Finance glossary

What is crypto crime?

Bristol James
5 Min

Crypto crime refers to a suite of illegal activities that involve cryptocurrency such as fraud, money laundering, drug trafficking, terror funding and dark marketplace trading.

Criminals use cryptocurrency to commit crimes because of the promise of relative anonymity. However, cryptocurrency is also popular because it is decentralised, delivers a superior ROI and has an extremely low barrier to entry.

At least $24.2 billion was received by illicit crypto addresses in 2023 – but this number is a lower-bound estimate and will likely increase as more illicit addresses are discovered.

What are the various types of crypto crime?

Here are some of the most common ways criminals are exploiting cryptocurrency platforms and commit some of today’s top crypto scams.

Scams and fraud

There are three main types of crypto scams which are fraudulent to varying degrees.

Fake crypto exchanges and wallets

Fake exchanges and wallets mimic the real thing but may defraud people in different ways. Some cybercriminals target users with phishing websites or emails that pretend to be official representatives of a company.

Once a link is clicked on, the user may inadvertently provide criminals with access to their accounts.

Others may run legitimate crypto trading platforms but then lock users out and steal their money if the value of their wallet appreciates.

Fake investments and jobs

Similarly, scammers hold fake initial coin offerings (ICOs) where investors are enticed into buying new cryptocurrency through an established exchange. The premise here is that the currency will generate a profit in the future.

At some point, however, criminals disappear with investor money and delete all evidence that the ICO ever occurred. As a consequence, this type of crypto crime is often referred to as a rug pull.

Victims can also lured into applying for “crypto trader” jobs from fake or impersonated financial services firms. Successful applicants believe they are trading crypto for the firm’s clients, but in actuality, they are laundering money for scammers.

Crypto to pay scammers

Scammers also request or demand payment in a variety of other contexts. Victims may be asked by a romantic interest, acquaintance or job recruiter to pay them in crypto only or buy crypto at a so-called “Bitcoin ATM”.

Some schemes involve social media giveaways where entities offer to match or multiply any amount of crypto invested with them. Such schemes are often accompanied by fake endorsements from celebrities.

Other, more nefarious schemes involve blackmail and extortion. Victims are notified that a criminal has access to their browsing history or other compromising content and must make a crypto payment to avoid the content being made public.

Types of crypto crime
Six types of crypto crimes (Source: AMLBot)

Ransomware

In a ransomware attack, criminals encrypt a victim’s files with malware and then demand payment in cryptocurrency to decrypt them.

Victims are incentivised to comply because those responsible for the attack are the only ones with the key required to recover the data.

In 2023, over $1 billion was extorted from this type of crypto crime. Most victims were high-profile institutions or providers of critical infrastructure, such as airlines, hotel chains, schools, hospitals, government agencies and even supply chains.

Hacking and theft

Hacking and theft are significant concerns in the cryptocurrency space due to the substantial value and pseudonymous nature of digital assets.

Hackers target exchanges and individual users to steal cryptocurrency and often cause substantial financial losses.

Two prime examples are the Mt. Gox incident in 2014 – where Bitcoin worth around $450 million was stolen – and the 2018 theft of around $530 million worth of NEM tokens from Japanese exchange Coincheck.

Individual cryptocurrency wallets are also not immune to hackers. The DAO (decentralized autonomous organisation) hack in 2016 exploited a vulnerability in smart contract code that allowed attackers to steal 3.6 million Ether (worth about $50 million at the time).

Money laundering

Money laundering is a crypto crime that involves disguising illicitly obtained funds to make them appear legitimate.

This can be achieved in a number of ways:

  • Crypto mixers – these are services that obscure the origin and destination of illegal crypto transactions by mixing them with legitimate transactions. This further increases the anonymity of crypto transactions and makes them difficult to trace.
  • Shell companies – where criminals utilise fake or dormant companies to funnel illicit crypto funds and integrate them into the financial system.
  • Over-the-counter (OTC) transactions – a white-collar crypto crime where brokers facilitate transactions between buyers and sellers who do not want to interact on an open exchange.
  • Cryptocurrency exchanges – those exchanges with weak know-your-customer (KYC) and anti-money laundering (AML) controls are also exploited by criminals to launder money, and
  • Darknet market commerce – most marketplaces on the dark web use cryptocurrencies exclusively, while others prefer privacy-focused currencies to increase anonymity. These markets also tend to be associated with crypto mixers and OTC transactions.

How can crypto crime be prevented?

The usual advice around online safety applies to crypto crime.

For consumers, it is important to be aware of the hallmarks of a scam and take appropriate action if necessary. Similarly, individuals must avoid clicking on suspicious links and recognise that if an opportunity seems too good to be true, then it probably is.

Businesses involved in cryptocurrency and the transfer of other digital assets should also have stringent KYC and AML procedures in place. This increases trust in the system and maintains the integrity of cryptocurrency as a payment method.

Blockchain intelligence

For law enforcement and other agencies tasked with investigating crypto crime, blockchain intelligence is an emerging solution.

While the blockchain is transparent and public, the data it contains has traditionally been difficult to read and analyse.

In other words, it provides little clarity on:

  • The pseudonymous entities that commit crimes – are they darknet markets, merchant processors or crypto exchanges?
  • The reasons for a transaction, and
  • How much the transaction is worth.

Blockchain intelligence provides answers to these questions as it enables law enforcement to analyse vast on-chain datasets and graph the data to show the flow of illicit funds over time.

Ultimately, authorities are able to connect crypto transactions to real-world entities, apprehend criminals and present cases for prosecution in a way that key stakeholders can understand.

Blockchain intelligence and crypto crimes
An overview of how blockchain intelligence can connect the dots and solve crypto crimes (Source: Chainalysis)

The above efforts also contribute to crypto fund recovery which, somewhat contrary to popular belief, is not impossible.

In March 2024, for example, the UK Metropolitan Police seized £2 billion in Bitcoin from an individual who laundered money in a room above a restaurant in North London.

Other examples include the recovery of $3.6 billion in stolen cryptocurrency in February 2022 after Bitfinex – one of the largest exchanges in the world – was hacked six years earlier.

Summary:

  • Crypto crime encompasses various illegal activities that involve cryptocurrencies. Each leverages the unique features of digital assets such as pseudonymity, decentralization and borderless transactions.
  • Crypto crime can take various forms. In addition to a multitude of different scams and fraud types, it can also involve ransomware, hacking, theft and money laundering.
  • Individuals and businesses have a role to play in counteracting crypto crime, but law enforcement and other agencies can use blockchain intelligence to analyse illegal activity and present prosecutable cases in a court of law.

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