Increase happens amid surge in sanctions designations and hacking.
2022 was one of the most tumultuous years in cryptocurrency history, with several large firms imploding, including Celsius, Three Arrows Capital, FTX, and others — some amid allegations of fraud.
Those allegations make this year’s Chainalysis Crypto Crime Report a bit tricky, as some feel that those businesses should be treated as criminal enterprises. Ultimately though, the platform doesn’t include their transaction volumes in its measures of illicit activity because its estimates are based solely on on-chain intelligence — it doesn’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, it will leave questions of criminality to the legal system.
The events of this 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. As more and more value is transferred to the blockchain, all potential risks will become transparent, and analysts will have more complete visibility.
For now though, Chainalysis continues to focus on illicit activity that can be measured on-chain.
Let’s look at how the market tumult of 2022 affected cryptocurrency-based crime.
Despite the market downturn, illicit transaction volume rose for the second consecutive year, hitting an all-time high of $20.1 billion. Chainalysis stresses that this is a lower bound estimate — its measure of illicit transaction volume is sure to grow over time as it identifies new addresses associated with illicit activity, and has to keep in mind that this figure doesn’t capture proceeds from non-crypto native crime (e.g. conventional drug trafficking involving cryptocurrency as a mode of payment). For example, last year the platform found $14 billion in illicit activity in 2021 and has now raised that figure to $18 billion, mostly due to the discovery of new crypto scams.
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 a great 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 – Chainalysis does not include that 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 has 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. (For those keeping a close eye on Chainalysis' annual analyses, you may be surprised to find that its estimate for the illicit share of all cryptocurrency transaction volume for 2021 actually decreased from the number it published in last year’s report – 0.15% to 0.12%. Don’t these estimates usually increase over time, as mentioned above? In this case, its denominator – total volume analyzed – increased as it added mature support for additional blockchains.)
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 showed above, illicit transaction volume grew slightly. In fact, Cgainalysis first spotted this trend back in August, when it noted that legitimate transaction volumes were declining faster than illicit volumes.
Overall, illicit activity in cryptocurrency remains a small share of overall volume at less than 1%. 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. Chainalysis full 2023 Crypto Crime Report will dig into the details of the criminal activity behind that 0.24%, as well as what its on-chain analysis reveals about the market failures of the last year.