The crypto industry has always been a haven for criminals thanks to soaring popularity, light regulation, and little mainstream knowledge. However, by looking at some prominent trends and familiarizing yourself with security best practices, you can avoid becoming a victim.
Let's look at the state of crypto crime, how decentralized finance plays a growing role, and how you can protect yourself.
How Prevalent Are Crypto Crimes?
Most people would agree that crypto crime is rising, but the scope of these crimes is the subject of much disagreement.
Chainalysis' 2022 Crypto Crime Report found that illicit wallets received about $14 billion last year (2023's report is forthcoming). While that sounds like a large number, it represents just 0.15% of overall transaction volume, which is actually the lowest-ever reading. And a mid-year update in August 2022 shows that these crime rates are on the decline.
Some researchers believe that actual crypto crime rates are much higher. For example, Sean Foley, an associate professor of applied finance at Macquarie University, authored a research paper suggesting that one-quarter of Bitcoin users are involved in illegal activity, and nearly half (46%) of Bitcoin transactions involve illicit payments.
Government regulators tend to fall in line with Foley's assessments. For example, in a July 2021 report of its own, the Financial Action Task Force (FATF) suggested that Chainalysis' evaluation was minimizing the full extent of crypto crime. Many agencies also point to the "unknown unknowns" in illicit wallets, making it hard to determine the true scope of crime.
DeFi's Role in Crime & Money Laundering
Decentralized finance (DeFi) is central in many scams and ubiquitous in money laundering activities.
Chainalysis found that scamming revenue rose 82% in 2021 to $7.8 billion. Of that total, $2.8 billion came from "rug pulls," where scammers posed as legitimate developers before running away with investor funds. In addition, $2.3 billion was stolen from DeFi protocols, meaning they've become a prime target for criminal activity.
In its mid-year update, the firm found that DeFi hacks have continued to rise in 2022. Nearly $2 billion was stolen through July 2022 compared to just under $1.2 billion at the same point in 2021. In particular, North Korea-affiliated hacking groups stole more than $1 billion from DeFi protocols in the first half of 2022 alone.
In addition to theft, DeFi protocols have become popular recipients of illicit funds. Chainalysis reckons that criminals laundered about $8.6 billion in crypto last year, representing a 30% increase over 2020. That's likely because DeFi protocols don't have to follow the same "know your customer" laws as centralized exchanges.
Several state-sponsored hackers and terrorist groups have caught on to these capabilities. For example, a North Korea-affiliated hacking group stole approximately $400 million in crypto in 2020 before laundering it through a series of DeFi protocols in 2021. Their success could encourage other groups to do the same.
How to Protect Yourself
Government agencies and law enforcement are stepping up their efforts to prevent these crimes. For example, the U.S. Treasury sanctioned Tornado Cash in August 2022, making it much more difficult for criminals to launder money through the service. And in 2021, the IRS and DOJ recouped billions of dollars worth of illicit funds.
While these efforts could help address money laundering concerns among organized criminals, there's only so much that governments can do to protect crypto users from thefts and scams. The best way to avoid losing money is to take basic steps to secure your crypto accounts and minimize the risk of falling victim to scams.
Five of the most essential best practices include:
- Multi-factor Authentication – Always use multi-factor authentication when using online exchanges to buy, sell, or hold cryptocurrencies. That way, hackers cannot compromise your accounts even if they know your password. The safest option is a hardware key since SMS-based codes can be easily intercepted using SIM swap scams, and phones can be hacked.
- Hardware Wallets – Hardware wallets (primarily offline "cold" storage) are the safest way to store cryptocurrencies. For example, you might keep most of your holdings in a physical hardware wallet stored in a safe and only a tiny amount in a "hot" exchange wallet. Just make sure you don't lose the hardware wallet.
- Take a Minute – Most scammers use the fear of missing out (FOMO) tactic to trick victims into quickly delivering tokens into scam accounts or investing in illegitimate businesses. The best way to avoid these common pitfalls is to carefully assess a potential opportunity, double-check URLs, and do your due diligence.
- Use a VPN – Public WiFi networks are notoriously susceptible to man-in-the-middle attacks whereby a hacker intercepts and analyzes traffic for passwords or other data. You can avoid these problems using a virtual private network (VPN) that encrypts your traffic through a secure tunnel – even on public networks.
- Diversify Investments – The crypto industry has seen even the most seemingly-reliable companies implode from scams or fraud. As a result, it's a good idea to hold assets across several DeFi protocols and centralized exchanges in case any single protocol or exchange experiences a hack or other issue.
The Bottom Line
Crypto crimes have been on the rise for years, but the crypto winter could help reduce crime rates in 2022. That said, some areas of the market continue to see a secular increase in crime rates, including decentralized finance (DeFi). As a result, crypto investors and enthusiasts should double down on security best practices to remain safe.
If you buy, sell, or trade crypto assets, ZenLedger can help you organize your crypto holdings, aggregate transactions across wallets and exchanges, and compute your capital gain or loss each year. You can even identify ways to save throughout the year using tax loss harvesting.
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax or other advice specific to your particular situation.