The crypto winter did not chill fraudsters

Even the criminals have felt the cold of the crypto winter.

Kim Grauer, director of research at Chainalysis, told PYMNTS that the state of crypto-related fraud … depends on where you look.

The interview came on the back of Chainalysis saying last month that the money the bad actors made from various scams – such as NFTs and romance – was halved. The 46% cut took the total of fraud-related shipments to $5.9 billion.

“Fraud is tied to market prices,” she told PYMNTS, “and because we’re in a bear market, the trend of fraud has gone down.”

And, she noted, “the bread and butter crimes,” she said, “Darknet marketplaces and scam shops saw massive declines in 2022.”

This is primarily due to the closure of Hydra, which had functioned as a marketplace for drugs and illegal goods and services. Hydra was shut down by the authorities a little less than a year ago, and millions of dollars worth of bitcoin were seized.

But at all? Cryptocrime hit a record high of $20.6 billion last year, up from $18 billion in 2018. And it is what Grauer noted is a “lower bound” estimate, almost certain to be revised upward. More than 40% of the 2022 volume can be traced to sanctioned entities – the exchanges and individuals and services targeted by the Office of Foreign Assets Control (OFAC) – behind hacking, ransomware, drug trafficking, money laundering and terrorist financing.

The amount of illegal transactions from that segment more than doubled last year, Grauer said, helping to push the overall numbers higher. High-risk crypto exchanges, mainly based in Russia, are “off ramps” for these crime networks, she said.

Following the money in the 21st century^St Century

That $20 billion figure, she said, “reflects how much of the volume associated with and moving the blockchain is illegal in nature.” The immutable electronic trail of the blockchain makes it possible to – in the old slogan from Watergate 50 years ago – follow the money. To that end, it has been possible, Grauer said, to crack cases that are six or seven years old – and based on new information ties to the transactions that eventually come to light.

Drilling down a bit into what the following money has uncovered, geographically speaking:

“North Korea is by far the most prolific hacking industry,” she noted, “and they took $1.7 billion in 2022 alone out of the $3.8 billion stolen [from hacking]. … What is special or unique about the North Korean hacker organizations is how they lean into the use of new technology to launder money.” That includes ransomware and NFT scams, she observed.

Where crypto is used – legal

The headlines may be focused on the bad actors, but it’s important to note, as Grauer shared, that the illegal activity in cryptocurrency is still a small percentage of the total volume, at less than 1%. There are many use cases that highlight the interest in, and the value of using, crypto for a variety of use cases.

Grauer said Chainalysis’ data shows that a wide range of services are popular in certain parts of the world. NFTs are popular in India. In Argentina, individuals use stablecoins to protect against the ravages of inflation.

“People all over the world are using cryptocurrencies to meet various needs specific to their social, political and economic conditions,” she said.

Fraud remains a concern

Despite the lingering impact of the crypto winter, fraud remains a problem area.

“Typically, we would just put fraud in one category,” Grauer said, “and for a long time that was sufficient because the vast majority of fraud was investment fraud.” Looking ahead, and with a nod to where criminals are finding opportunities, Chainalysis has found that “pig slaughtering” is growing as a preferred approach by criminals.

These scams mix elements of romance scams and investment scams, where scammers create social profiles and personas that manipulate victims into investing in/sending crypto. Rather than waiting for victims to come to them, scammers are prodding and proactive as they reach out across apps and text messages to find new targets.

“The scammers may not have made as much money as before,” Grauer said, “but they’re not going to give up … and we know that criminals are among the fastest to adapt and pivot” to new opportunities.