According to fresh data from blockchain analytics firm Chainalysis, scammers amassed a record of $14B in cryptocurrency in 2021.
Theft and scams drove a 79% increase in losses from crypto-related crime compared to the previous year. In 2021, the most common type of cryptocurrency-related crime was scumming, which was followed by theft, the majority of which was committed through bitcoin company hacking.
DeFi is a huge part of the story for both, according to the firm, adding to the growing list of cautionary tales for individuals experimenting in the crypto space.
In its annual Crypto Crime report, Chainalysis stated, “DeFi is one of the most interesting aspects of the wider cryptocurrency ecosystem, giving significant opportunity for businesses and cryptocurrency users alike.”
“But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft.”
DeFi’s far-flung frontier
DeFi is a rapidly emerging segment of the cryptocurrency industry that attempts to eliminate middlemen like banks from typical financial activities like acquiring a loan.
A programmable piece of code known as a smart contract replaces banks and attorneys in DeFi. This contract is written on a public blockchain, such as Ethereum or Solana, and it runs when certain circumstances are met, eliminating the need for a middleman.
“The financial system is basically sending money around with various terms and conditions attached to it,” said Joey Krug, CIO of Pantera Capital, a cryptocurrency and blockchain-focused asset management.
According to Chainalysis figures, DeFi transaction volume increased by 912% in 2021. Decentralized tokens such as Shiba Inu have had impressive returns, which has led to a feeding frenzy among DeFi tokens.
When it comes to dealing in the nascent crypto environment, though, there are a number of red signals.
According to Kim Grauer, Chainalysis’ head of research, one issue with DeFi is that many of the new protocols being introduced contain coding flaws that hackers can exploit. In 2021, these code attacks were responsible for 21% of all hacks.
While third-party organizations undertake code audits and publicly identify which protocols are secure, Grauer tells CNBC that many users still choose to engage with risky platforms that skip this step in the hopes of making a significant profit.
From 2020 to 2021, the value of cryptocurrency stolen increased by 516% to $3.2 billion. DeFi methods were responsible for 72% of the total stolen monies.
The value of cryptocurrencies lost to scams increased by 82% to $7.8B.
Over $2.8 billion of this total came from a relatively new but very popular type of scheme known as a “rug pull,” in which developers build what appear to be legitimate cryptocurrency projects, before ultimately taking investors’ money and disappearing.
“Given the hype around DeFi, people may have been more okay with using less secure platforms due to a fear of missing out on potential gains,” explained Grauer.
Statistics on crime aren’t always accurate
Although bitcoin-related criminality is at an all-time high, experts have shown that legitimate cryptocurrency usage is far outpacing criminal usage.
Illicit transactions accounted for only 0.15 % of the $15.8T in overall crypto trade volume in 2021, a record low. Illicit money is identified by the research firm based on its proven link to illegal conduct. If funds were sent to or from a darknet market, for example, or if they were known to have been stolen in a hack, they would be regarded as illegal.
“The fact that the increase was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all,” Chainalysis wrote.
If funds were sent to or from a darknet market, for example, or if they were known to have been stolen in a hack, they would be regarded as illegal. The research went on to say that “crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.”
The increasing toolkit of law enforcement, as well as the inherent openness of blockchain technologies, are credited by researchers as contributing to the slowing rise of crypto-based crime.
Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.
Every transaction, unlike cash and other traditional means of value transfer, is recorded in a publicly available ledger, and Grauer claims that with the correct tools, it is feasible to discover how much of all cryptocurrency activity is linked to criminality.
“Authorities have been enormously successful in leveraging the transparency of blockchains to investigate and shut down illicit activity,” said Grauer.
The IRS Criminal Investigations division, for example, announced in November that it had seized over $3.5 billion in cryptocurrency in 2021, entirely from non-tax investigations, accounting for 93% of all monies confiscated by the division during that time period.
Other law enforcement victories in 2021 included a $56 million seizure by the Department of Justice in a cryptocurrency scam investigation, $2.3 million seized from the ransomware group behind the Colonial Pipeline attack, and an undisclosed amount seized by Israel’s National Bureau for Counter-Terrorism Financing in a terrorism financing case.
