The dark side of crypto: fraud and money laundering

Two things often come to mind when we hear the word ‘crypto’: freedom and crime. Cryptocurrencies for sure have revolutionised the financial world, offering speed, transparency, and accessibility not seen before. Yet, their promise of financial liberation comes with unintended consequences. The decentralised, pseudonymous nature of crypto makes it a double-edged sword—for some it represents freedom and for others a tool for crime. 

In 2023, illicit transactions involving cryptocurrencies reached USD 24.2 billion, according to TRM Labs, with scams and fraud accounting for nearly a third of the total. 

These numbers reveal a sobering truth: while crypto has opened doors to innovation, it has also become an enabler for global crime networks, from drug and human trafficking to large-scale ransomware operations. Criminals exploit this space to mask their identities, making crypto the go-to medium for those operating in the shadows.

What are the common types of crypto fraud?

Crypto fraud takes many forms, each designed to exploit vulnerabilities and prey on the unsuspecting. The most known ones are: 

• Ponzi and pyramid schemes– Fraudsters lure victims with promises of guaranteed high returns. These schemes use investments from new participants to pay earlier ones, creating an unsustainable cycle. When the influx of new investors dwindles, the scheme collapses, leaving most participants with nothing. In 2023, these scams contributed significantly to the USD 24.2 billion received by illicit crypto addresses, showcasing their pervasive nature.
• Phishing attacks– Fake websites, emails, and messages designed to mimic legitimate services trick victims into revealing sensitive information like wallet keys. A single successful phishing attack can drain entire crypto wallets, with victims often having no recourse. The shift to stablecoins, noted for their volume in scams, has intensified the use of such tactics.
• Initial Coin Offering (ICO) scams– The ICO boom has introduced countless opportunities—and risks. Fraudulent projects draw in investors with flashy whitepapers and grand promises, only to vanish with millions. For instance, ICO scams contributed to a notable chunk of crypto crimes in previous years, as highlighted by TRM Labs.
• Rug pulls– Developers create hyped tokens, inflate their value, and abruptly withdraw liquidity, leaving investors holding worthless assets. In 2023, such schemes became increasingly sophisticated, targeting decentralised exchanges to exploit inexperienced investors.
• Cryptojacking– Hackers infect computers or networks with malware to mine cryptocurrency without the owner’s knowledge. This hidden crime drains energy and resources, often leaving victims to discover their losses long after the attack. 
• Fake exchanges and wallets– Fraudulent platforms mimic legitimate services, enticing users to deposit funds, only for them to disappear. These scams exploit the trust gap among new investors, further driving crypto-related crime statistics.

The connection between crypto fraud and money laundering

Crypto fraud and money laundering are two sides of the same coin. Stolen funds need to be legitimised, and criminals have devised a range of techniques to obscure their origins. One of the most common methods involves crypto mixers and tumblers. These services blend cryptocurrencies from various sources, making it nearly impossible to trace individual transactions.

The process often works as follows:

1. Initial theft: Stolen funds are moved from wallets linked to scams or hacks.
2. Mixing: These funds are transferred to a mixing service, where they are broken into smaller amounts and shuffled with others.
3. Redistribution: The mixed funds are sent to new, seemingly unrelated wallets.
4. Conversion: The laundered crypto is then converted to stablecoins or fiat currency, often through decentralised exchanges or peer-to-peer transactions, masking its origins.

This method has made crypto a preferred tool for laundering money linked to drug cartels and even human trafficking networks. The convenience and pseudonymity of crypto ensure its growing role in these illicit industries. 

How big crypto crime really is? 

The numbers are staggering. Last year (2023), illicit addresses received USD 24.2 billion in funds. While scamming and hacking revenues declined (29.2% and 54.3%, respectively), ransomware attacks and darknet market activity saw significant growth. Sanctions-related transactions alone accounted for USD 14.9 billion, driven by entities operating in restricted jurisdictions.

Bitcoin and Monero remain the most-used cryptocurrency for darknet sales and ransomware.

Cryptocurrencies have become the currency of choice for underground networks and darknet markets facilitate the sale of illicit goods. Human trafficking networks use crypto for cross-border payments, exploiting its decentralised nature to evade detection. 

According to the Chainalysis report, the prevalence of crypto in these crimes highlights the urgent need for better monitoring and regulation. 

Stablecoins like USDT are gaining traction- criminals prefer stablecoins for their reliability as they mimic traditional fiat currencies, enabling transactions in environments where access to traditional banking is limited. 

How to fight crypto crime? 

Solving the issue of crypto crime requires a multi-faceted approach:

• Regulatory innovation: Governments must create adaptable frameworks to address the evolving crypto landscape while encouraging legitimate use.
• Public awareness: Educating users about common scams and best practices can reduce vulnerabilities at the grassroots level.
• Global cooperation: International collaboration is essential as cryptocurrencies knows no borders. Only by sharing data and strategies can nations effectively combat cross-border crypto crime.

The thing is cryptocurrency is a young and rapidly evolving space. While some countries have enacted comprehensive legislation, others lag behind. However, the pace of innovation makes it nearly impossible to create foolproof regulations. Every new development introduces potential loopholes, requiring legislators to remain agile and informed. 

The power of crypto: innovation or exploitation?

Cryptocurrencies hold immense power, offering unparalleled financial empowerment and innovation. As it usually happens, with great power comes great responsibility. Freedom must be balanced with accountability to ensure it serves civilisation for the greater good. Shockingly, stolen crypto assets are currently circulating undetected within global financial systems, intertwining with legitimate transactions. The question is: can the industry mitigate risks without compromising its core principles of decentralisation and transparency by addressing vulnerabilities and implementing robust safeguards? The true potential of crypto lies in its ability to reshape economies, empower the unbanked, and foster global financial inclusion. Yet, this power can also be exploited if left unchecked, becoming a tool for crime in the wrong hands. The future of crypto depends on ensuring it remains a beacon of innovation and empowerment, harnessed responsibly to create a safer, more equitable financial ecosystem for all.