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.
What could those estimates look like in a year like 2022? 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.
Those allegations make this year’s Crypto Crime Report a bit tricky, as some feel that those businesses should be treated as criminal enterprises. Ultimately though, we don’t include their transaction volumes in our measures of illicit activity because our estimates are based solely on on-chain intelligence — we don’t account for instances where, for example, off-chain bookkeeping may have been fraudulent. Plus, 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.
The events of this year have made clear that although blockchains are inherently transparent, the industry has room for improvement in this respect. There are opportunities to connect off-chain data on liabilities with on-chain data to provide better visibility, and transparency of DeFi, where all transactions are on-chain, is a standard that all crypto services should strive to achieve. As more and more value is transferred to the blockchain, all potential risks will become transparent, and we will have more complete visibility.
For now though, we’ll continue to focus on illicit activity that can be measured on-chain. Let’s look at how the market tumult of 2022 affected cryptocurrency-based crime.
Despite the market downturn, illicit transaction volume rose for the second consecutive year, hitting an all-time high of $20.6 billion. We have to stress that this is a lower bound estimate — our measure of illicit transaction volume is sure to grow over time as we identify new addresses associated with illicit activity, and we have to keep in mind that this figure doesn’t capture proceeds from non-crypto native crime (e.g. conventional drug trafficking involving cryptocurrency as a mode of payment).
For example, last year we published that we found $14 billion in illicit activity in 2021 — we’ve now raised that figure to $18 billion, mostly due to the discovery of new crypto scams.
It’s also worth keeping in mind that 43% of 2022’s illicit transaction volume came from activity associated with sanctioned entities, in a year when OFAC launched some of its most ambitious and difficult-to-enforce crypto sanctions yet. Crypto exchange Garantex, which accounted for the majority of sanctions-related transaction volume last year, is a great example. OFAC sanctioned Garantex in April 2022, but as a Russia-based business, the exchange has been able to continue operating with impunity. Transactions associated with Garantex or any other sanctioned crypto service represent, at the very least, substantial compliance risk for businesses that are subject to U.S. jurisdiction, including fines and potential criminal charges.
February 26, 2023 Published by The Chainalysis Report. (Download PDF Report)