June 2, 2023

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Cryptocurrency-Based Crime Hit a Record $14 Billion in 2021

The dollar amount collected through cryptocurrency-based crime hit a record high in 2021, as the volume of cryptocurrency transactions overall grew into tens of trillions of dollars, according to blockchain data platform Chainalysis Inc.

However, the volume of illicit activities remains a small share of the total cryptocurrency transactions volume, according to a preview of Chainalysis’s 2022 Crypto Crime Report to be published in February.

The volume of cryptocurrency transactions grew to $15.8 trillion in 2021, up 567% from 2020, in a sign that the trading of digital assets is becoming increasingly mainstream. Illicit transactions totaled $14 billion in 2021, up 79% from $7.8 billion the previous year. But illicit transactions only made up 0.15% of cryptocurrency transaction volume in 2021.

While risks remain for potential cryptocurrency investors, Ross Delston, a Washington, D.C., lawyer who advises clients on anti-money-laundering issues, said he doesn’t expect the level of interest to ebb anytime soon.

“What’s so interesting about cryptocurrency is we usually associate it with illicit transactions; there is so much news about anything that goes wrong with crypto,” he said. “As Chainalysis points out in the report, it’s relatively a small fraction of transactions that are criminal in nature.”

In its report, Chainalysis warns that its tracked volume of illicit activity is likely to rise later as the company identifies more bad actors and incorporates data gained from that into its historical analysis. The company added that with the exception of 2019, which was notable for the PlusToken cryptocurrency scam, bad actors have made up a smaller component of overall cryptocurrency transaction volume over the past few years.

Chainalysis also warns that the rise of DeFi, or decentralized finance—an umbrella term for financial services offered on public blockchains—is a particularly menacing threat to the sector.

Out of the total of about $3.2 billion in cryptocurrency stolen in 2021, 72% was stolen from DeFi protocols, according to Chainalysis.

DeFi also was an increasingly popular way of money laundering, according to Chainalysis. The use of DeFi as a way to launder money increased 1,964% between 2020 and 2021, according to the company.

Chainalysis’s report is valuable but has its limitations, said

Jeffrey Alberts,

a partner at law firm Pryor Cashman LLP with a focus on financial technology. For instance, he said the data doesn’t capture all the illicit transactions but only those crypto addresses Chainalysis has associated with illicit activity and might exclude those addresses Chainalysis doesn’t know belong to known criminals.

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“All of this said, it is clear that there was a massive increase in valid activity involving cryptocurrency in 2021,” he said, adding that the trend is likely to continue this year.

Alex Zerden,

who worked on policy issues related to illicit finance in both the Obama and Trump administrations, said the report is a useful contribution from Chainalysis to the public’s understanding of trends in illicit finance involving cryptocurrency, but it would be beneficial to have additional clarity on the definitions of “illicit activities” mentioned in the report. He said having a common language between various regulators and industry observers would be helpful to discuss this issue from a policy development perspective.

“Having other academic, quasi-academic analysis would help to support these claims, and further transparency on flow of funds is welcomed,” said Mr. Zerden, the founder of financial technology advisory firm Capitol Peak Strategies LLC and an adjunct senior fellow at the Washington-based Center for a New American Security.

Many are calling decentralized finance, or DeFi, the “Wild West of finance.” This fast-growing industry aims to provide automated banking services for cryptocurrencies to everyone, with no middlemen. But DeFi is still in its early stages, which means there are risks. WSJ explains. Photo illustration: Tammy Lian/WSJ

Write to Mengqi Sun at [email protected] and David Smagalla at [email protected]

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