Chainalysis: What impact does the market downturn have on cryptocurrency criminal activity?

2022 will be a turbulent year for the cryptocurrency market. All cryptocurrencies saw sharp price drops in May and June. While it is not known if we have bottomed out, July-August was relatively stable, with Bitcoin prices hovering between $20,000 and $24,000.

How has the market downturn affected cryptocurrency criminal activity?

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All cryptocurrency trading volumes have fallen this year due to the drop in prices, but crypto crime appears to be more resilient: criminal volumes are down just 15% year-over-year, while legitimate volumes are down 36%. However, aggregated data does not tell the whole story. If we dig into specific forms of cryptocurrency crime, we see that some of them actually increased in 2022, while others fell more than the market as a whole.

Decrease in scam revenue

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Total cryptocurrency scam revenue in 2022 is currently $1.6 billion, which is 65% lower than at the end of July 2021, a decline that appears to be related to a drop in cryptocurrency prices. 

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Since January 2022, scam revenue has more or less moved in line with Bitcoin price. As we can see from the graph below, it’s not just scam revenue that is down, the cumulative amount of funds transferred by individuals to scam wallets is at its lowest level in the past four years. 

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These figures show that fewer people are falling into cryptocurrency scams than ever before. One reason for this may be that as asset prices fall, cryptocurrency scams (often promising huge returns) become less attractive to potential victims. Also, as cryptocurrency prices are falling, new, inexperienced users who are more likely to fall for scams are not as common in the market.

It’s also important to remember that scam revenue is often driven by large scams, such as PlusToken, which defrauded victims of over $2 billion in 2019, or Finiko, which defrauded victims of over $1.5 billion in 2021 . As of July 2022, there have been no major scams that have come close to either level this year.

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The biggest scam of 2022 so far has defrauded $273 million worth of cryptocurrency, which is only 24% of Finiko’s by the end of July 2021. However, this also has a downside: since total scam revenue for the year studied is typically made up of one or two large scams, it is possible that a large scam will emerge before the end of 2022 and reverse the decline in scam revenue we are currently seeing.

Darknet market revenue declines

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Darknet market revenue has also declined significantly in 2022, currently 43% below July 2021 levels, and has fallen sharply in April 2022, which is certainly due to the sanction and closure of Hydra Marketplace on April 5th, The marketplace served as a major darknet marketplace for years, serving as a hub for drug sales, hacking tools, stolen data and money laundering services.

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Pictured above is the message displayed on Hydra’s homepage after it was shut down by German law enforcement.

Interestingly, while overall darknet market revenue declined following the closure of Hydra, transaction volumes on the remaining markets increased significantly.

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We suspect this growth represents a move of Hydra merchants and customers to new markets in search of alternatives. However, the drop in darknet market revenue following Hydra’s shutdown shows the tangible impact of law enforcement’s growing ability to combat cryptocurrency-based crime.

Hacking and stolen funds are on the rise

No cryptocurrency-based criminal activity can reverse the 2022 decline in revenue, such as stolen funds. 

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Cryptocurrencies worth $1.9 billion were stolen by July 2022, compared to less than $1.2 billion at the same time in 2021. This trend doesn’t seem to be reversing anytime soon, as two more things happened in the first week of August: Token cross-chain bridge Nomad was hacked with $190 million in funds ; hackers stole from over 8,000 Solana wallets $5 million in funding . (These two events are not shown in the graph above because we chose July 31st as the cutoff point for our study). 

Much of this can be attributed to an increase in hackers stealing funds from DeFi protocols, a trend that began in 2021. As we’ve covered before, DeFi protocols are particularly vulnerable to hackers because their open source code can be researched by hackers and looking for exploits (though open source code is inherently more secure). Additionally, most of the assets stolen from DeFi protocols can be attributed to North Korea-related hacking groups, especially elite hacking groups like the Lazarus Group. We estimate that by 2022, North Korea-linked hacking groups have stolen around $1 billion in cryptocurrency from DeFi protocols. 

We shouldn’t “fantasy” that hacker theft will decline based on the movements of the cryptocurrency market like scams — as long as DeFi protocols and other services hold large and vulnerable cryptocurrencies, then hackers will try to steal them. The only way to stop hackers is for the crypto industry as a whole to strengthen security and educate investors on how to judge whether a project is safe or not. At the same time, law enforcement must also continue to develop capabilities to counter theft by hackers. 

Crypto crime is down, but it can’t be slack

No one likes a bear market, but it’s heartening that illicit cryptocurrency activity has dropped alongside legitimate trading volumes, albeit not by as much.

Of these, the drop in scams is the most encouraging, with less hype appearing to mean fewer people being fooled by scammers. In darknet markets, the closure of Hydra markets by law enforcement appears to have dampened the entire marketplace for illicit trade. Still, with the massive increase in stolen funds, we cannot rest on our laurels. The public and private sectors must continue to work together and hone their ability to fight cryptocurrency-based crime.

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risk warning:

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Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/chainalysis-what-impact-does-the-market-downturn-have-on-cryptocurrency-criminal-activity/
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