Cryptocurrency-based crime breaks $14 billion record in 2021

However, according to a preview of Chainalysis’s 2022 Crypto Crime Report to be published in February, the volume of illegal activities remains a small fraction of the total cryptocurrency transaction volume.

Cryptocurrency trading volume increased to $15.8 trillion in 2021, up 567% from 2020, a sign that digital asset trading is increasingly becoming mainstream. Illegal transactions totaled $14 billion in 2021, up 79% from the previous year’s $7.8 billion. But illegal transactions made up only 0.15% of cryptocurrency trading volume in 2021.

While the risk remains for potential cryptocurrency investors, Ross Dalston, a Washington, DC attorney who advises clients on anti-money laundering issues, said he does not expect interest levels to drop any time soon.

“What is so interesting about cryptocurrency is that we usually associate it with illegal transactions; there is a lot of news about anything that can go wrong with crypto,” he said. “As Chainalysis points out in the report, it is only a small fraction of transactions that are criminal in nature.”

In its report, Chainalysis warned that its tracked volume of illegal activity is likely to increase later as the company identifies more bad actors and incorporates data derived from it into its historical analysis. The company said that with the exception of 2019, which was notable for the PlusToken cryptocurrency scam, bad actors made up a small component of overall cryptocurrency trading volume over the past few years.

Chainalysis also warned that the rise of DeFi, or decentralized finance—an umbrella term for financial services offered on public blockchains—is a particularly dangerous threat to the sector.

According to Chainalysis, 72% of the approximately $3.2 billion in cryptocurrencies stolen in 2021 were stolen from the DeFi protocol.

According to Chainalysis, DeFi is also a popular method of money laundering. According to the company, the use of DeFi as a method of money laundering grew by 1,964% between 2020 and 2021.

Jeffrey Alberts, partner at Prior Cashman LLP, a law firm focusing on fintech, said the Chainalysis report is valuable, but has limitations. For example, he said that the data does not capture all illegal transactions, but only those crypto addresses associated with Chainalysis illegal activity and can exclude addresses that Chainalysis does not know that belong to known criminals.

“All of this said, it is clear that there was a huge increase in legitimate activity involving cryptocurrencies in 2021,” he said, adding that this trend is likely to continue this year.

Alex Zherdan, who worked on policy issues related to illicit finance in both the Obama and Trump administrations, said the report from Chainalysis is a useful contribution to the public’s understanding of trends in illicit finance involving cryptocurrencies, but that it would be beneficial to have additional clarity. On the definitions of “illegal activities” mentioned in the report. He said having a common language among various regulators and industry observers would help in discussing the issue from a policy development perspective.

“Having other academic, quasi-academic analysis would help support these claims, and further transparency on the flow of funds is welcomed,” said Mr. Zurdan, founder of fintech advisory firm Capital Peak Strategies LLC and a Assistant Senior Fellow at the Washington-based Center for a New American Security.