Chainalysis Crypto Crime Report Details Impact of OFAC Sanctions

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The global crypto market may have crashed in 2022, but the total value of illicit crypto activity has reached an all-time high of over $20 billion.

Blockchain analytics firm Chainalysis is set to release its latest annual report on crypto crime next month, but the company has started previewing some of its headline findings for 2022. The headline figure is that the total value of digital currencies received by illicit addresses hit a record high of $20.1. billion last year, and the company warns that this is likely a lower estimate.

For example, while Chainalysis initially pegged the total value of crypto crime for 2021 at $14 billion, they have since revised that sum to $18 billion, primarily due to the discovery of new crypto scams. Chainalysis also warns that these sums do not include non-crypto native proceeds of crime, such as drug traffickers using crypto as payment instead of fiat currency.

According to Chainalysis, 2022 estimates are further complicated by the years of unprecedented carnage following the collapse of several major crypto firms, including digital lender Celsius, hedge fund Three Arrows Capital (3AC), and exchange FTX. Chainalysis notes that many of these implosions occurred amid allegations of fraud, which means the true scale of blockchain crime in 2022 could be out of the ordinary.

Since many of these companies are currently embroiled in bankruptcies or criminal cases, Chainalysis says that for now, leave crime issues to the court system. For reporting purposes, Chainalysis should limit its estimates to on-chain information and disregard fraudulent off-chain accounting.

Breaking down $20.1 billion in 2022, the value of stolen funds increased by 7%, but most other categories, including scams, ransomware and darknet marketplaces, saw their value decline. Chainalysis attributed this to the onset of crypto winter in early 2022 and the fact that less money in crypto overall tends to be correlated with less money associated with crypto crime.

The percentage of illicit activity in overall crypto activity was 0.24%, double the 2021 total and the first year-over-year increase since 2019 (which saw a sharp rise to 1. 9%). And while legitimate trading volumes were declining faster than illicit volumes during the current bear market, Chainalysis argues that crime as a share of all crypto activity is still trending lower.

Year of Sanctions

In terms of illicit activity, the highest year-on-year growth in 2022 was seen in the sanctions category, which accounted for 44% of all illicit transaction volume. That’s a staggering 10,012,224.34% more than in 2021, reflecting growing interest in crypto business by regulators such as the states’ Office of Foreign Assets Control (OFAC). -United.

While the number of sanctioned crypto entities has seen only modest growth from 2021 to 2022, the number of sanctioned addresses has exploded. According to Chainalysis, this is partly due to OFAC adapting its policies by designating entire crypto services as opposed to individual malicious actors.

Among OFAC’s most notable moves in 2022 was its targeting of the Tornado Cash mixing service and the blacklisting of any Ethereum address the service interacted with. Targeting a so-called decentralized finance protocol for the first time, OFAC accused Tornado Cash of laundering funds to malicious cyber actors on a regular basis and without basic measures to address its risks.

Chainalysis says that 34% of the funds sent to Tornado Cash came from illicit sources, with most illicit funds arriving in brief spikes, causing large fluctuations from day to day.

OFAC also targeted Russian exchange Garantex for helping the Russian Hydra darknet market. While Hydra has been shut down, Garantex continues to operate, despite OFAC convincing Estonia to revoke the exchange license allowing ransomware.

Incoming funds from illicit addresses accounted for more than 68% of Hydras’ volume, and another 12.6% came from risky addresses. Chainalysis defines risky as involving one or more counterparty addresses [that] are associated with a risky entity, such as a high-risk exchange or gambling service.

By comparison, illicit and risky entries were only 6.1% and 16.1%, respectively, at Garantex in the 60-day period prior to the imposition of the sanctions. That doesn’t seem like much, but Chainalysis notes that over a comparable 60-day period, illicit inflows to other centralized exchanges were just 0.3%. Garantex was therefore a notable exception in terms of handling suspicious funds.

Hydra and Garantex were prime destinations for ransomware malicious actors. Hydra handled 2.2% of funds sent from ALL ransomware-related addresses in the 60 days prior to the sanctions, while Garantex handled a worrying 11.6%. Chainalysis notes that the numbers underscore just how crucial these services are in enabling ransomware attacks.

Tornado Cash’s illicit activity was almost entirely focused on hacks and scams. In fact, in the 60 days prior to the OFAC sanctions, stolen funds accounted for 99.7% of illicit funds sent to the mixing service. The Harmony Bridge hack in June 2022 accounted for nearly two-thirds of all stolen funds sent to Tornado Cash during that time.

The impact of sanctions

The April 2022 sanctions against Hydra were accompanied by a coordinated law enforcement action such that its entries were completely shut down (while Russia-based Hydras servers were based in Germany). Meanwhile, Garantex saw overall monthly inflows more than double from April to October as Russian authorities refused to enforce US sanctions, effectively rolling out the welcome mat at Garantex for bad actors based outside the US. United.

Tornado Cash saw its volume fall off a cliff following the OFAC sanctions and while volume has recovered somewhat, it is still well below its pre-sanctions peak. This may be because the website providing easy access to the mixer has been removed, leaving only committed customers to continue using the service.

After the sanctions, Garantex saw a spike in the influx of addresses linked to scammers and darknet markets, which Chainalysis theorized was based on the growing perception that Garantex was not at all interested in curbing illicit activities.

Tornado Cash suffered a decline in entries in nearly every category except scams and other mixing services. However, these two categories weren’t heavy users of the Tornado Cash pre-penalties, so the percentage gains are a bit of an illusion. And the wave of scams was mostly down to a single YouTube-based bot scam that did all its damage in just four deposits.

Did it make a difference?

By studying the activities of bad actors who did not use the sanctioned services, Chainalysis attempted to establish a control group to determine whether the sanctions resulted in a significant loss of revenue for those who used these services.

With the exception of 10 fraud stores, which individually saw their revenue increase by about $5,000 in the two months after the sanctions were imposed, all other categories saw their revenue decline. The most drastic reduction was for 20 cybercriminal administrators, who each suffered an average drop of $750,000 over the two-month period.

Chainalysis admits that the formula is anything but definitive and only examines a very narrow time horizon, meaning it’s quite possible that bad actors were eventually able to adapt and overcome the obstacles posed by these sanctions.

Chainalysis summarizes their findings as follows: Sanctions can be effective if authorities cooperate on a global scale. But as the example of Garantex indicates, a reluctance to cooperate on the part of the authorities of a territory of origin of the operations will have only a minimal impact.

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