Scams and darknet market activity both fell through the end of July

Hacks and stolen funds increased compared with 2021

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Criminal activity in the cryptocurrency world has fallen so far in 2022 along with overall prices, according to a new report from blockchain forensics firm Chainalysis.

The U.S. Treasury Department sent shockwaves through the web3 community last week when it sanctioned cryptocurrency mixer Tornado Cash for allegedly aiding in $7 billion worth of money laundering since 2019. It said over $455 million of that is attributable to the North Korean-affiliated hackers the Lazarus Group. Subsequently, a Tornado Cash developer was arrested in The Netherlands.

In an unprecedented move, Treasury’s Office of Foreign Assets Control placed the collection of Ethereum smart contracts – code, in other words – that makes up Tornado Cash on its sanctions list. The sanctions prohibit Americans from interacting with Tornado Cash, which is still active on Ethereum because smart contracts can’t be shut down once deployed.

Some of the smart contracts sanctioned by the U.S. government

Through the end of July, illicit transaction volume is down 15 percent this year compared to the same period in 2021, while legal transactions have dropped 36 percent year over year, Chainalysis said in a report released today. Scammers have pulled in $1.6 billion through the end of July in 2022, compared with just under $5 billion in 2021 and about $8.5 billion in 2019. General losses in the current bear market are a likely factor in the slowing criminal activity, Chainalysis said.

“New, inexperienced users who are more likely to fall for scams are less prevalent in the market now that prices are declining, as opposed to when prices are rising and they’re drawn in by hype and the promise of quick returns,” the report said. The firm also noted that the largest scam this year, which it called Unique-exchange.co and PARAIBA.world, has collected $267 million, far less than the $1.6 billion the Russian Ponzi-scheme Finiko nabbed in 2021.

The other area of falling criminal activity was in the darknet market, where industry leader Hydra was shut down by German authorities in April. Revenue from darknet markets -- which sell stolen identity information, money laundering tools, hacking software, drugs and other items – has fallen 43 percent through July, Chainalysis said.

“The decline in darknet market revenue — and indeed, cryptocurrency value received by all criminal categories — following Hydra’s shutdown shows the tangible impact of law enforcement’s growing ability to fight cryptocurrency-based crime,” the report said.

Increased illicit activity

Two areas where illicit activity has increased so far this year is hacking and stolen funds, according to Chainalysis. As of July, $1.9 billion in crypto had been hacked, compared with $1.2 billion in the same period last year. The trend looks set to continue, the firm said, as its figures don’t include the $190 million hack of the Nomad bridge and $5 million from Solana wallets, which both occurred this month. Many of the hacks occur on decentralized finance, or defi, protocols due to their open source code, Chainalysis said.

“Much of the value stolen from defi protocols can be attributed to bad actors affiliated with North Korea, especially elite hacking units like Lazarus Group. We estimate that so far in 2022, North Korea-affiliated groups have stolen approximately $1 billion of cryptocurrency from defi protocols,” the report said. “As long as crypto assets held in defi protocol pools and other services have value and are vulnerable, bad actors will try to steal them. The only way to stop them is for the industry to shore up security and educate consumers on how to find safe projects to invest in.”