Last week we published our analysis on crypto crime in 2020, analyzing traditional (fiat) vs crypto crime, which crypto criminal sectors were rapidly growing, a detailed look at the different types of crypto fraud and more.
We found that total crypto crime in 2020 amounted to just under 10.5 billion USD, comprising the total value of activities in crypto from opiate trafficking, fraudsters, terrorism financiers and all other illicit activity.
When I say ‘value’ – in reality it is the corrupted cost levied on society.
The reason why I co-founded Coinfirm, why Reclaim Crypto was created – was the cost. But not the monetary cost of 10.5 billion.
The human cost.
The United Nations estimates that victims of human trafficking ‘traded’ into one form of servitude or another, number 4 million per year. This is why we joined the Anti-Human Trafficking Intelligence Initiative.
In Nigeria, corruption will have lost 37% of the nation’s GDP by 2030, leading to poor education standards, low life expectancies and the increased blight of terrorism. This is why we launched the Africa Blockchain Lab with Nigeria’s KAD ICT Hub to improve financial inclusion.
Illicit drug use is – directly or indirectly – responsible for 750,000 deaths worldwide per year. This epidemic is why we work with and train various financial intelligence units around the world in disrupting darknet markets.
Or the human cost from states such as Iran’s or North Korea’s suppression of their population’s freedom in the pursuit of weapons of mass destruction. This is why we counter proliferation financing on a daily basis.
For me personally, fighting financial crime is not measured by a job, company or industry.
It’s a mission.
Fiat Crime Arms Far More Terrorists than Crypto
Before we dive into crypto crime, let’s look at the legacy system.
Throughout my career prior to Coinfirm I worked extensively in traditional financial institutions. So I was not shocked by the FinCEN Files’ revelations of lax compliance last year.
It does not take a consensus algorithm to know fiat crime is far larger than crypto. Taking an annual cost of $1.4 trillion (this is the lower end of the estimated scale) attributable to the legacy number, this would buy enough AK-47s to take 21 trips to the Moon if stacked end-to-end.
Crypto-native commercial entities simply can’t get away with the same tricks as the fiat economy. Resources such as blockchain explorers and Whale Alert enable anyone to see what’s going on at least on a base level – important in an ecosystem whose genesis nature is P2P. With advanced tools deployed by Coinfirm, evasion becomes very hard indeed.
How many AK-47s does crypto buy? This translates to just 1.6 trips around the Earth.
The Fastest Growing Types of Crypto Crimes
But the truth is there is a lot of evil out there, with crypto no exception. Data analysis revealed that most types of crypto crime have increased dramatically in the past few years. Notable amongst them are; darknet markets, hacks, sanctions evasion and scams.
Darknet markets have naturally become focal centres of crypto criminality. These markets act as buyers and sellers of everything under the Moon. These are of special concern as it is possible to buy things that can aid in other crimes, such as stolen data and the rise of RaaS or ‘Ransomware-as-a-Service’ whereby malicious code is bought/rented out.
Meanwhile, sanction evasion cases have steadily risen – despite the fact that the OFAC and other sanctions lists omit multiple addresses with hundreds of millions of dollars on them – with various trade wars raging and the trend of sanctioning and counter-sanctioning as seen between China and the United States.
Scams are a big issue. The variety of schemes is truly astounding; fake ICOs, exchanges, apps, Ponzi scams, various types of market manipulation tactics, exit scams, sim-swapping, crypto-jacking, false vanity address generators, phishing and trust trading. Scamming is so endemic that scammers routinely scam other scammers with honeypot smart contracts!
The increased rate of hacks is particularly noticeable in 2020 due to the government-mandated lockdowns that criminals took advantage of.
Whilst other forensic blockchain analytics reports were also recently released, the market is wildly underestimating the cost of crypto crime to the tune of billions of dollars. Our findings reveal that crypto fraud and scams account for, on average, 2 thirds of the total.
A Tighter Regulatory Environment
Pressure is coming.
It is becoming harder for criminals to obfuscate funds as authorities in various jurisdictions wake up after seeing the crypto industry as an untapped goldmine for government coffers just as fiscal imbalances hit the government due to the pandemic. The IRS’s “Operation Hidden Treasure” is one such initiative.
The difference between the crypto and traditional markets is what I like to call ‘regulatory hashing’, where due to the fast paced nature of this industry authorities need to repeatedly seek magic formulas for new risks that develop. Exemplary in the SEC Commissioner Hester Peirce’s comments on decentralized finance that “regulators, mindful of the potential upsides and downsides, need to provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services.”
The U.S. Treasury Secretary Janet Yellen is not quite so positive, claiming that “cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.”
The blockchain economy is more inclusive, but despicable aspects must be stamped out. Whilst the innovation of crypto financial products has also benefited criminals – believing that smart contracts can replace the shell companies of the legacy system – the auditability of blockchain means effective tracing via clustering algorithms, e-discovery, destination and source of funds, ownership analysis and fingerprints of activity.
Coinfirm works in every ecosystem sector – governments, financial institutions, protocols, centralized and decentralized exchanges – to drive out malicious actors from the blockchain economy. Because those who do not know history are doomed to repeat it.
If blockchain really is going to hit mass adoption, we must be mindful to not take the pitfalls of legacy with us and remember the true – human – cost of crypto crime.