The Truth Behind Crypto Crime

Highlights

• Only 1.1% of cryptocurrency transactions in 2019 were illicit
• Majority of illicit transactions are funds obtained from crypto scams
• Money laundering is a common connection between the varieties of cryptocurrency crimes
• Due to wide-scale adoption, the magnitude of cryptocurrency crimes have increased
• Stronger KYC and general crypto awareness can help combat the majority of crime in the cryptosphere

Cryptocurrencies have long been belittled and portrayed as the currency of choice for criminals and thus creating a negative image around cryptocurrencies as a whole. However, this could not be more further than the truth.

Cryptocurrencies as a whole have seen a dramatic increase in adoption. According to polls, 81% of Americans are familiar with at least one type of cryptocurrency (Bitcoin, Ethereum, Ripple, etc). Despite many Americans having a basic knowledge of cryptocurrencies, cryptocurrencies are still shrouded in negativity. This is due to the majority of media centering coverage on the illicit uses of Bitcoin and cryptocurrencies as a whole. However, only 1.1% of Bitcoin transactions were illicit and used for criminal purposes.

What Type of Crime Occurs?

Crypto crime is a very broad term and encompasses a lot. We will be specifically focusing on criminal transactions through cryptocurrencies.

According to a recent study, only a few percent of all cryptocurrency transactions are illicit, a minuscule amount compared to the magnitude of transactions that occur on the blockchain every day.

Here is a summary:

• Scams make up the majority of illicit transactions, especially in the last few years
• Darknet markets account for the second-largest amount of illicit transactions
• Terrorism financing and other media exaggerated crimes rarely account for illicit transactions

Cryptocurrency Scams

Cryptocurrency scams are responsible for the largest volume of illicit transactions. These scams come in the form of ICOs and Ponzi schemes. According to Chainalysis, if it weren’t for three major Ponzi schemes affecting many victims, illicit transactions would only account for 0.46% of all crypto transactions.

The majority of the remaining scams are ICOs – also known as Initial Coin Offerings. ICOs are similar to IPOs in the sense that they are used to distribute newly minted coins as companies distribute stock in order to raise funds. Over the last few years, the cryptospace has seen a plethora of IPOs with empty promises.

How Scam ICOs Work

• Scammers create a fake website and in some cases fake credentials followed by creating an ERC-20 token on the Ethereum blockchain
• The team then announces the sham project on various cryptocurrency announcement pages luring in victims
• Scam ICOs often promise generous guaranteed returns on users’ investments and portray the investment as complete risk-free
• Unsuspecting users then buy into the ICO and receive their tokens with the hope to generate stellar returns
• The team behind the fake project takes the funds generated by the ICO and are never to be seen again, leaving the sold tokens worthless

Once the team successfully sells the funds, they restart the process once again. Although ICO scams have been present since the birth of crypto, they have begun to accelerate as new naive users fall for these clear scams and cash-grabbing attempts – there is no such thing as a guaranteed return.

It is clearly evident that individual victims of these scams make these scams a profitable venture for scammers and thus scamming will not go away in the near future. However, before investing in any cryptocurrency or project always make sure to do your own research (DYOR).

Cryptocurrency Exchange Hacks

Cryptocurrency exchanges, the majority of which are heavily centralized, store vast magnitude of cryptocurrencies and thus always being a lucrative target to hackers.

The trend shows that more major cryptocurrency exchanges are hacked every year. However, the amount of stolen varies every year due to hackers rarely hacking exchanges with a large magnitude of trader holdings like Mt.Gox ($473M) in 2014 and Coincheck ($534M) in 2018.

Exchange hacks are frequent talk in the crypto community due to their centralization and susceptibility. To combat this, we have seen the rise of DEXs, also known as decentralized exchanges. Completely decentralized, traders have control of their own private keys and thus do not have to rely on an exchange.

Tracking Illicit Transactions

These illicit transactions don’t disappear. Although Bitcoin is notorious for its privacy, Bitcoin is actually one of the least private cryptocurrencies. Every Bitcoin transaction can be traced up to when the coin entered the blockchain through mining. This allows the authorities to track cryptocurrency transactions from start to finish.

The destination for the majority of these transactions are cryptocurrency exchanges were criminals are able to sell cryptocurrency to unsuspecting buyers, in-effect laundering the currency. Over the years there have been ab increase of exchanges being the most popular exit path for illicit transactions. We attribute this to the increasing liquidity of cryptocurrencies, allowing criminals to liquidate millions of dollars of assets in mere minutes. It is also important to note that OTC brokers often buy illicitly obtained currencies at discount prices. OTC brokers are generally person-to-person rather than a public exchange.

Crypto crime in 2019 compared to 2018

Crypto crime in 2019 made major headlines on numerous occasions. But how does crime in 2019 compare to crime in 2018?

In short, crypto crime has grown in magnitude in 2019 presumably to wide-scale adoption leading to an exponential increase in victims falling susceptible to large-scale scams.

Cryptocurrency Scams Compared

It is evident that the magnitude of cryptocurrency scams is only increasing every year, a trend evident once again in 2019. Along with the revenue of scammers, the raw amount of people falling for these traps is also increasing every year. This is primarily due to naive investors unaware of the easily-avoidable scams.

Exchange Security Protocols

As the significance of exchange hacks grows year after year, exchanges have faced scrutiny over their security protocols. As a result, we’ve seen the widespread adoption of DEXs, with Binance (one of the biggest cryptocurrency exchanges), launching its own DEX platform. DEXs allow users to retain control and responsibility for their coins and thus make it difficult for hackers to make hacking a profitable venture as they would have to hack everyone’s individual wallet.

However, these DEXs may appear to be confusing to use and thus, the majority of traders still use centralized exchanges regardless of the immense risk. We predict that 2020 will see a larger shift towards DEXs.

Potential Solutions

As cryptocurrency adoption inevitably grows it is important to address potential solutions and minimize crypto crime.

Crypto Education

Educating the masses about crypto will prevent many from falling for scam tactics. Simple education can help people discern between obvious scams and legitimate projects. Although universities are beginning to teach cryptocurrencies as an individual course, the majority of the public is naive about cryptocurrencies and blockchain technology.

There are several organizations dedicated to this cause, one of them being the Blockchain Education Network (BEN). At BEN students can learn about cryptocurrencies and receive a custom BEN token in return. This allows users to experience crypto and understand the vast variety of knowledge before investing real money.

Basic crash courses on investing websites are also a wealth of knowledge. Investopedia offers a free crash course covering the basics of cryptocurrencies.

Stronger KYC Protocols for Exchanges

Even as DEXs go mainstream, the majority of new users will always rely on centralized exchanges to trade and unadvisably store their cryptocurrency holdings. Thus, increased exchange security to filter out criminals and keep funds safe is essential.

Only a fraction of cryptocurrency exchanges require Know-Your-Customer (KYC) information. KYC allows exchanges to collect users’ personal information in order to flag them for crimes and pass on that information to law enforcement if necessary.

KYC identification is a controversial subject in the crypto community due to its lack of privacy. Many in the crypto community advocate for complete privacy. However, regulation is needed, especially for the most vulnerable type of exchanges.

Thus, exchanges should adopt more stringent KYC protocols and act upon this information and diligently forward it to law enforcement if necessary.

Regulated Privacy Coins

Privacy coins are a hot topic in the crypto community. Unlike Bitcoin, privacy coins, in some cases are completely private, displaying only when the transaction took place and no other details.

Privacy coins allow criminals to launder money in the cryptosphere and thus should be regulated. Privacy coins deposited in exchanges using private transactions should not be allowed as transactions would be untraceable.

Greater Transparency Regarding Crypto Crime

Lastly, and perhaps the most important solution to minimizing crypto crime, is greater transparency. The media frequently portrays cryptocurrencies as an illegal and tainted asset, however that could not be further from the truth. Educating and promoting the “ugly” side of crypto helps the public understand that the situation is not as severe as commonly thought.

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