Record $14bn flowed into crime-linked crypto wallets in 2021

Criminals used a record amount of cryptocurrencies for illicit purposes in 2021 but the overall growth of digital asset markets outstripped the rise in scams. The amount of crypto sent to addresses with known criminal associations shot to a record $14bn last year, more than doubling from 2020, according to […]

Criminals used a record amount of cryptocurrencies for illicit purposes in 2021 but the overall growth of digital asset markets outstripped the rise in scams.

The amount of crypto sent to addresses with known criminal associations shot to a record $14bn last year, more than doubling from 2020, according to research from data company Chainalysis.

Scams, ransomware and theft rose 79 per cent in dollar terms last year but the overall market expanded by 550 per cent, with $15.8tn worth of cryptocurrencies traded in 2021. That means the relative share of illicit activities has dropped to a record low.

“The yearly trends suggest that . . . crime is becoming a smaller and smaller part of the cryptocurrency ecosystem,” Kim Grauer, director of research at Chainalysis, wrote in the report.

“With the growth of legitimate cryptocurrency usage far outstripping the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower, at 0.15 per cent,” Grauer added. In its previous study, Chainalysis estimated that 0.34 per cent of cryptocurrency transactions were made for illegitimate reasons.

In spite of the trend, cryptocurrency markets remain highly risky for investors. Scams involving cryptocurrencies cost investors $7.8bn in total and roughly $3.2bn worth of cryptocurrency was stolen in 2021, a 516 per cent increase over the previous year.

In January, illicit addresses held more than $10bn worth of cryptocurrency, Chainalysis calculated.

Law enforcement and regulators have become better at tackling crimes involving bitcoin and other cryptocurrencies but they are playing catch-up with new markets such as decentralised finance, or DeFi, which present opportunities for criminals to launder money and steal funds.

More than $100bn of funds are locked into DeFi markets, where algorithms handle all transactions and there is no human interaction between parties. The fivefold growth of this space last year has provided a rich hunting ground for thefts and scams such as “rugpulls”, where scammers persuade investors to put money into a new token before disappearing.

Those scams cost investors $2.8bn last year. Theft has also proliferated, with some $2.2bn of funds stolen from DeFi venues, an increase of 1,330 per cent from 2020. One example was the $600m breach of the Polygon Network, which the hacker dubbed Mr White Hat later returned.

Elliptic, another specialist cryptocurrency data company, calculated in November that investors lost $12bn of funds in DeFi markets last year.

“As DeFi has continued to grow, so too has its issue with stolen funds . . . We’ve also seen significant growth in the usage of DeFi protocols for laundering illicit funds,” the report from Chainalysis said.

In late October, the Bank for International Settlements took the first step towards bringing DeFi markets under regulatory supervision by outlining plans to make operators of such venues comply with anti-money laundering rules.

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