The value of illicit cryptocurrency transactions rose to a record high in 2022 amid arguably the most troublesome year for the highly-volatile industry, a new report from Chainalysis shows.
The value received by dubious wallets — virtual places where cryptocurrency can be stored securely — climbed more than 11 per cent to roughly $20 billion in 2022, from about $18 billion a year earlier, the New York-based blockchain platform said in its 2023 Crypto Crime Trends report on Thursday.
“While concerning, this rise can be explained by the fact that due to the bear market, there was a drop in overall transaction volume while illicit transaction volumes declined at a slower rate,” Kim Grauer, director of research at Chainalysis, told The National.
The cryptocurrency industry has witnessed a period of continued price declines since last year. Its market capitalisation peaked at more than $3 trillion in November 2021, but has since declined, and as of Thursday, stood at around $866 billion — a plunge of almost three quarters — according to data from CoinMarketCap.
Last year was one of the most tumultuous in cryptocurrency history, with the implosion of several large crypto firms including Celsius, Three Arrows Capital and, most prominently, FTX, which filed for bankruptcy on November 11.
The downfall of the exchange once valued at $32 billion rocked the entire industry, dealing a blow to arguments making a case for the viability of digital currencies and attracting more scrutiny from regulators on how they handle user assets.
FTX founder Sam Bankman-Fried is facing criminal charges in the US.
Job losses have also added to the industry's woes. On Tuesday, Coinbase, one of the world's biggest crypto platforms, said it was slashing 20 per cent of its workforce, its third round of cuts in eight months.
“While crypto is already more transparent than traditional finance, these collapses demonstrate there are opportunities to connect off-chain data on liabilities with on-chain data to provide better visibility,” Ms Grauer said.
The events of 2022 are an indication that although blockchain — the underlying technology behind cryptocurrencies and decentralised finance (DeFi) — are inherently transparent, the industry has room for improvement in this respect, Chainalysis said.
“It is pivotal for the industry to help the investing public understand the opportunity and corresponding risks that come with investing in cryptocurrencies,” Jehanzeb Awan, chairman of the Middle East, Africa and Asia Blockchain Association, wrote in a note this week.
“The importance of holistic regulation to minimise regulatory arbitrage is key to reducing the impact of the recent events as well as bringing confidence back to the industry.”
About 44 per cent of illicit cryptocurrency volumes in 2022 came from activity associated with sanctioned entities, during which the US Office of Foreign Assets Control (Ofac) launched major, but difficult-to-enforce crypto actions, Chainalysis said.
Other notable addresses involved in illegal activity include those working for stolen funds, scams and the darknet market, which offers illicit goods for sale and usually trades in cryptocurrencies for payment.
“The level of transparency that is inherent to DeFi is what all crypto services should strive towards. As more value moves on-chain, transparency will increase and systemic risks will be easier to identify,” Ms Grauer said.