Out-Law / Your Daily Need-To-Know

Cryptocurrency-based crime doubled in 2021

Out-Law News | 12 Jan 2022 | 1:38 pm | 3 min. read

Cryptocurrency-based crime hit a new all-time high in 2021, constituting around $14 billion-worth of transactions – up from $7.8bn in 2020, according to a report from data provider Chainalysis.

But despite the increase in value, criminal activity represented just 0.15% of overall cryptocurrency transaction volume in the last 12 months. The report found that while total transaction volume across all cryptocurrencies grew by 567% to $15.8 trillion in 2021, illicit transactions increased by just 79%.

Chainalysis said: “with the growth of legitimate cryptocurrency usage far outpacing the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower.”

“Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem…with the understanding that $14 billion worth of illicit activity represents a significant problem,” it added.

Hinesh Shah, forensic accounting expert at Pinsent Masons, said: “The 567% increase in transaction volume confirms that cryptocurrencies have become a mainstream asset. As more and more investors look to this emerging asset class for financial returns, fraudsters will continue to seek out opportunities to take advantage and we anticipate crypto-related crime will continue to increase in 2022.”

“We also expect to see greater legal and enforcement action in 2022 and beyond as investors look to recover defrauded monies, through both civil and criminal routes,” Shah added.

The report said law enforcement’s evolving attitude to cryptocurrency-based crime may be one factor in the relatively slow growth of illicit transactions.

“We’ve seen several examples of this throughout 2021, from the [Commodity Futures Trading Commission] filing charges against several investment scams, to the FBI’s takedown of the prolific REvil ransomware strain, to the [Office of Foreign Assets Control] sanctioning Suex and Chatex, two Russia-based cryptocurrency services heavily involved in money laundering,” it said.

Craven Jennifer

Jennifer Craven

Senior Associate

This will require cross-border co-operation between courts, enforcement agencies, lawyers and experts to deal with the internationalisation of the issues posed by crypto fraud.

Chainalysis identified decentralised finance (DeFi) platforms, which offer financial instruments on the blockchain without relying on intermediaries like banks, as a key area of growth for cryptocurrency criminality. Approximately $2.2bn worth of cryptocurrency was embezzled from DeFi protocols in 2021 - a 1,330% increase on the 2020 figure. Overall, funds stolen from DeFi protocols represented 72% of all cryptocurrency theft in 2021.

“Most instances of theft from DeFi protocols can be traced back to errors in the smart contract code governing those protocols, which hackers exploit to steal funds,” the report said.

Jennifer Craven, civil fraud expert at Pinsent Masons, said: “The increase in illicit crypto-fraud activity is reflected in the increased amount of cases being brought before judges in the English High Courts, which have witnessed a growing trend of victims of crypto fraud pursuing extremely urgent, complex and high value claims against fraudsters, and utilising civil court weapons such as worldwide freezing orders and disclosure orders to trace and recover crypto assets across the globe.”

“No doubt these types of cases will continue into 2022 as more victims choose to act quickly and instruct legal and forensic experts to navigate the blockchain and the complex web of transactions through which crypto assets are dissipated internationally. Crucially, this will require cross-border co-operation between courts, enforcement agencies, lawyers and experts to deal with the internationalisation of the issues posed by crypto fraud,” she added.

The report comes after Marlon Pinto, director of investigations at AnotherDay, told Out-Law in October how his company receives “daily” calls and emails from distressed investors concerned that they have been victims of cryptoasset investment scams.

“We get enquiries on the smaller cases daily and we will see perhaps three to four of those enquiries coming in [per day],” Pinto said. “Those cases are people losing between £500 and £20,000. It is a large problem and it's just getting worse.”

The UK Financial Conduct Authority (FCA) has reported that the number of enquiries it received about potential cryptoasset scams has grown steadily, from 176 enquiries in April 2020 to 566 enquiries in March 2021.

The regulator has previously estimated that as many as 2.3 million UK consumers now hold cryptoassets but has described investment in them as “high risk”. The FCA has now drawn up a new three-year consumer investments strategy, which contains proposals for how it intends to combat investment scams.

In its strategy, it said that, by 2025, it wants to halve the number of consumers investing in high risk investments who indicate a low risk tolerance or demonstrate the characteristics of vulnerability, and is further targeting a reduction in the amount of money consumers lose to investment scams, through reductions in investment scams perpetrated or facilitated by regulated firms.