A recent report by CipherTrace indicates that crypto-related crimes are on the low as the market matures. The market recently crossed the $2 trillion mark, an impressive feat that represents a growth of over 10x in the past year as more institutional investors open up to digital currencies. The report analyses what went on over the past year and showed there was a 57% drop from the numbers registered back in 2019.
The number could have been significantly lower was it not for the DeFi sector, which saw an explosion last year. And where money flows, criminals follow. Half of the crimes last year were DeFi related, according to the report, with fraud and money laundering highly prominent. Today, the TVL has grown over 5800% since the beginning of last year, which is a testament to how popular DeFi has become. This explosive growth and lack of regulatory clarity attracted bad actors to the sector leading to an unprecedented number of hacks.
The report indicates that over 50% of thefts that took place in 2020, over half were on DeFi protocols totaling about $129 million. Interestingly even the largest theft of $281 million from KuCoin, a centralized exchange, involved DeFi as criminals tried to launder the stolen funds using Uniswap, one of the largest decentralized exchanges. As DeFi grows, the need to be vigilant about its money laundering risk becomes more apparent. The problem is most DEXs don’t collect KYC information from their users and lack a way to freeze funds as a centralized exchange can.
Receiving and sending money to criminal accounts was another issue highlighted within the report. Criminal-associated BTC addresses sent coins worth over $3.5 billion last year. The figure includes addresses that belonged to fraudsters, dark markets, hackers, and ransomware actors. The general notion is that most of these coins will be laundered using crypto exchanges to be converted to fiat and sent to bank accounts.
Analysts at CipherTrace Armada weren’t surprised to find out one prominent US exchange had received $3.5 million worth of BTC directly from criminal sources over the past year despite having strong KYC. Interestingly this is just a tiny figure compared to how much the platform sent to criminal-associated addresses; $36.7 million. The general consensus is that these transactions should have been stopped and can be stopped by using adequate AML software.
One such project is AMLSafe, which offers a platform where users can counter-check for “tainted” transactions and block them. This prevents mixing your funds with “dirty money.” It utilizes an algorithm that analyzes over 10,000 open sources and 2,500 plus scam addresses in real-time.
Judging by the number of outgoing transactions sent directly to criminal sources, there is a need for accurate blockchain analytics data. You need to understand that most criminals will not send directly to and from their tainted addresses when they are dealing with regulated exchanges. This makes the $36.7 million a conservative figure meaning the number of funds flowing from criminals is relatively high.
Overall, US exchanges received $8.4 million worth of BTC directly from criminals and sent around $41.2 million to addresses linked to criminals.
Like cash that is anonymous and liquid, crypto appeals to many criminals for boasting such traits and the ability to move large amounts online. Even though illicit transactions make up only 0.5% of Bitcoin’s yearly volume, crypto continues to struggle to shake off its bad reputation resulting from the criminal association. VASPs or virtual asset service providers are on the front line when it comes to identifying criminals and preventing financial crimes. However, the lack of adequate AML controls at these VASPs ends up facilitating the flow of tainted funds around the world. What is clear is that more strong measures are required to combat the issue.
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