The stunning growth of cryptocurrency markets in 2021 also came with an 80% rise in crypto crimes, new analysis shows
The cryptocurrency market saw stunning growth in 2021 as coins from bitcoin to dogecoin hit record highs. But along with this rally came a steep rise in illicit activity, a new study from Chainalysis shows.
In 2021, crypto-based crimes hit a new all-time high with illicit addresses receiving $14 billion, nearly 80% higher compared to the $7.8 billion seen in 2020.
However, the crypto analytic and forensics firm also pointed out that total crypto transaction volume also ballooned 550% to $15.8 trillion last year.
"The amount of legitimate activity grew much faster than the amount of criminal activity," Kim Grauer, head of research at Chainalysis, told Insider. She added that given the growth of the space, the increase in crimes has never been smaller in comparison to legal transactions.
Still, illicit activities continued to be rampant. And criminal abuse of digital assets threatens broader institutional adoption as regulators all over the world clamp down on crypto, Chainslysis said.
Crimes that Chainalysis observed in 2021 included the ongoing threat of ransomware and NFT-related frauds. But two other trends in particular stood out last year: scamming and stealing funds, with decentralized finance being the common denominator.
The value of crypto that scammers duped from victims totaled $7.8 billion in 2021 -- an 82% rise compared to 2020. More than $2.8 billion of this amount came from rug pulls, a new type of scam in which creators quickly cash out their gains after developing what seemed like a legitimate token.
This scam was laid bare when the top boss of Turkish crypto exchange fled Istanbul, leaving almost 400,000 unable to access their accounts.
Other than that one incident, which accounted for 90% of all rug-pull revenue last year, every other rug pull tracked by Chainalysis involved DeFi projects, the study said.
Grauer said a possible reason why scams are prevalent in DeFi may have to do with smart contract code governing the protocols. She said anyone equipped with the technical skills to create DeFi tokens can have them listed in exchanges despite not having a code audit, which is when an external party analyzes and confirms the credibility of a certain project.
"A lot of the code that is writing these protocols is public and open-sourced," she told Insider. "So anyone can go over them and look for bugs in the code that they can then exploit."
Another reason is just the rapid growth of the space. DeFi transaction volume leapt 912% in 2021, thanks to decentralized tokens like shiba inu that have spurred speculation.
Then there is outright theft, and the revenue from stealing crypto jumped 516% to $3.2 billion in 2021.
Roughly $2.2 billion -- 72% of last year's total -- were stolen from DeFi protocols, Chainalysis said. That's up from just under $162 million in 2020.
Chainalysis also saw explosive growth in DeFi protocols being used for laundering illicit funds in 2021, a practice that only saw scattered examples in 2020. In fact, money laundered shot up 1,964% compared to 2020.
"I hope next year we don't see this much hacking of DeFi protocols because I hope that through data like these people will realize the importance of taking security measures to protect their platforms," Grauer told Insider.Source