Why Law Enforcement Struggles to Curb Crypto Fraud

Agence France-Presse

21 October 2022 | 11:00

PARIS, France — Under the headline “Fraudsters in Paris,” a netizen known as ZachXBT published a blog in August detailing how a pair of youths stole millions worth of crypto assets.

Much to his surprise, the French police announced last week that they had acted on his tip and charged five people.

It was the first time his investigation led to police action, ZachXBT told AFP, despite investigating crypto scams and thefts worth $250 million and chronicling them to his 300,000 Twitter followers.

One explanation for the lack of action is that low-level fraud is not a priority.

The authorities in the EU and the US – the leaders in crypto control – have relentlessly focused on aspects of cryptocrime related to terrorist financing, money laundering and sanctions.

Arrests have been rare at the federal level in the US – the Department of Justice’s specialized unit charged only eight suspects in the first half of this year.

US federal agencies have often focused on headline suspects such as Heather Morgan, an amateur rapper nicknamed “Razzlekhan” who was charged with money laundering in February, and more recently reality TV star Kim Kardashian, who was fined this month for illegally promoting a cryptocurrency. .

Still, specialist crypto firm Chainalysis said more than $3.5 billion had been lost to fraud and hacks between January and July.

AFP contacted police departments and crime agencies in Europe and the US, but none could provide figures for clearance rates or charges for crypto-related crime.

“Fear of Crypto”

The sheer scale of crime is proving difficult for law enforcement agencies that already lack resources for financial crime.

Chainalysis is one of several firms rushing to fill the gap in expertise, selling its tools and services to agencies including the New York Police Department.

Former New York Police Chief Terry Monahan told a recent Chainalysis event that before he resigned last year, officers would deal with three cryptocurrency cases every day.

But they had no way to investigate, so the cases would be closed.

“The victim had nowhere else to go,” he said, pointing out that federal agencies were only interested in cases worth millions.

Another part of the problem is the direction from the top.

The focus on terrorism and the unwinding of sanctions comes as regulators struggle to decide whether crypto assets are securities or commodities.

If they backfill, crypto companies will face so much regulation and fines that the sector could be decimated.

Omid Malekan, a professor at Columbia University, said the maneuvering by US agencies could be seen as “their fear of what a cryptocentric future could mean for US power at home and abroad”.

If decentralized crypto networks revolutionize finance, American politicians would no longer be able to project power the way they do now with the dollar and banks.

“Very little” enforcement

With Washington and Brussels focused on high-value targets, victims of low-level fraud are often left high and dry.

Some people end up asking ZachXBT for help and he has refunded them.

“I would say there is very little law enforcement in the crypto space,” he said, adding that China was particularly unresponsive to his inquiries.

But he said U.S. authorities were at least paying more attention to lower-level fraud.

Fraud has become harder to ignore since crypto lender Celsius went bankrupt owing $4.7 billion to investors.

Many of those who lost were ordinary people sold on the idea of ​​quick and easy profits.

Their testimony to regulators—retirees robbed of their savings, small investors contemplating suicide, farmers losing their livelihoods—restored the image of a typical crypto-scam victim.

“Treasury”

Monahan and Malekan both expect the police to slowly catch up.

Monahan praised the tracking technology provided by the likes of Chainalysis for allowing some funds to be returned.

“At least we got something back for (the victims), we didn’t just take that case and throw it in the trash,” he said.

And Malekan says increasingly sophisticated tools are helping to expose fraudsters despite the much-vaunted anonymity of the blockchain – the digital ledgers where all transactions are stored.

“Once a single participant is exposed,” Malekan said, “their chain history becomes a treasure trove of data to hunt down their entire network”.

However, the damage from years of lax enforcement will be difficult to undo.

“I think the lack of enforcement encourages and emboldens the scammers,” said Molly White, whose project “Web3 Goes Well” chronicles some of the most outrageous scams and thefts in the crypto world.

“I think it’s contributed to a perception that cryptohacks are basically risk-free and high-reward, which a lot of them have been.”