Despite rising illicit activities with cryptocurrencies, strategic regulations can ensure a safer and more prosperous crypto economy.
The Illicit Crypto Ecosystem Report by TRM Labs highlights the significant evolution and expansion of illicit activities involving cryptocurrency. Despite the cryptocurrency market’s value contraction since 2021, crypto-related crime didn’t see a proportional decrease in dollar value in 2022.
Crypto Crimes Remain Resilient
The report reveals that criminals funneled an astonishing USD 7.8 billion into Ponzi or pyramid schemes, with USD 1.5 billion spent on darknet markets dealing in illegal drugs, and a whopping USD 3.7 billion siphoned off through hacks and exploits. Multi-chain systems, which enable cryptocurrency to pass from one blockchain to another, have bolstered the resilience of crypto-related crime. As a result, criminals stole approximately USD 2 billion through attacks on cross-chain bridges in 2022.
These chain-hopping techniques allow criminals to launder money by moving funds through various blockchain networks, obscuring the source and destination of their gains.
Shift from Bitcoin to Other Cryptos
The dawn of the multi-chain era has dramatically reshaped the distribution of illicit crypto volume. Bitcoin’s share of this volume has nosedived from 97% in 2016 to a mere 19% in 2022. The shift away from Bitcoin for illegal activities, including terrorist financing, is also notable. Assets on the TRON blockchain almost entirely replaced Bitcoin for this purpose by 2022.
Examining the Illicit Crypto Ecosystem
The TRM Labs report presents an all-encompassing study of the new illicit crypto ecosystem. It identifies, studies, and categorizes over 40 types of criminal activity, from espionage to SIM swapping and pump and dump schemes. The report comprehensively covers crypto-mediated illicit finance and the laundering of crime proceeds across more than 20 blockchains.
Criminal activities that generate crypto proceeds split into several categories: illicit commerce, illicit payments, fraud, and theft. The report also outlines how people can use the crypto ecosystem to launder proceeds of crime, whether fiat or crypto. These insights are crucial for law enforcement agencies, regulators, and industry stakeholders to combat wrongdoings and prevent financial platforms from a potential misuse for money laundering.
The report also categorizes money laundering activities into placement, layering, and integration stages. These stages describe the process criminals follow to disguise the origin of illicitly obtained money and reintegrate it into the legitimate financial system
Specific Illicit Activities & Crypto
The report offers a detailed breakdown of illicit commerce involving the trade of illegal goods and services. While the majority of such commerce still uses fiat currency like the US dollar, cryptocurrency has become the preferred medium of exchange on darknet marketplaces, cybercrime forums, and child sexual abuse material (CSAM) sites. Darknet markets, specializing in selling drugs and personally identifiable information (PII), are the largest drivers of illicit commerce using cryptocurrency.
However, it is crucial to note that cryptocurrencies, despite their misuse, offer unique benefits in the fight against financial crime. The transparent and traceable nature of crypto transactions allows for systematic measurement of illicit activity, insights into criminal networks and typologies, and an ability to track money in criminal investigations effectively.
As the world of cryptocurrencies expands and evolves, it has unfortunately opened new avenues for illicit activities. The TRM Labs report offers a comprehensive breakdown of these activities, categorizing them into four primary types: Illicit Commerce, Illicit Payments, Fraud and Scams, and Theft.
Illicit Commerce: Trading Illegally with Crypto
Illicit Commerce refers to the trade of illegal goods and services facilitated by cryptocurrencies. It encompasses various activities, including:
- Illicit Drug Trafficking: Crypto-mediated illicit drug trades primarily occur on Darknet markets (DNMs), inaccessible parts of the internet that facilitate illicit global commerce. These DNMs enable anonymous trading of illegal goods, with cryptocurrencies allowing transactions to take place outside of traditional financial systems.
- Cybercrime Services: Cryptocurrencies are used to purchase services related to hacking, DDoS attacks, and malware provisioning.
- Illicit Trafficking of Stolen Goods: Stolen goods are traded on the darknet using cryptocurrencies.
- Human Trafficking and Migrant Smuggling: While not the primary method, these illegal activities can be facilitated by cryptocurrencies.
- Child Sexual Abuse Material (CSAM): Cryptocurrency is the preferred medium of exchange on sites hosting CSAM.
- Murder for Hire: In rare cases, cryptocurrencies are used for illegal activities like contract killings.
Illicit Payments: Crypto’s Dark Transactions
Illicit Payments involve cryptocurrencies being used to facilitate illegal transactions. Some examples include:
- Ransomware: Cybercriminals encrypt a victim’s files and demand a cryptocurrency ransom to restore access.
- Kidnapping and Extortion: Ransom in cases of kidnapping can sometimes be demanded in cryptocurrencies.
- Terrorist Financing: Certain terrorist organizations have been found to use cryptocurrencies for fundraising purposes.
- Sanctions Evasion: Cryptocurrencies can be used by countries and entities under economic sanctions to evade these restrictions.
Fraud and Scams: The Crypto Pitfalls
The anonymity and decentralization of cryptocurrencies also make them attractive for various Fraud and Scams:
- Ponzi and Pyramid Schemes: These types of investment fraud often use cryptocurrencies.
- ICOs and Token Scams: Fraudulent Initial Coin Offerings (ICOs) and token scams are a significant problem in the crypto space.
- Market Manipulation: Cryptocurrencies can facilitate pump-and-dump schemes and other forms of market manipulation.
- SIM Swapping: This form of identity fraud can lead to cryptocurrency theft.
Crypto Theft: Digital Heists
Theft in the crypto world can take various forms, each involving the illegal taking of cryptocurrencies:
- Exchange Hacks: Cryptocurrency exchanges are often the target of hackers.
- DeFi Exploits: Hackers can exploit Decentralized Finance (DeFi) platforms.
- Private Key Theft: Hackers can steal the private keys of individual cryptocurrency users.
- Dusting Attacks and 51% Attacks: Both types of attacks can lead to the theft of cryptocurrencies and compromise the integrity of the blockchain network.
Money Laundering and Crypto: A Digital Veil
Finally, cryptocurrencies have also been used for money laundering, where illicit funds are concealed and integrated into the economy as legitimate:
- Placement: Illicit money is introduced into the financial system using cryptocurrencies, often through complex transactions.
- Layering: The illicit funds are transferred through multiple accounts or cryptocurrencies to obscure their origin.
- Integration: The now disguised funds are reintegrated into the economy as apparently legitimate funds.
Crypto: A Tool For Crime or Crime Fighting?
Cryptocurrencies, while being a tool for illicit activities for some, can also serve as a formidable weapon in the fight against crime. The inherent transparency and immutability of blockchain technology, the foundation of cryptocurrencies, enable all transactions to be recorded on a public ledger, providing law enforcement agencies with an unprecedented level of traceability.
Unlike cash, which you can transfer anonymously and without a trace, crypto transactions leave a permanent, digital footprint. This means that, given the right tools and expertise, investigators can “follow the money” and trace the movement of illicit funds from their origin to their final destination, revealing the identity of criminals who believe they are operating anonymously.
Further, the integration of advanced analytics and artificial intelligence (AI) with blockchain can automate the detection of suspicious activities, potentially preventing crimes before they occur. Experts can easily flag in real-time unusual patterns or volumes of transactions, which might indicate fraud or money laundering, allowing for rapid response.
In essence, cryptocurrencies can turn the tables on criminals, using the very attributes that attract illicit activities – decentralization, pseudonymity, and global reach – to create an environment where crimes are harder to commit, easier to detect, and nearly impossible to hide. By fostering technological innovation and cooperation between the crypto industry, regulatory agencies, and law enforcement, we can harness the full potential of cryptocurrencies not just as a medium of exchange, but as a tool for building a safer and more transparent world.
Cryptocurrency Regulation: The Key to a Secure Crypto Future
Although the misuse of cryptocurrencies for illicit activities is a serious concern, it as also an opportunity to establish a robust regulatory framework that safeguards the crypto ecosystem while promoting its healthy growth. Sensible regulation, grounded in a comprehensive understanding of crypto technology and its potential uses, can mitigate the risks associated with illicit activities.
Regulatory agencies can enforce stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) policies on crypto exchanges and DeFi platforms to prevent their use for illegal purposes. Enhanced transaction monitoring can detect suspicious activities in real-time, and advancements in blockchain analytics can aid in tracing illicit activities. Regular audits of crypto platforms can ensure adherence to security measures and ethical practices.
Moreover, fostering international cooperation among regulatory bodies can significantly bolster the global response to crypto-related crimes. Sharing knowledge, information, and best practices can help create a unified regulatory approach that transcends borders, crucial in a field as globally interconnected as cryptocurrencies.
Furthermore, the smart contract capabilities of blockchain can automate and secure a plethora of processes across sectors. That includes supply chain management all the way to real estate transactions. The tokenization of assets can provide unprecedented liquidity, enabling fractional ownership and opening up new investment opportunities.
Indeed, it’s important to remember that the world of cryptocurrencies extends far beyond its potential for misuse. With sensible regulation in place, cryptocurrencies can revolutionize the global economy. Their decentralized nature can democratize financial services, making them accessible to underbanked populations.