mentioned on several cases above.
However, the Chainalysis report points to law enforcement’s increased ability to prosecute crimes, citing recent efforts by the CFTC to file charges against various investment scams, the FBI’s removal of the prolific REvil ransomware strain, and OFAC’s sanction of Suex. and Chatex – two Russia-based cryptocurrency services heavily involved in money laundering. And this is an area we want to dive into more.
The IRS also announced that in 2021 they had seized more than $3.5 billion in illegally acquired cryptocurrency, the US Department of Justice seized $56 million in the infamous BitConnect fraud, and another $2. 3 million in the Colonial Pipeline ransom attack.
Increasingly, law enforcement has been able to target the crypto-fiat bridge to help prosecute these activities. The transparency that the blockchain provides is actually a problem for criminals in that sense, because it becomes difficult to ‘wash’ the money on a large scale, when the world can see what is happening on the blockchain. It might be easier to move it virtually, but if you want to bridge the gap to fiat, it requires considerably more ingenuity.
Forecast in the future
Considering that cryptocurrency transaction volume grew 567% to $15.8 trillion between 2020 and 2021, while scams and stolen funds grew only 129%, this represents a 66% drop in illicit activity as a percentage of transaction volume, which is more representative than just looking at the numbers for scams and stolen funds.
If we extrapolate forward and look at a case where cryptocurrency transaction volume remains at that $15.8 trillion level for 2022, the same 66% drop in scams and stolen money as a percentage of volume would mean scams and stolen money would reach $3.7 billion in 2022, significantly lower than the $11 billion in 2020.
So without the rapid growth across the industry, the frequency of such heists drops significantly – which is what the chart below, which extrapolates the numbers from 2021 to this year, shows (forgive the little bit of ax crime, it’s just a visual representation!) .
So, to conclude, authorities are beginning to understand and control the formerly wild west world of crypto more and more. Prosecutions are becoming more frequent and regulations are catching up. The numbers suggest that with the explosive growth of DeFi and cryptocurrency, hacks and security breaches are actually declining, on a proportional basis. Although difficult to quantify, such problems naturally arise in the trad-fi world.
That said, however, the magnitude of the individual hacks we see in crypto is worrying. Customers need to be extra vigilant with their money and careful with their custody practices. The industry may be growing at a relentless pace and the magnitude of the problem may be exaggerated — especially when compared to similar events in the traditional world — but it’s still a problem.
But if the trends continue, we are on the right track.