Despite a major market downturn dubbed the “crypto winter”, illicit transactions and cybercrime in the cryptocurrency space is up for the second consecutive year, with their value hitting a record high of $20.1bn, according to a new report by blockchain analysis company Chainalysis.
Almost half of the illicit transactions in 2022 came from activities linked to “sanctioned entities”, which are organisations listed on economic and trade embargo lists around the world. Anyone from a country issuing such a sanction is prohibited from dealing with that entity.
Despite that, trading seems to be higher than ever, although the majority of activity came from Russian exchange Garantex and involved Russian users converting assets into cryptocurrency as sanctions were imposed following the outbreak of war in Ukraine. However, Chainalysis says most compliance professionals still treat this as illicit activity due to the sanctions imposed on the exchange.
Transactions associated with any sanctioned crypto service represent a substantial compliance risk for businesses that are subject to US jurisdiction, including fines and potential criminal charges.
In total 44% of 2022’s illicit transaction volume came from activity associated with sanctioned entities. This happened in a year when the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) launched some of its most ambitious and difficult-to-enforce crypto sanctions yet.
OFAC sanctioned Garantex in April 2022, but as a Russia-based business it was able to continue operating with impunity as US, EU and other countries couldn’t touch it or close it down.
It wasn’t all bad news, as transactions volumes fell across other categories of cryptocurrency-related crime. This included fraud shops, darknet markets, scams and ransomware. The only area to see an increase was stolen funds, up 7% year-on-year.
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Cryptocurrency crime and the FTX failure
The drop in illicit transaction volume was to be expected, Chainalysis explained, as “total transaction volume fell with the onset of the bear market,” although overall, the share of all cryptocurrency activity associated with illicit activity rose for the first time since 2019, from 0.12% in 2021 to 0.24% in 2022 – still a very small share of the overall volume of crypto activity.
“Every year, we publish our estimates of illicit cryptocurrency activity to demonstrate the power of blockchains’ transparency – these kinds of estimates aren’t possible in traditional finance – and to teach investigators and compliance professionals about the latest trends in cryptocurrency-related crime that they need to know about,” the Chainalysis team explained.
“Last year was one of the most tumultuous in cryptocurrency history, with several large firms imploding, including Celsius, Three Arrows Capital, FTX, and others — some amid allegations of fraud.”
This made compiling the crime report more difficult, Chainalysis says, as some of the analysts working on the report felt those companies should be considered as “criminal enterprises” but it was decided not to include their transaction volumes within the measure of illicit activities as the estimates used are gathered on “on-chain” intelligence.
This doesn’t include instances where off-chain booking may have been fraudulent. Chainalysis added that “the bankruptcy and criminal cases associated with these collapses are still ongoing, so for the time being, we’ll leave questions of criminality to the legal system.”
What the potentially fraudulent activities, such as that allegedly said to have taken place at FTX, within some of those companies highlighted to the Chainalysis team was that, although the blockchain is inherently transparent, the industry has room for improvement, adding that “there are opportunities to connect off-chain data on liabilities with on-chain data to provide better visibility.”
This was the second year in a row that saw an increase in the overall transaction volume of illicit activities. It hit $20.1bn this year and that is a “lower bound estimate” as the figure is likely to grow over time as the Chainalysis team uncover new addresses linked to illegal activity.
Last year the discovery of additional addresses saw the over volume of illicit activity increase from $14bn to $18bn – mostly due to the discovery of new crypto scams linked to those addresses.
