Does it seem like 2022 has been the worst year for illicit activity in crypto? I hate to say that it is the “wild west,” because the term is an overused simplification, but it feels like bandits are making off with our money at an unprecedented rate.
If you disagree, you are actually right. The data around illicit activity is far more nuanced than the headlines would lead us to believe.
I covered this exact topic yesterday in a short news segment titled, “Scams Are Slowing Down,” which was based on a recent research report from Chainanalysis. I wanted to revisit the findings because, in crypto, it’s far too easy to assume the worst. For instance, just this year alone, we had record-breaking DeFi hacks - namely Ronin, Wormhole, and Beanstalk. Just last week Solana wallets were drained. We all have PTSD and are shell shocked, waiting to open our wallets and find them empty. But things are not as bad as they seem.
The first thing that the report does is to distinguish the 3 different types of illicit activity that dominate the crypto space: scams, darknet markets, and hacking/stolen funds. The results are far from black and white. You will see what I mean.
Value received by illicit entities (scams) is down 15% vs. last year but so too is the value received from non-illicit (legitimate) activities, which is down 36%. In summation, legitimate volume this year has dropped faster than illegitimate volume by a factor of two. Scams are more resilient to the bear market but are down overall. Although I like the baseline of showing overall volume, there is also the consideration of the percentage of new entrants in the market, who are most likely to fall for scams.
Another nuance in the discussion of illicit activity is how falling prices affect data. For instance, if Bitcoin was 3x more valuable in 2021 than it was in 2022 then it’s easier to conclude scams were worse if you don’t dig into the numbers based on USD value. As a hypothetical, let’s say Bitcoin was worth $60,000 on average in 2021 and $20,000 in 2022. If that were the case, then 100 Bitcoins stolen in 2021 would be a USD equivalent to 300 Bitcoins stolen in 2022. But 300 Bitcoins is clearly worse than 100 Bitcoins.
The report shows that scam revenue closely mirrors the Bitcoin chart. Until the two diverge, it’s hard to argue scams have significantly decreased. What was positive in the scam category is the fact that fewer people overall are falling for scams. There is an undeniable drop in the number of total victims, which could be attributed to better education. I’m going to conclude that for the category of scams, there isn’t a definitive improvement.
Darknet market revenue is reportedly down 43% from this point last year. Furthermore, the cumulative value sent to darknets is sitting below 2021 and 2020 and is on pace to cross below 2019’s value sent. A major contributor to this year’s decrease in value sent relates to authorities shutting down Hydra market, a well-known criminal hotspot for drugs, hacking tools, stolen data, and money laundering services. Total deposits to the darknet are also well below the 2021 and 2020 numbers. Law enforcement are doing their job and crypto is being used less for illicit activity. This is positive.
Hacking and Stolen Funds
This category is the worst… but maybe not as bad as we think. 2022 is currently worse than 2021 and other years in terms of cumulative monthly stolen funds in USD - by about 35% as of July. According to Chainanalysis, it is suspected that North Korea’s Lazarus Group has stolen over $1 billion in 2022 alone.
2021’s worst hack came in August, so the numbers are misleading. If there are no major incidences this month, then 2022 will likely fall BEHIND 2021.
Hacks are a tough category to avoid. It’s code-dependent, a foreign language to 99% of us who aren’t capable of understanding the plumbing. Our only safety net is using major platforms or self-custody and hoping for the best. And even with all of the known hacks, DeFi users won’t stop using platforms, which means that there are endless green fields for bad actors.
Overall, I think it’s safe to say that the current state of the crypto market isn’t as bad as the headlines. Darknet activity is down dramatically, scams are about even, and hacks could eke out a year better than the last if we get our shit together.
In the coming years, all three of these categories will see massive improvements and the “wild west” moniker will be a distant memory.