The stigma associated with crypto is largely unwarranted

Although cryptocurrencies have been widely available for around 15 years — if one counts from the introduction of bitcoin — the industry is still in an early phase of its evolutionary journey. The industry has suffered from growing pains, punctuated by several cycles of rapid expansion and retraction and by the well-publicized collapse of several businesses. As we have previously written, regulators have struggled to fit cryptocurrency into existing regulatory regimes, and attempts to impose regulatory oversight over cryptocurrencies have, on occasion, been met with stiff resistance. These factors have collectively shaped the public's view of the cryptocurrency industry, contributing to the formation of certain perceptions that do not necessarily accord with the broader realities of its use and applications.

One such perception is that cryptocurrency is disproportionately used in illicit activity, such as in the trade of illicit drugs and other forms of illegal activity.

Interestingly, the Chainalysis 2024 Crypto Crime Report suggests that this perception may be unfair and exaggerated. The report suggests that the rate at which crypto is used in illicit economic activity is holding steady or falling, and is equal to or less than the overall incidence of illicit activity globally.

The report’s findings

Chainalysis, a blockchain research and data platform providing services in over 70 countries, recently published its annual Crypto Crime Report, which examined the latest trends in ransomware, scams, hacking and other illicit activity in the blockchain space.

In the report, the research firm found that illicit activity in global crypto markets dropped from an estimated US$39.6 billion in 2022 to US$24.2 billion last year. Comparatively, the American Banker and OODALoop estimate that illicit money flows in traditional fiat currency totalled over $3 trillion globally in 2023. Chainalysis estimates that the share of all crypto trading volume involved in illicit activity declined from 0.42% in 2022 to 0.34% in 2023. While the 2023 numbers are likely to rise slightly as further illicit activities are discovered and as individuals and companies are convicted of related crimes, the decline in crypto-related crime represents a promising trend for investors and those interested in the space.

According to the report, three key trends define the current crypto crime landscape:

1. Scamming and stolen funds are down significantly. Both crypto scamming and hacking revenue fell significantly in 2023, with total illicit revenue for each down 29.2% and 54.3%, respectively. These declines contributed greatly to the total decrease in illicit crypto activity in 2023. The large dropoff in stolen funds is largely due to a decline in decentralized financial application (DeFi) hacking, which may signify that DeFi protocols are improving their security practices. The report warns that while the trend in scamming is promising, approval phishing and romance scams remain large threats.
2. Ransomware and darknet market activity is on the rise. In contrast with overall trends, ransomware and darknet markets saw revenues rise in 2023. Ransomware payments hit a record high in 2023, exceeding $1 billion. Various factors contributed to this rise, including growth in the number of threat actors, adaptation to overcome organizations’ cybersecurity improvements and increase in “big game hunting” (i.e., targeting larger institutions). Concurrently, darknet market revenue increased after a 2022 decline resulting from the shutdown of Hydra, once the world’s most dominant market. Darknet revenue is still down significantly since 2021 and no other market has matched Hydra’s financial success.
3. Transactions with sanctioned entities drive the vast majority of illicit activity. Sanctioned entities and jurisdictions accounted for a combined $14.9 billion worth of transaction volume in 2023, which represents 61.5% of all illicit transaction volume measured by Chainalysis. Sanctions-related transactions are making up a larger share of all illicit transaction volume year-over-year, in part due to the number of entities being sanctioned and the difficulty of enforcing sanctions against entities in regions that don’t comply with the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) designations.

According to the report, money laundering also declined in 2023, with illicit addresses sending $22.2 billion worth of cryptocurrency to services — a significant decrease from the $31.5 billion sent in 2022. Market manipulation, child sexual abuse material (CSAM) and terrorism financing were also discussed, but did not contribute significantly to the 2023 trends.

Crypto’s stigma is unwarranted

As the report itself notes, tracking the extent to which cryptocurrency is used in illicit transactions is difficult to pin down. Nevertheless, according to the report, the share of crypto trading volume involved in illicit activity has held steady at less than 0.5% since 2020. Notably, this share is much lower than illegal activity as a percentage of global GDP. In 2009, the United Nations Office on Drugs and Crime estimated that transnational organized crime generated 1.5% of global GDP.^[1] In Canada, it is estimated that underground economic activity accounts for 2.7% of GDP.^[2]

Accordingly, there are valid grounds to argue that crypto assets have been improperly and unfairly stigmatized as being associated with illegal activity. Compared to the illicit share of global and Canadian GDP, crypto does not appear to be disproportionately used in illegal economic activity. Businesses and financial institutions should remain alive to the potential stigmatization of crypto assets, particularly as regulators continue to attempt to impose regulatory oversight over this transformative and unique industry. The findings from the Crypto Crime Report indicate that the perception of cryptocurrency primarily serving illicit activities is unwarranted.