How blockchain analytics can help to combat cryptocurrency-based crime

Chainalysis’ Head of Global Investigations, Janey Young reveals for The Paypers ways to leverage cryptocurrency’s inherent transparency to ensure that the new financial system is safe from abuse

The last 12 months has been a breakout period for cryptocurrencies. In spite of the global economic damage resulting from the COVID-19 pandemic, there was substantial growth in the crypto ecosystem. Many cryptocurrencies went beyond their existing price records, largely driven by the increased demand from institutional investors, alongside significant consumer adoption of DeFi and NFTs.

As cryptocurrencies become more widely adopted, their use by both good and bad actors will naturally increase. This is particularly true given their pseudonymous nature and the ease with which they allow users to instantly send funds anywhere in the world. However, our 2021 Crypto Crime Report in fact shows that cryptocurrency-related crime consistently hovers at around 1% of transaction volume, and decreased in 2020 compared to 2019.

In 2020, scams made up the majority of all cryptocurrency-related crime at 54% of illicit activity, totalling roughly USD 2.6 billion worth of cryptocurrency received. Darknet markets were the second-largest crime category, accounting for USD 1.7 billion worth of cryptocurrency activity, up from USD 1.3 billion in 2019. But the crime story of 2020 was the rise of ransomware. Although it accounted for only about 7% of illicit transactions, ransomware payments grew more than 300% year over year. No other category of cryptocurrency-based crime rose so dramatically in 2020, as COVID-prompted work-from-home measures opened up new vulnerabilities for many organisations.

That said, it is worth noting that Chainalysis ransomware estimates should be considered at the lower bounds, as they are only the payments Chainalysis has been able to confirm and underreporting of ransomware is an ongoing challenge. Beyond the numbers, ransomware is uniquely destructive in that attacks can cripple local governments and businesses for extended periods of time. Experts estimate that the total economic losses from payments, as well as businesses and governments being taken offline in attacks, could be in the region of USD 20 billion in 2020.

The good news is cryptocurrency provides unparalleled transparency. Every transaction is recorded on a public, unchangeable ledger. This allows financial institutions to ensure they’re working with the safest possible customers. Exchanges and other cryptocurrency businesses can monitor transactions on their platforms for illicit activity in real-time. And government agencies can more easily trace the flow of illicit crypto funds than in most other forms of value transfer. Cryptocurrency’s inherent transparency makes it uniquely safe and efficient.

There is an onus on governments and industry to increase the resources devoted to countering threats and to find more effective ways to collaborate. As it stands, many attackers – like ransomware groups – continue to operate because the potential rewards outweigh the costs. We need to work on effective strategies to de-incentivise bad actors by raising the physical and financial costs of conducting cryptocurrency-based crime.

Traditionally, many exchanges relied on other cryptocurrency services’ publicly stated Know Your Customer (KYC) and Anti-Money Laundering (AML) policies when assessing their riskiness. If the policy was up to scratch, many exchanges would happily treat the service as if it were safe. That approach will no longer count as a sufficient level of due-diligence with institutional money flowing into cryptocurrency like never before. Financial institutions, whether they are buying cryptocurrency of their own, offering custodial services, or accepting cryptocurrency businesses as banking clients, will treat other services with more scrutiny as risk-based compliance becomes the norm. In the long run, these efforts will also remove some of the incentive to use cryptocurrency in criminal activity, as it becomes harder for cybercriminals to convert cryptocurrency into cash.

The excitement about the future of cryptocurrencies exists precisely because of the speed of innovation in the space. Over the past year, we have seen DeFi take off and an influx of institutional dollars. The global pandemic was an extreme test of cryptocurrency’s value as a safe haven asset, and Bitcoin's price surged. But just as the industry is rapidly evolving, so too are the bad actors who commit cryptocurrency-related crime. The public and private sectors must get the resources and tools they need to work together to leverage cryptocurrency’s inherent transparency to ensure this new financial system is safe from abuse.

About Janey Young

Janey Young is Head of Global Investigations at Chainalysis. Prior to joining the company, Janey undertook a wide variety of policing roles including as Head of Investigations at the UK National Cyber Crime Unit and developing the European response to illicit activity on the dark web at Europol.

About Chainalysis

Chainalysis is the blockchain data platform. It provides data, software, services, and research to government agencies, exchanges, financial institutions, and insurance and cybersecurity companies in over 60 countries. Chainalysis data powers investigation, compliance, and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases and grow consumer access to cryptocurrency safely.