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Scammers took home a record $ 14 billion in cryptocurrency in 2021, thanks in large part to the rise of decentralized finance platforms (DeFi), according to new data from blockchain analytics firm Chainalysis.
Crypto-related crime losses were up 79% from the previous year, driven by an increase in thefts and scams.
Scam was the largest form of cryptocurrency-based crime in 2021, followed by theft, most of which occurred by hacking cryptocurrency businesses. The firm says DeFi is a big part of the story for both of them, in another warning for those venturing into this emerging segment of the crypto industry.
"DeFi is one of the most exciting areas of the broader crypto ecosystem, presenting enormous opportunities for both entrepreneurs and crypto users," Chainalysis wrote in its annual report. Crypto Crypto Report.
"But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also enables widespread scam and theft."
DeFi's Wild West
DeFi is a fast-growing sector of the crypto market that aims to weed out intermediaries, such as banks, from traditional financial transactions, such as obtaining a loan.
With DeFi, banks and lawyers are replaced by a programmable code called a smart contract. This contract is written on a public blockchain, like ethereal or solarium, and it runs when certain conditions are met, which negates the need for a central broker.
"The financial system is basically sending money with various terms and conditions," said Joey Krug, chief investment officer at Pantera Capital, an asset manager focused on cryptocurrencies and blockchain.
DeFi's transaction volume grew 912% in 2021, according to statistics from Chainalysis. The impressive returns from decentralized tokens like shiba inu also sparked a frenzy among DeFi tokens.
But there are many red flags when it comes to dealing with this fledgling crypto ecosystem.
One problem with DeFi, according to Kim Grauer, head of research at Chainalysis, is that many of the new protocols being released have code vulnerabilities that hackers can exploit. 21% of all hacks in 2021 took advantage of these code exploits.
Grauer tells CNBC that while there are third-party firms that conduct code audits and publicly designate which protocols are secure, many users still choose to work with risky platforms that bypass this step if they think they can get a great return.
Crypto theft increased 516% from 2020, to $ 3.2 billion worth of crypto. Of this total, 72% of the stolen funds were taken from DeFi protocols.
Scam losses increased 82% to $ 7.8 billion in cryptocurrencies.
More than $ 2.8 billion of this total comes from a relatively new but very popular type of scheme known as a "carpet pull," in which developers build what appear to be legitimate cryptocurrency projects, before finally taking the money from investors and disappear.
"Given the hype around DeFi, people may have been more in agreement with the use of less secure platforms due to fear of losing potential profits," he explained. Grayer.
Crime statistics don't tell the whole story
Cryptocurrency-related crime may be at an all-time high, but researchers note that the growth in legitimate use of cryptocurrencies far outpaces the growth in criminal use.
Transactions involving illicit addresses accounted for an all-time low of just 0.15% of the $ 15.8 trillion in total crypto trading volume in 2021.
The investigation firm identifies illicit funds based on their connection to a confirmed illicit activity. For example, funds would be considered illicit if they were sent to or from a darknet marketplace, or if they were known to have been stolen in a hack.
"The fact that the increase was only 79%, almost an order of magnitude lower than mainstream adoption, might be the biggest surprise of all," wrote Chainalysis.
"Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem," the report continued.
Researchers attribute the slowed growth of crypto-based crime in part to the evolving suite of law enforcement tools, as well as the transparency inherited from blockchain technologies.
Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.
Chainalysis
2021 Crypto Crime Report
Unlike cash and other traditional forms of value transfer, each transaction is recorded on a publicly visible ledger and, with the right tools, Grauer says it is possible to see how much of all cryptocurrency activity is associated with crime.
"The authorities have been enormously successful in leveraging blockchain transparency to investigate and stop illicit activity," Grauer said.
In November, for example, the IRS Criminal Investigations agency said it had seized more than $ 3.5 billion in cryptocurrency in 2021, all from non-tax investigations, representing 93% of all funds seized by the division during that period of time.
Other victories for law enforcement in 2021 included the seizure of $ 56 million from the Justice Department in a cryptocurrency scam investigation, $ 2.3 million seized of the ransomware group behind the Colonial Pipeline attack, as well as an undisclosed amount seized by the Israel National Office for Combating the Financing of Terrorism in a case related to terrorist financing.
