Illicit transaction volume in crypto hit ATH in 2022
A much-anticipated annual report has revealed that 2022 experienced more crypto crime than any other year.
The industry-respected Chainalysis ‘Crypto Crime Report’ paints a disturbing picture in which illicit transaction volume reached an all-time high of more than $20bn.
Alarmingly, this figure does not take into account current investigations into several large crypto firms which imploded last year – Celsius, Three Arrows Capital, FTX and others where allegations of fraud have been made.
“Those allegations make this year’s Crypto Crime Report a bit tricky, as some feel that those businesses should be treated as criminal enterprises,” the report states.
“Ultimately though, we don’t include their transaction volumes in our measures of illicit activity because our estimates are based solely on on-chain intelligence – we don’t account for instances where, for example, off-chain bookkeeping may have been fraudulent.
“Plus, the bankruptcy and criminal cases associated with these collapses are still ongoing, so for the time being, we’ll leave questions of criminality to the legal system.”
It goes on to say the events of last year have made clear that although blockchains are inherently transparent, the industry has room for improvement in this respect.
There are opportunities to connect off-chain data on liabilities with on-chain data to provide better visibility, and the transparency of all transactions on-chain in DeFi is a standard that all crypto services should strive to achieve, the report adds.
There’s also a stark warning over the all-time high figure of $20.1bn.
“We have to stress that this is a lower bound estimate – our measure of illicit transaction volume is sure to grow over time as we identify new addresses associated with illicit activity, and we have to keep in mind that this figure doesn’t capture proceeds from non-crypto native crime (such as conventional drug trafficking involving cryptocurrency as a mode of payment).
“For example, last year we published that we found $14 billion in illicit activity in 2021 – we’ve now raised that figure to $18 billion, mostly due to the discovery of new crypto scams.”
Despite the alarm, the Chainalysis 2022 report reminds readers that illicit activity in cryptocurrency amounts to small fraction of all activity.
“Overall, illicit activity in cryptocurrency remains a small share of overall volume at less than one per cent,” it states.
“It’s also worth keeping in mind that despite this year’s jump, crime as a share of all crypto activity is still trending downwards.
“It’s also worth keeping in mind that 44% of 2022’s illicit transaction volume came from activity associated with sanctioned entities, in a year when OFAC launched some of its most ambitious and difficult-to-enforce crypto sanctions yet.”
Crypto exchange Garantex, which accounted for the majority of sanctions-related transaction volume last year, is cited as a good example. OFAC sanctioned Garantex in April 2022, but as a Russia-based business, the exchange has been able to continue operating with impunity.
Transactions associated with Garantex or any other sanctioned crypto service represent, at the very least, substantial compliance risk for businesses that are subject to US jurisdiction, including fines and potential criminal charges.
Note: Sanctions-related transaction volume rose 10,012,224.34% from 2021 to 2022 – and this not reflected on the graph above due to the scale issues it would create.
Transaction volumes fell across all of the other, more conventional categories of cryptocurrency-related crime, with the exception of stolen funds, which rose 7% year-over-year. The market downturn may be one reason for this.
Chainalysis says it found in the past that crypto scams, for instance, take in less revenue during bear markets, likely because users are more pessimistic and less likely to believe a scam’s promises of high returns at times when asset prices are declining. In general, less money in crypto overall tends to correlate with less money associated with crypto crime.
Overall, the share of all cryptocurrency activity associated with illicit activity has risen for the first time since 2019, from 0.12% in 2021 to 0.24% in 2022.
This shouldn’t come as a huge surprise. As one might expect, total transaction volume fell with the onset of the bear market and, as demonstrated above, illicit transaction volume grew slightly. In fact, Chainalysis says they first spotted this trend back in August, when it was noted that legitimate transaction volumes were declining faster than illicit volumes.
View the full Chainalysis Annual Crypto Crime Report which digs into the details of the criminal activity behind that 0.24%, as well as what the on-chain analysis reveals about the market failures of the last year.