InventionsTwo Sides of the Digital Coin

Two Sides of the Digital Coin


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The year 2021 proved to be a tough one for anyone affected by the COVID-19 pandemic, though it was awesome for crime involving cryptocurrencies.

Last year, illicit blockchain addresses received a whopping $14bn in ill-gotten gains, almost twice the $7.8bn unlawfully obtained in 2020.

That’s according to Chainalysis, a blockchain data firm.

More than half of that $14bn ($7.8bn) can be attributed to cryptocurrency scams, which rose 82 per cent compared to 2020. Cryptocurrency theft ($3.2bn) did even better, up 516 per cent from 2020.

The remainder of the crime pie consists of the proceeds from ransomware, malware, and assorted other illicit activities.

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As Chainalysis tells it, this sounds like good news because total transaction volume reached $15.8tr in 2021, an increase of 567 per cent compared to 2020. Sure, that’s just a bit more than the 516 per cent crypto theft surge but it’s almost an order of magnitude more than the 79 per cent increase in crypto crime transactions across all categories.

“In fact, with the growth of legitimate cryptocurrency usage far outpacing the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower,” the firm said.

A sense of balance, for the moment

That’s one way of looking at it, though the cited figures don’t really quantify investor risk.

Stephen Diehl, a London-based software developer who has been critical of crypto industry hype, cautioned that Chainalysis is a for-profit entity that doesn’t provide a lot of detail on its research methodology.

In a message to The Register, Diehl said the total transaction figure in the report doesn’t include “wash trading” in the company’s classification of illegal activity – investors simultaneously buying and selling the same asset to create the illusion of market vitality, which isn’t the same thing as money laundering.

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Wash trading, he said, represents about 70 per cent of cryptocurrency transaction volume, citing a recent report that found as much.

“So details like this matter when we look at their reported figures,” he said. “I’m not saying they’re inaccurate per se, but they probably are more on the low-ball side of things and underestimate rather than overestimate.

In an email to The Register, Kim Grauer, head of research at Chainalysis, explained the company’s approach.

“Wash trading is only analyzed in the NFT section, and not included in the high-level numbers,” said Grauer. “We investigate wash trading, but our figures include only wallets definitively controlled by criminals in through investigations. Many wash trading claims are mostly speculative at this point.”

“Our methodology is that we combine proprietary heuristics and human experts to identify wallets connected to illicit activity such as scamming, ransomware, and darknet market commerce, and we then monitor the flows of those funds. This allows us to see with great levels of accuracy the amount of criminal activity happening in real-time on the blockchain.”

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Asked whether the firm’s findings suggest the crypto industry is getting safer – something Chainalysis explicitly hopes for in its post – Diehl said he does not believe that’s the case because order book making and price formation at offshore exchanges is so opaque.

“Crypto is the most dangerous market the public could possibly engage with, and personally I don’t think retail investors should touch it with a ten foot pole,” he said.

“The public has no insight into how much market manipulation or leverage there is baked into the price formation of these assets because they’re completely unregulated. And manipulated markets at that level are generally just an indirect wealth transfer from the public to insiders.” ®

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