Written by Tonya Riley
Illicit cryptocurrency activity reached an all-time high of $20.1 billion in 2022, increasing from $18 billion the previous year in large part due to escalating US sanctions targeting digital currencies, according to a report released Thursday by researchers at Chainalysis.
Last year saw the US government more aggressively sanction cryptocurrency-related entities and individuals, and nearly 44% of the $20 billion in transactions classified as illicit by Chainalysis can be attributed to transactions linked to sanctioned entities.
In classifying illicit cryptocurrency activity, Chainalysis included transactions tied to child sexual abuse materials, human trafficking, ransomware, stolen funds, terrorism financing, scams, cybercriminal administrators, dark net markets and sanctions.
“This was the year that [Treasury Department’s Office of Foreign Assets Control] kind of started to come out pretty hard with their sanctioning of services,” said Kim Grauer, head of research at Chainalysis. “And we’re seeing that in our numbers this year.”
Among the 10 cryptocurrency-related groups sanctioned last year by the US government were Tornado Cash, a mixing service that the Treasury Department’s Office of Foreign Assets Control sanctioned in response to the North Korean hacking group Lazarus’s use of the technology to launder more than half a billion in stolen cryptocurrency. The move against Tornado Cash represented OFAC’s first sanctions against a decentralized protocol, a move that drew fierce criticism from blockchain industry leaders and privacy advocates who argued that sanctioning the code overstepped the Treasury Department’s authorities.
While sanctions have decreased the flow of digital funds to some sanctioned entities, the impact of OFAC sanctions has been uneven, according to a separate report by Chainalysis.
After it was sanctioned, inflows to Tornado Cash decreased significantly. By contrast, after OFAC sanctioned the Russian exchange Garantex for its role in money laundering schemes transactions on the exchange grew significantly. Transactions on the sanctioned Hydra Marketplace, a dark web market popular with ransomware gangs and other cyber criminals, dropped to zero — but that was because its infrastructure was seized by German police.
The cryptocurrency industry “is having to reckon with the fact that funds are still flowing to some of these services that have been sanctioned,” Grauer said.
The illicit use of cryptocurrencies is a growing concern in Washington and has led the Treasury and Justice Departments to make major investments in tracing and combating crime relying on digital currencies. The US Treasury Department is expected in coming weeks to release a report advising US financial institutions on handling illicit finance risks.
Nevertheless, illicit activity remains a small fraction of overall cryptocurrency activity. A mere .24% of all cryptocurrency transactions in 2022 were tied to illicit activity, up from .12% in 2021, according to Chainalysis’s figures.
One explanation for the shift is a fall in legitimate cryptocurrency transactions this year thanks to a rocky market for investors. “Scamming is down. Dark net market activity is down. Ransomware is down,” said Grauer. “We’re in a bear market, and that is certainly reflected in the high-level numbers for those illicit activities.”
That turbulence may also be a reason that transaction volumes tied to cryptocurrency scams fell in 2022. Chainalysis researchers reported in August that revenue for cryptocurrency scammers dropped alongside sinking Bitcoin prices, suggesting that users are less likely to fall for scams promising big returns in a weak market.
As of August, the top three cryptocurrency scams in 2022 had made just a fraction of the top scams in 2021, according to Chainalysis.