Cryptocurrencies And Crime: What Led Illicit Activity In 2021

The popularity of cryptocurrencies is rising. So is crime, albeit not in proportion to its increased transactions.

Chainalysis, a cryptocurrency research platform, estimated that cryptocurrency-based crime hit a new all-time high in 2021. Alleged illicit addresses received $14 billion during 2021, up from $7.8 billion in 2020, it said in a report released on Feb. 16, an abridged version of which had been released earlier.

Estimated crime has risen 79% but total cryptocurrency transactions rose 567% to $15.8 trillion in 2021. As such, the share of illicit activity in total transactions has fallen to 0.15% in 2021 from 0.63% in 2020, the report said.

The detailed report lists the most common forms of cryptocurrency crime and those that are fast emerging as new favourites for alleged criminals.

Scams are still the largest form of cryptocurrency-based crime, accounting for losses of over $7.7 billion. But the nature of scams is changing.

Over $2.8 billion worth of these scams came from what are being called "rug pulls". Here, developers build new cryptocurrency projects, attract money and then disappear.

These figures for such losses represent only the value of investors’ funds that were stolen, and not losses from the tokens’ subsequent loss of value following a rug pull, said the Chainalysis report. To be sure, 90% of the total value lost to rug pulls was lost in a single case, the report added. "However, every other rug pull tracked by Chainalysis in 2021 involved DeFi or 'Decentralised Finance' projects."

Meanwhile, the number of deposits to scam addresses fell from just under 10.7 million to 4.1 million, which the report suggests could mean there were fewer individual scam victims. But the number of financial scams active at any point in the year rose significantly in 2021, from 2,052 in 2020 to 3,300, the report added.

Plain old-fashioned cryptocurrency theft remained a popular means to defraud in 2021.

An estimated $3.2 billion worth of cryptocurrency was stolen in 2021 — a 516% increase compared to 2020, said Chainalysis. "Roughly $2.2 billion of those funds — 72% of the 2021 total — were stolen from DeFi protocols."

The report goes on to assess how much cryptocurrency alleged criminals are currently holding. To make this assessment, the research group identified addresses with alleged illicit activity.

"As of early 2022, illicit addresses hold at least $10 billion worth of cryptocurrency, with the vast majority of this held by wallets associated with cryptocurrency theft."

Approximately $2.3 billion of funds stolen in 2021 were stolen from DeFi platforms, the report said. "In every year prior to 2021, centralised exchanges lost the most cryptocurrency to theft by a large margin. But this year, DeFi platform thefts dwarfed exchange thefts by a factor of six."

One of the biggest concerns that authorities have around cryptocurrencies is money laundering.

Cybercriminals laundered $8.6 billion worth of cryptocurrency in 2021, the report said. It added that money laundering activity in cryptocurrency is heavily concentrated. And money laundering activity increased 30% over a year ago.

"While billions of dollars’ worth of cryptocurrency moves from illicit addresses every year, most of it ends up at a surprisingly small group of services, many of which appear purpose-built for money laundering based on their transaction histories," the report said. "Law enforcement can strike a huge blow against cryptocurrency-based crime and significantly hamper criminals’ ability to access their digital assets by disrupting these services."

The report qualified that assessing the extent of crime where proceeds from offline crime like drug trafficking are converted from fiat currency to cryptocurrencies is tougher. As such, much of the estimates are for “cryptocurrency-native” crime, meaning cybercriminal activity such as darknet market sales or ransomware attacks, in which profits are virtually always derived in cryptocurrency rather than fiat currency.

The report further added that cryptocurrency crime is concentrated in a small group of addresses.

A group of just 583 deposit addresses received 54% of all funds sent from illicit addresses in 2021, the report said. "Each of those 583 addresses received at least $1 million from illicit addresses, and in total, they received just under $2.5 billion worth of cryptocurrency."

An even smaller group of 45 addresses received 24% of all funds sent from illicit addresses for a total of just under $1.1 billion. One deposit address received just over $200 million.

The report identified 4,068 allegedly criminal whales holding over $25 billion worth of cryptocurrency. "Criminal whales represent 3.7% of all cryptocurrency whales — that is, private wallets holding over $1 million worth of cryptocurrency," it said.

The popularity of non-fungible tokens or NFTs surged in 2021.

According to Chainalysis, about $44.2 billion worth of cryptocurrency was sent to two types of Ethereum smart contracts associated with NFT marketplaces and collections — up from just $106 million in 2020.

Two forms of illicit activity emerged using NFTs:

• Wash trading to artificially increase the value of NFTs.

• Money laundering through the purchase of NFTs.

In the case of wash trading, two accounts controlled by the same owner would push up the value of the NFT by selling it at a higher price. The owner would then attract buyers at a higher price.

In addition, money laundering via NFTs picked up with value sent to NFT marketplaces by allegedly illicit addresses crossing $1 million worth of cryptocurrency in the third quarter of 2021 and $1.4 million in the fourth quarter.

"Perhaps, most concerningly, in the fourth quarter, we saw roughly $2,84,000 worth of cryptocurrency sent to NFT marketplaces from addresses with sanctions risk," the report said.

Ransomware remains a kind of crime where proceeds are being increasingly demanded in cryptocurrencies.

Chainalysis estimated that over $692 million in cryptocurrency payments were demanded in 2020 as part of ransomware attacks. The report identified $602 million worth of ransomware payments in cryptocurrencies in 2021, but added that this number is likely to go up.

The average ransomware payment size was over $1,18,000 in 2021, up from $88,000 in 2020 and $25,000 in 2019.

Pointing to the popularity of ransomware-related crimes, the report points to platforms which are now offering ransomware-as-a-service (RaaS). This allows users to launch attacks using a ransomware program offered by a specific service provider.