Last week, Coinfirm, a leading global provider of AML software and blockchain analytics, published a crime analysis for 2020, analyzing traditional (fiat) and crypto crimes, and which crypto-criminal sectors are growing rapidly.
The human cost of crime
It was found that the total volume of crypto crimes in 2020 was just under $ 10.5 billion, including the total value of cryptocurrency transactions from opiate trading, fraud, terrorist financing, and other illegal activities.
In fact, $ 10.5 billion is a corrupt price imposed on society. It’s not just money, it’s a human price.
The United Nations estimates that the number of victims of trafficking who have “converted” to some form of forced labor is 4 million per year.
In Nigeria, corruption will cause the loss of 37% of the national GDP by 2030, leading to low educational standards, low life expectancy and increased terrorism. That’s why the Africa Blockchain Lab was launched with the Nigerian KAD ICT Hub to improve access to financial services.
Illicit drug use, directly or indirectly, is responsible for 750,000 deaths worldwide per year. This epidemic is the reason why the crypto industry works with various financial intelligence units around the world, and trains them to disrupt the darknet markets.
Or the human cost of suppressing the freedom of their populations by States like North Korea in pursuit of weapons of mass destruction. This is why the crypto space is countering the proliferation of this kind of funding on a daily basis.
The fight against financial crime is not measured by work, company, or industry. This is a mission.
Fiats Contribute To Much More Crime Than Cryptos
Before we delve into crypto-crime, let’s take a look at the legacy system.
To understand that fiat crime is much more than cryptocurrency, no consensus algorithm is required. Taking into account the annual cost of $ 1.4 trillion (the lower end of the estimated scale) related to outdated data, this would buy enough AK-47s to make 21 trips to the Moon, according to NASA’s space program, if they are added up.
Native cryptocurrencies of commercial organizations simply cannot avoid the same tricks as the fiat economy. Resources like blockchain researchers and Whale Alert allow anyone to see what’s going on, at least at a basic level, which is important for an ecosystem whose nature is based on P2P. With the advanced tools deployed by Coinfirm, evasion becomes really very difficult.
How much AK-47 can you buy with cryptocurrency? This is only 1.6 trips around the world.
But the truth is that there is a lot of evil, with the exception of cryptocurrency. Data analysis has shown that the number of crypto crimes has increased dramatically over the past few years. The most famous among them are: Darknet markets, hacks, sanctions evasion and fraud.
The darknet markets have naturally become hotbeds of crypto-crime. These markets act as buyers and sellers of everything under the Sun. This is of particular concern because it is possible to buy things that may contribute to other crimes, such as data theft and the distribution of RaaS, or “ransomware as a service”, through which malicious code is bought / rented.
In the past two years, the cryptocurrency crime scene has been dominated by massive exit scams. In 2019, the Ponzi PlusToken scheme generated $ 2.9 billion through exit fraud, accounting for 64% of the total crime for the year. In 2020, WoToken, a similar scheme run by some of the same people as PlusToken, lured $ 1.1 billion from investors in its exit scam – 58% of the total criminal activity in 2020. Although the volume of major fraud has decreased significantly, it still accounted for 73% of the total number of crimes in 2020.
While a similar number of thefts, hacks, and scams were recorded in 2019 and 2020, the average obtained by criminal actors in 2019 was 160% higher than in 2020, indicating the maturity of the crypto space as organizations continue to strengthen systems and safeguards against internal and external threats.
Fraud is a big problem. The variety of schemes is truly amazing: fake ICOs, exchanges, applications, Ponzi scams, various types of market manipulation tactics, exit fraud, SIM card substitution, crypto-jacking, false celebrity address generators, phishing, and trust trading. Fraud is so common that attackers regularly trick other attackers by using smart contracts as bait.
The increase in the number of hacks is particularly noticeable in 2020 due to government-sanctioned restrictions that criminals have taken advantage of.
In 2020, there was a major hack of the $ 281 million KuCoin cryptocurrency exchange, and the exchange claims to have already recovered 84% of the stolen funds, which is almost unheard of in previous years.
The year 2020 was hijacked by dozens of DeFi-related hacks and scams that were much smaller in size. Half of all cryptocurrency hacks in 2020 were related to DeFi protocols-a scheme that was virtually insignificant in all previous years, and almost 99% of the main fraud volumes in the second half of 2020 were related to DeFi protocols
And of course, everyone remembers the ICO craze in 2017. In a process similar to “pump and dump”, some investors liquidate the entire DeFi pool, leaving the remaining token holders without liquidity, and unable to trade, destroying the remaining value.
Meanwhile, the number of cases of sanctions evasion is growing, despite the fact that OFAC and other sanctions lists do not include addresses with hundreds of millions of dollars on them, against the background of various trade wars raging and the trend of sanctions and counter-sanctions observed between China and the United States.
Although other reports on blockchain forensic analytics have been published recently, the market is grossly underestimating the cost of crypto crimes, estimated in the billions of dollars. The results show that cryptocurrency fraud accounts for an average of 2/3 of the total number.
A tougher regulatory environment
On the regulatory front, the crypto sphere has been inundated with new legal attention as regulators and policy makers weigh up how this space should work. In the US, FinCEN has proposed two major rule changes regarding the regulatory obligations faced by banks and virtual asset service providers (VASPs) when conducting certain virtual currency transactions.
One Proposed Rulemaking Notice (NPRM), issued in October, sought to amend the record-keeping and transaction rules to collect, store and transmit information about the transfer of international payments at a much lower threshold. Currently, financial institutions transmit records of any transfers in excess of $ 3,000. The new rule stipulates that much smaller transfers (more than $ 250) are subject to the same requirements if the transfer of funds begins or ends outside of the United States. The rule specifically includes cryptocurrency transfers as a class of transactions to which this offer will apply.
Another NPRM, released in December, will require banks and VASPs to verify the identity of their customers, keep records of virtual currency transactions worth more than $ 3,000, and provide CTR-like reports for virtual currency transactions worth more than $ 10,000 if the counterparty to the transaction uses a wallet with “other coverage”. The NPRM defines “otherwise covered” wallets as wallets held in a non-BSA financial institution located in a foreign jurisdiction that is identified by FinCEN as a major money laundering problem, such as in Burma, Iran, and North Korea.
Upon taking office in January 2021, the Biden administration announced a freeze on all agency rule-making activities pending review by the head of the department or agency appointed by the president. While the Trump administration has already extended the unofficial wallet’s NPRM by 15 days for the $ 10,000 threshold and 45 days for the rest of the rules, FinCEN has since extended and consolidated both deadlines to 60 days. There is no indication yet that the Travel Rules NPRM will receive a similar re-opening and renewal.
It is likely that these rules (or something close to them) will come into force in the first half of 2021, creating significant new requirements for crypto compliance and dramatically increasing the sense of urgency that banks and VASPs feel when registering cryptocurrency CTR and SAR.
Yes, it is becoming increasingly difficult for criminals to hide funds as authorities in various jurisdictions wake up to see the crypto industry as an untapped gold mine for the state treasury, while fiscal imbalances have hit the government due to the pandemic. The IRS Operation Hidden Treasure is one such initiative.
The difference between cryptocurrency and traditional markets is what is called “regulatory hashing”, when, due to the rapidly evolving nature of the industry, authorities have to constantly look for magic formulas for new emerging risks. Securities and Exchange Commission Commissioner Hester Pearce’s comments on decentralized finance provide an example that regulators, mindful of the potential advantages and disadvantages, must provide both legal clarity and freedom to experiment so that DeFi can compete with CeFi by offering financial services to investors.”
2021 has started where 2020 left off – with more regulations and enforcement measures.
The blockchain economy is more inclusive, but the despicable aspects need to be eradicated. While innovations in crypto-financial products have also benefited criminals, it must be understood that smart contracts can replace the shell companies of the legacy system – the ability to audit the blockchain means effective tracking through clustering algorithms, electronic detection, destination and source of funds, property analysis and traces of activity.
Blockchain works across all sectors of the ecosystem – governments, financial institutions, protocols, centralized and decentralized exchanges-to drive attackers out of the blockchain economy. Because those who do not know history are doomed to repeat it.
If blockchain is indeed going to become widespread, we should be mindful of not taking the pitfalls of legacy with us and be mindful of the true-human costs of crypto-crime, rather than inheriting everything from the world of traditional finance.