Considering the previous year, the rate of cryptocurrency crime had massively increased both on the clearnet and the dark web. However, it has been seen that 2020 bears the highest record for the hidden and unreported crypto crime.
Statistics show that 80% of the cryptocurrency relegated black hat hacking and fraud cases have never been reported to law enforcement in that year. There is no global government repository of the cryptocrimes that may combine the information from the law enforcement agency from the local zones, private sector forensic financial investigators, and legal offices.
What Is The Original Scale Of The Cryptocurrency Crime?
An analysis of the cryptocurrency crime reveals that the total crypto crime occurring in 2020 has amounted to only below 10.52 billion USD. This is just enough to purchase 70,726,934 AK-47s (148 USD per locally produced Pakistani model). When these AK-47s are stacked end to end, it is capable of circumnavigating the Earth’s equator 1.6 times. However, this amount fades in comparison to the complete traditional financial crime.
The Central bankers have continued to accept the negative view of the Bitcoin (BTC) cryptocurrency and the other crypto assets. The president of the ECB, Christine Lagarde, had stated last month that Bitcoin is used chiefly for rigorous money laundering. That being said, the crimes associated with fiat currency is a much bigger problem. Last year, the FinCen files had laid bare bearing an annual cost of money laundering alongside the associated crimes being 1.4-3.5 trillion USD, as EY had mentioned.
Considering the lower band of the 1.4 trillion USD worth of financial crime in the traditional markets, those funds are enough to purchase AK-47s that could be stacked end to end and could make 21 trips to the Moon.
47.5% of the world’s estimated gun supply, or 9.5 billion AK-47s, is a lot for well-armed terrorists.
What Did The Law Fail To Target In Crypto Crime?
Irrespective of most of the billion dollars crypto frauds that have been spotted back in 2019 and earlier have paved the way for the larger volumes of the more minor cases to enter 2020.
One of such hidden crypto fraud in the most infamous vanity address generator scams that had predominantly been popular amongst the cybercriminals in the period between 2014 and 2017, when the fact is the actual theft had occurred in 2020. In one of the cases, 185 million USD or 4000 BTC of funds could be traced from a single Singaporean exchange. Most of the victims are yet not aware that their funds have been misplaced from their wallets.
The scams and the frauds are a specific problem that requires to be tackled as this has accounted for 67.8% of the total cryptocurrency crime in 2020.
Although there had been a seemingly increased crackdown in the crypto crime, back in July 2020, over a hundred Chinese people had been arrested having a connection to the PlusToken crypto scam. In October of the same year, the owner of the Helix and Coin Ninja Bitcoin tumblers had laundered a lot of Bitcoin, and thus they had been arrested in the United States.
In January of 2021, 30 individuals had been charged in Japan for knowingly trading 96 of the 560 million USD acquired in the 2018 Coincheck hack. The in-house estimates stated that over 90% of the criminal activity cases had been related to the crypto assets that remained unsolved.
Why is such a scenario?
The reason is that possibly the law enforcement officials do not have the proper and the necessary tools for thwarting even something as simple as the maintenance of an updated sanctions list. Adding to the proficient tools shortage, many of the jurisdictions have not yet reported the requirements.
Bitcoin Bubble Burst During The Cryptocurrency Crime Scenario
The criminal networks these days are purely depending on and misusing the superpowers of the digital currency or cryptocurrency. Owing to the severe crypto crimes, the bitcoin bubble burst took place in 2018 and the Bitcoin value severely went down marking 80%. Some have forecasted that this would be the end to the rising popularity of the alternative currencies or altcoins. But nothing went as forecasted.
On the contrary, it has been reported that the crypto trading volumes have shooted up. That being stated, it had doubled. It had exceeded the entire 2018 US corporate debt trading value. Furthermore, 2019 expected that the cryptocurrency exchange volume will rise by 50%. This would match the volumes of the combined equities traded in Euro.
Path of The Crypto Fund Flow
Reuters had analyzed 11 cryptocurrency exchanges of which the most popular one was BitMex bearing over $92B of traded cryptos in just 30 days. It is however more than the sum of the cryptocurrencies traded within the 30 days on the exchanges that ranked between 2 and 4 – Binance ($32B), Huobi ($20B) and OKEx ($27B).
Out of the 11 crypto exchanges analyzed, BitMex is the only one to be registered in the Republic of Seychelles. This crypto exchange is also the only one non-performing AML/KYC operations. This is just a portion of what actually is as the funds acquired via the criminal activities are skillfully washed via the ecosystem of tumblers, payment services and gambling sites.
Forbes in this regard mentions that the cryptocurrencies are broadly used in sanction evasions, darknet transactions, money laundering and the related cryptocurrency crimes. It also states that the crypto financial world is also not protected itself and is highly exposed to be in the grip of the cybercriminals. 2018 marks $1.7 billion stolen cryptocurrencies and experienced over 3.6 times more cyber hacks on the exchanges than in 2017. The cryptocurrency trading fuels the dynamic growth of the cybercrime zone bearing a staggering cybercrime cost of $6 trillion as expected in 2021 (accounted for over 7% of global GDP).
Shedding Light On The Cryptocurrency Crimes & The Financial System’s Dark Side
Principle states that the analysis of the cryptocurrency flow takes place the exact way traditional money or fiat currency flows. However, this is done by a limited number of the prosecutors and the investigators due to several reasons such as – technological barriers, lack of the understanding of how the cryptocurrency world works or even the limited access to the data.
However, most of the economies have started investing in the infrastructure construction for capturing the data and enabling the analytical capabilities for the law enforcement agencies. This is because it does not cover the part of the financial flow that gives rise to both a majority security threat and tax loopholes.
A Coin Telegraph report states that most of the systems are still in development and will be restricted to the data inflow from the cryptocurrency exchanges registered in a particular country.
The cryptocurrency trade analysis is solely a piece of a big puzzle. This is because several ways to effectively hide the trader’s identities via multiple tools exist that range from the Tor network or the dark web through the cryptocurrency mixers, anonymous exchanges like the JoinMarket to the anonymous crypto coins like Monero (XMR). This had made the investigation of the cryptocurrency crimes far more complicated.
Cryptocurrency Crime Span Between 2017 and 2020
The below graph mentions the breakdown by the number and the value of the criminal activities between the different types of the crypto crimes such as terrorism financing, scams, sanctions breaches, hacks, ransomware, blackmail, and the dark web markets or the darknet marketplaces drug trafficking during the period between 2017 and 2020.
The above chart shows the remarkable leap of the crypto fraud from 2018 to 2019. This was possible due to the PlusToken cryptocurrency Ponzi scheme, one of the largest cryptocurrency frauds discovered so far. In this Ponzi scheme, the company had scammed $2.9 billion from more than 2.6 million of the unsuspecting Chinese and South Korean victims via thousands of investor levels. It used multi-level marketing, a very common method that draws in more victims in the pyramid schemes.
The crypto asset values had misappropriated owing to the frauds and the scams occurring per year. Each year, it doubled from 3.65 billion USD to 7 billion USD compared to 2017 over 2020. Of the analyzed years, on average, the crypto crime in the form of fraud bears 77.6% of the total.
The scams have yet not been a systematic risk to the cryptocurrency or digital currency industry as data theft, the value of the misappropriated assets from the scams has significantly been higher than the hacks at a multiple of 7 in 2020. The data theft had comprised 9.6% of the total from the previous year.
In the above visual, the almost vertical notable surge in the hack related illegal activities has been much clearer. It rose 944% from $98.5 million to more than $1 billion between just one year, 2019-2020. This is primarily due to the government-mandated lockdowns. The victims had been spending more time of the day online, which the criminals have entirely taken advantage of.
The dark web markets had experienced a 21.8% surge in the fund flows. The surge was from 1.57 billion USD to 1.92 billion USD. In the same period, the sanctions breaches had continued to take a leap at a high rate of 45.5%, from 281 million USD to $709 million.
Although the sanctions hack had made up only 3.9% of the total breaches in 2020, the risk segment in respect to the others sees a more steady increase. Political Exposed Persons (PEPs) and Specially Designated Nationals (SDNs), along with the sanctions breaches, is not likely to diminish due to the sanctions and the counter-sanctions by the several trade wars raging worldwide continue.
However, the average surge in the total cryptocurrency crime between the above analyzed years is 34.92%. If this rate seems to be steady, projections mention that 2021 would experience an annual value of $14.1 billion. It would be 46.5 billion USD for 2025 and a staggering 207.8 billion USD in 2030.
Major Cryptocurrency Crime Fraud Schemes
Fraud schemes are available in various shapes and sizes that hold the truth of the cryptocurrency asset industry. Since scams and frauds related to cryptocurrency are seen in most cases, it is worthy enough to look further at this kind of illegal activity. Here we have identified 15 major cryptocurrency crime based fraud schemes that are perpetrated by fraudsters.
- Crypto Jacking: Crypto jacking occurs when malevolent hackers acquire control of the victim’s computer for hijacking their CPU power in the bid to mine cryptocurrency. This scam leads the victims to have massive figured energy bills. If it is used prolifically in a network, it could lead to fake market dynamics.
- Crypto Malware: These are viruses that specifically target cryptocurrency users. These viruses attack the accounts and wallets of the crypto users and drain their funds or replace the legit address of the users with that of the fraudsters.
- Exit Scam: The exit scams refer to the fraud taking place when a private key holder cleans out the escrow addresses or the custodian addresses and flees with it. This is mainly seen with the dark web markets, as in the case of Empire Market in August 2020.
- Fake Crypto Exchanges: Fake cryptocurrency exchanges can be seemingly legitimate and carved out of a legit crypto exchange or false darknet marketplaces (DNMs). These exchanges or the darknet markets offer products and services against their currencies and flee with their money.
- Fake ICOs: ICOs or Initial Coin Offerings can be fake, which the scammers use to lure the unsuspecting victims promising them quick profits. The ICOs can be entirely fabricated, bearing false biographies of the “ghost” team members. It can also contain the mirrored technical whitepapers and other mirror images of the additional mainstream crypto assets.
- Fake Wallets / Applications: Simultaneously with the fake ICOs, the app stores are flooded with counterfeit wallets and applications with the same purpose of extracting the client’s cash.
- Honeypot Smart Contracts: In the private Telegram groups, the scammers at times leave behind the private keys to specific addresses or even display traps for the aspiring hackers. However, a smart contract trips them up.
- Investment Scams: The investment scams do not pay out the investors on a periodic basis. However, victims tend to be alerted after they request a withdrawal and hence are stonewalled. One of the classic cases of this type of cryptocurrency crime is the cloud mining scam. Both cryptocurrency mining and cloud mining are pretty complex fields making it easier to scam people with either technologies or those who are not acquainted.
- Market Manipulations: The scammers generally manipulate the crypto-asset markets that involve the transaction of spot and related derivatives. The market manipulation utilizes the spoofing technique, where a large amount of the bid or call orders are canceled quickly. Additionally, it involves front running and churning schemes. The front running scheme refers to the trading of cryptos in the direction of a big call or bid orders before they get executed. The churning method involves excessive trading of the clients’ accounts for generating fees.
- Phishing: The phishing techniques involve acquiring the account details of individuals, such as the usernames and the passwords for fraudulently accessing the victims’ accounts through social engineering.
- Ponzi Schemes: The Ponzi schemes provide the fraudsters opportunity to get rich quickly. The Ponzi schemes require massive funds to pay off the fake returns to the people who adopted the scheme earlier. It has been noticed that in some cases, a “fund” manager initiates operating a fund with original returns. However, at a certain point, they switch to a Ponzi structure. The reason behind the switch could probably be out of two circumstances – one, they became greedy, or two, they are actually making up for huge losses. A prominent example, in this case, is PlusToken.
- Pump & Dump: The cryptocurrency markets are also vulnerable to the classic market manipulations of Pump & Dumps or P&D. The lesser-known and the capitalized crypto-asset owners attempt to drive the price up prior to selling off their holdings at a fake peak. Misleading claims hype the demands. This enables the originators of the pump and dump scheme to acquire large profits. This type of manipulation is prevalent in the crypto market as limited P&D regulations persist.
- Sim Swapping: Most financial applications employ the use of two-factor authentication or 2-FA for increasing security measures. With the aid of the sim-swapping technique, the cybercriminals reroute the 2FA codes sent via the calls or mobile texts to the devices under their control. For doing this, they need to fraudulently claim the device being “lost” to the mobile service provider. Alternatively, they can also intimate that the service had been changed.
- Trust Trading: This refers to a type of scam in which an entity claims to conduct a giveaway. They ask people to send them 0.1 BTC (say for registering themselves for the giveaway), against which the investing individuals will receive 1 BTC. Not only does greed drive trust trading, but the victims are often lured by the scammers who pose as well-known or reputable individuals.
- Vanity Address Scam Generators: The crypto addresses are customizable using the address generators. However, these service providers can leave behind a backdoor into the unsuspecting users’ addresses. With just a single click, they could simultaneously rob them or even practice “Salami Slicing”. Salami Slicing refers to stealing small funds for a more extended period.
Will There Be An End To The Cryptocurrency Crimes?
The conclusion drawn is pretty simple. The cryptocurrency world has now become a crucial part of the global financial system and that it needs to be included in the monitoring as well as analytical effort. As for now, the capability to identify and as well as investigate cryptocurrency crimes has increasingly become the basic need for the international and the national law enforcement agencies.
It has proven itself to be more important preserving the historical data due to the fact that the cryptocurrency world has become even more dynamic. It has also been analyzed that in some of the cases, the crypto crime look back analysis may be particularly impossible and if possible will be very challenging. To cope up with or combat the rising cybercrime, the law enforcement agencies need to possess the right tools.
Thus, we come to the end of the article where we have seen the latest trends in cryptocurrency crime or financial crime, their rise, fall and growth, and some prevalent crypto crimes most prominent in the crypto markets.
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