By Blerina Jasari* -It is no secret that criminal organizations have long been using cryptocurrency exchanges to commit a host of financial crimes, including fraud and money laundering.
The blockchain promises cryptocurrency traders to remain completely anonymous and trade on a decentralized platform, creating the perfect environment for abuse by criminal organizations.
According to the Federal Trade Commission, since the start of 2021 until the first quarter of 2022, fraudsters stole more than $1 billion from 46,000 people in crypto-scams.
Blockchain analytics company Chainanalysis’ 2023 report on ransomware payments recorded more than $456.8 million in extorted money during 2022, and a 68% increase in illicit addresses sending cryptocurrency from the prior year, which equates to about $23.8 billion in laundered money.
These statistics indicate a significant prevalence of fraud within the industry. Despite the appeal of anonymity for cryptocurrency traders, prioritizing secure and crime-free exchanges that safeguard traders’ assets is crucial for the financial sector to maintain relevance in the future.
Finance is inherently built on trust, and the industry needs to address the widespread criminal activities on its exchanges in order to secure their customers’ trust going forward.
Governments are actively working to eradicate crime in the cryptocurrency market, and while this may result in a loss of some anonymity for investors, it could ultimately be deemed acceptable for the sake of a safer environment.
As mentioned previously, criminal organizations commit a host of financial crimes using cryptocurrency exchanges; but let’s talk about the most significant crimes riddling these exchanges:
In 2021, 37 percent of all cryptocurrency scam revenue came from so-called rug pulls, a scheme in which developers build what appear to be legitimate cryptocurrency projects only to take the investors’ money and disappear.
There are three primary categories of rug pulls: liquidity stealing, limiting sell orders, and dumping. Liquidity stealing involves token creators withdrawing all coins from the liquidity pool, effectively erasing the value injected by investors and causing the currency’s price to plummet to zero.
These “liquidity pulls” are typically observed in DeFi environments. Limiting sell orders occur when developers encode tokens in a way that grants only them the ability to sell.
An example of this rug pull type is the Squid Game token, which experienced a surge of over 23 million percent before funds were drained from investors unable to sell their tokens.
Dumping is akin to a traditional pump-and-dump scheme, wherein developers rapidly sell their substantial token supply, leading to a coin price decline and leaving remaining investors with essentially worthless tokens.
Theft in the cryptocurrency space escalated further, witnessing a surge to approximately $3.8 billion in stolen cryptocurrency in 2022—the biggest year ever for crypto hacking.
Traditionally, cryptocurrency thefts have been attributed to security breaches where hackers gain access to victims’ private keys, obtained through methods such as phishing, keylogging, or social engineering. However, DeFi has brought about deeper vulnerabilities within the software.
In 2021, a significant portion (49.8 percent) of the total value stolen across all services resulted from code exploits and flash loan attacks, a type of exploit involving price manipulation.
Notably, the ten largest hacks in 2021 accounted for the majority of stolen funds, with seven of these attacks targeting DeFi platforms.
The largest theft, amounting to $613 million, involved an unidentified hacker exploiting a flaw in the cryptography or coding of the DeFi platform Poly Network, leading to the theft of tokens on Binance Smart Chain, Ethereum tokens, and USDC. Ultimately, the hacker returned the stolen funds.
A money launderer’s goal is simple: convert their illicitly obtained funds to clean cash. This is why money laundering serves as the foundation for all other forms of cryptocurrency-related crime.
Without a means to access the funds, the motivation to engage in criminal activities involving cryptocurrency diminishes. Surprisingly, money laundering activity in cryptocurrency is heavily concentrated.
While billions of dollars’ worth of cryptocurrency moves from illicit addresses every year, most cryptocurrency money laundering is facilitated by a very small group of people.
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) imposed sanctions on two major money laundering services—Russian cryptocurrency Over The Counter broker, Suex, and cryptocurrency exchange, Chatex—for accepting funds from ransomware operators, scammers, and various cybercriminals. Despite these actions, numerous other money laundering services continue to operate.
In 2022, only four deposit addresses cracked $100 million in illicit cryptocurrency received, and combined received just over $1 billion, while 1.2 million deposit addresses received under $100 in illicit funds accounting for a total of $38 million.
The cryptocurrency community has traditionally advocated for minimal regulation, driven by the autonomous and boundary-free nature of the blockchain.
The apprehension stemmed from concerns that any form of regulation could undermine the fundamental reasons for the existence of cryptocurrencies.
However, a recent DIFC Fintech conference unveiled a shift in sentiment, indicating a growing inclination within the cryptocurrency industry towards advocating for well-defined regulations.
In the United States, in 2022, President Biden published an Executive Order on Ensuring Responsible Development of Digital Assets, which states that the United States “has an interest in ensuring that digital asset technologies and the digital payments ecosystem are developed, designed, and implemented in a responsible manner that includes privacy and security in their architecture.”
Government entities around the world are seeking increased regulations to gain more control over cryptocurrency platforms and it appears that the industry welcomes this development in an effort to skyrocket the trade of cryptocurrencies.
Notably, when global cryptocurrency exchange, Binance, introduced KYC verifications, more than 96 percent of its customers complied.
Furthermore, there is a noticeable enhancement in the global law enforcement’s capability to monitor and confiscate unlawfully acquired cryptocurrency.
A case in point is the announcement made by the IRS Criminal Investigations Division in November 2021, revealing the seizure of over $3.5 billion in cryptocurrency throughout the year. Notably, this amount, derived from non-tax investigations, constituted 93% of all funds seized by the division during that period.
Additionally, the Department of Justice achieved successful seizures, including $56 million in a cryptocurrency scam investigation, $2.3 million from the ransomware group linked to the Colonial Pipeline attack, and an undisclosed sum by Israel’s National Bureau for Counter Terror Financing in a case related to terrorism financing.
Moreover, the SEC imposed a total of approximately $2.35 billion in monetary penalties against participants in the digital asset market in 2021.
It is clear that cryptocurrency is not an untraceable, unseizable asset perfect for crime. In contrast to fiat currency, which is often concealed within networks of foreign banks and shell corporations, cryptocurrency transactions are recorded on the blockchain and remain visible to all.
This transparency presents a significant investigative opportunity for government agencies worldwide. Billions of dollars have already been seized by law enforcement, and it is expected that we will witness continued success in seizing these assets in the future.
*Blerina Jasari is a partner at Boyle & Jasari LLP, a boutique international law firm concentrating in white-collar crime, international arbitration and FINRA arbitration. After obtaining her initial law degree in Germany and an LL.M. in French and European Union Law in France, she came to the United States to complete an LL.M. in International Legal Studies.After law school, she worked in the Prosecutor’s Office at the International Criminal Tribunal for the Former Yugoslavia where she contributed to the prosecution of Ratko Mladic. She may be contacted at her firm or at her LinkedIn contact.