The rising interest of individuals and institutions in cryptocurrencies has also led to a boom in criminal activity over the past year that has cost investors billions, underscoring the urgency of efforts to regulate the digital movement of coins.
Cryptocurrency addresses linked to illegal activity have amassed $ 14 billion, according to research firm Chainalysis. However, when weighted against total cryptocurrency activity, that number accounts for just 0.15% of total funds changing hands on a blockchain - the lowest ever, according to the company.
The data comes amid broad debate over cryptocurrency regulation, with authorities determined to protect the growing class of small shoppers who flock to digital currencies.
"In absolute terms, crime is still increasing, but the ecosystem is becoming safer. Of course, there are a lot of caveats," said Kim Grauer, Research Director of Chainalysis.
Over the past five years, the company has found that the majority of criminal revenue has always come from financial fraud. However, amid the explosive growth of cryptocurrencies, total economic activity across all blockchains has increased from $ 2.3 trillion to $ 15.8 trillion, reducing the importance of crime-related activities.
Economic activity has boomed on the chain, but Chainalysis attributes much of the volume to decentralized funding (DeFi), which has also opened a window for criminal activity in a segment of the market where scams grossed $ 7.7 billion.
While criminals looted around $ 200 million in DeFi scams, a single rug pull scam on Turkish cryptocurrency exchange Thodex made up most of the funds lost.
Theft was the second most common type of crime, with DeFi logs proving to be a hot target. Criminals stole $ 3.2 billion worth of cryptocurrencies in 2021, 72% of which was attributable to attacks or exploits by DeFi protocols.
A major obstacle to breaking down cryptocurrency crime is overestimating how much on-chain data can track all crimes. In most cases, Chainalysis can only attribute illegal transactions to crimes that originated on the chain - as opposed to someone who steals and then converts those funds into cryptocurrency.
The ransomware threat The website cryptosec.com shows a timeline of DeFi exploits over the past two years. According to this, DeFi logs were affected by almost 60 attacks in 2021, which corresponds to an average of around one attack per week.
The largest logs under attack include Cream Finance, which suffered three separate attacks totaling $ 186 million, and the Poly Network, which originally lost $ 600 million in August before the hacker returned $ 342 million days later.
On the other hand, the funds stolen in ransomware attacks like the Colonial Pipeline incident in June 2021, which forced victims to pay $ 5 million, are small in comparison.
"Ransomware attacks on critical infrastructures can be far more threatening than a financial fraud that promises a 50% return on DOGE for life," Grayer of Chainalysis told Yahoo Finance.
"But since fraudsters can disguise themselves as legitimate services, they potentially have more time to raise the revenue they steal from victims before they are caught," added Grauer.
DeFi growth and crime
According to DeFi Pulse, the total value of DeFi logs blocked is $ 100 billion, up $ 12 billion over the past week.
Victor Fang, founder and CEO of blockchain forensics startup Anchain, told Yahoo Finance that his company has seen a massive influx of customers over the past year, including assistance with recovering lost or stolen smart contract-based digital assets were looking for.
A prominent customer is the Securities and Exchange Commission (SEC). The agency signed a contract with Anchain back in August to help the regulatory agency monitor illegal wallet addresses and suspicious transactions in this area.
In October, SEC chairman Gary Gensler told Yahoo Finance that DeFi "will end badly" if investor protection is not stepped up.
The latest regulatory action came earlier this week after the Commodities and Futures Trading Commission fined the DeFi Protocol Poly Market $ 1.4 million for operating an "unregistered binary options market", and the protocol had instructed it to cease operations.
Fang predicts "10x growth over the next 3 years" in DeFi assets, but admits that crime will no doubt follow money.
"Such rapid growth will continue to drive increasingly complex attack vectors, forcing both the public and private sectors to focus more on the types of tools they have in their arsenal of crypto-compliance technologies," said Keep catching.
The majority of DeFi activity and the associated crime takes place on the Ethereum blockchain, where high transaction costs represent an additional barrier to entry for smaller retail investors.
