Crypto Crime Soared in 2021, But So Did Usage: Chainalysis

A significant rise in cryptocurrency-related crime accompanied the rise of decentralized finance in 2021. While crypto crime rates hit record highs in absolute numbers, illicit crypto transactions marked record lows in relative terms, representing just 0.15% of the total transaction volume in 2021.

Chainalysis: Crypto Crime Hit Record Highs in 2021

Data suggests that crypto is still the Wild West of finance.

According to the latest crypto crime report published by renowned blockchain intelligence firm Chainalysis, crime involving cryptocurrencies hit an all-time high of $14 billion in 2021.

Crypto transactions linked to illicit activity jumped 79% from the year before, while the total crypto transaction volume grew by 550%. Interestingly, illicit activity represented just 0.15% of the total crypto transaction volume in 2021, marking a 126% decline from 2020 and a record low.

According to Chainalysis, the yearly trend suggests that crime is becoming an ever-smaller part of the cryptocurrency ecosystem. However, with the amount of illicit activity sitting at roughly $14 billion, the chances of the industry seeing an increased regulatory and enforcement activity this year are growing.

Notably, the decentralized finance sector played a central role in crypto crime in 2021, with scams and stolen funds growing by 82% and 516% respectively from the previous year. Most of that activity was related to DeFi protocols on smart contract networks like Ethereum and Polygon. 

Scamming revenue totaled $7.8 billion, over 2.8 billion of which reportedly came from “rug pulls”—a type of scam where crypto founders abruptly abandon their projects, pull the liquidity away from centralized or decentralized exchanges, and run away with the funds. Rug pulls are particularly common in DeFi as it’s relatively simple to withdraw funds from a liquidity pool. Plus, many developers stay anonymous, making it difficult to track those responsible for malicious activity. 90% of the total value lost due to rug pulls in 2021 resulted from an incident concerning the Turkish centralized exchange Thodex, where the founder took off with over $2 billion in user funds. Six people were subsequently jailed.

On the other hand, cryptocurrency theft totaled roughly $3.2 billion, with DeFi incidents accounting for the majority of the losses. 72% of the $3.2 billion total was stolen from decentralized finance platforms. In December alone, Crypto Briefing reported on five DeFi hacks amounting to roughly $271 million in stolen funds. Chainalysis further reported that DeFi protocols saw the most growth by far in usage for money laundering, marking a 1,964% increase compared to the year before.

According to Chainalysis, as of early 2022, illicit addresses held over $10 billion worth of cryptocurrency, the vast majority of which was associated with theft. The growing absolute volume of crypto-related activity has caught the attention of regulators and enforcement agencies worldwide over the last year. In response, last year, the U.S. Department of Justice created a special crypto task force, dubbed the National Cryptocurrency Enforcement Team, with a mandate to “tackle complex investigations and prosecutions of criminal misuses of cryptocurrency.”

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.