New fraud types hit crypto industry

As the year canters on and the dust settles on the crypto crash, it might be tempting to think crypto’s over.

New fraud types hit crypto industry

But think again: as of January 3, 2023, more than $800 billion is still held in crypto around the world, with roughly a third of that in Bitcoin alone.

Furthermore – the notorious volatility of this instrument notwithstanding – Bitcoin’s value went up around 10% in the first few days of the new year and is holding.

There are other reasons why those proclaiming crypto’s demise might want to temper their predictions.

“Criminals have used new fraud types to launder $4 billion.”

To start with, governments’ continued ambitions to introduce Central Bank Digital Currencies (CBDCs) – despite the many complexities – has heightened the attraction of crypto to some.

That’s because if CBDCs are ever introduced, crypto could be transferred and used for payments on the same rails, considerably widening its utility.

Another group for whom crypto’s attractions have not diminished is the criminal fraternity.

DEX puts crims in the mix

While a wide range of security measures have been introduced by big exchanges such as Coinbase, Binance and Kraken, the recent FTX scandal shows just how deep criminal involvement in crypto runs.

Despite the best efforts of international, national and supra-national bodies to strengthen KYC and AML requirements – plus much better end-to-end transaction monitoring – a new report from Elliptic suggests criminals have used new developments in crypto trading to launder some $4 billion of criminal proceeds, more than a quarter of which ($1.2 billion) has been stolen from crypto wallets.

Criminals and high-risk entities are using Decentralised exchanges, or DEXs, cross-chain bridges and coin swap services to launder their funds.

DEX facilities allow crypto assets to be swapped on the same blockchain, unlike traditional trading which requires users to hold a wallet, load it with fiat money and use the fiat money (or proceeds from crypto) to fund purchases.

As a result, traditional exchanges can lay claim to a far clearer “paper trail” for their transactions than swapping between coins on the same chain.

“$2.4 billion has been laundered using crypto swaps.”

Elliptic’s report says some $1.2 billion of stolen crypto from DeFi or exchange thefts have been swapped using DEXs – over a third of all crypto stolen.

Some of the most prolific perpetrators include hackers, dark web markets, online gambling platforms, illicit virtual asset services, ponzi schemes and ransomware.

Elliptic add that a further $1.2 billion in illicit assets has been laundered using “coin swap” services, which allow users to swap assets both within and across blockchains without opening an account.

Many are advertised on Russian cybercrime forums and cater almost exclusively to a criminal audience.

A final, related form of fraud comes from “crypto bridges”, which allow value swaps between different coins on different platforms.

Whichever method is used, the objective is clear – to obfuscate the source of funds, obscure the chain linked to those funds, and enable criminals to eventually exit their cash via legitimate, monitored transactions via regulated exchanges and bank accounts linked to those exchanges.

PCM SAYS:

New fraud types were always going to emerge as the crypto market becomes more sophisticated.

However, the prevailing wisdom that “crypto is done” ignores not just the huge asset base that remains vested in digital currencies, but also the ongoing susceptibility to fraud of the entire decentralised finance paradigm, especially now the temptation is to dismiss crypto as a viable means of exchange.

Ignoring crypto – and in particular, the criminal entities exploiting it – would be a serious mistake, especially as instant payments and account-to-account (A2A) transactions surge.

It’s not hard to foresee criminal entities exiting their laundered funds from crypto, then executing several instant payments to disperse the cash.

Given the challenges in performing adequate KYC and AML checks in instant payments, this is just one area among many that both regulators and law enforcement should be looking at more closely.

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