The use and adoption of cryptocurrencies have surged in recent years as crypto has entered the mainstream. With the proliferation of new digital assets, however, comes increased illicit use and abuse.
CoinJournal reviewed a report by Chainalysis to determine how widespread crypto crime is, which types of incidents are most common, and which years saw the largest losses to crypto-related crime.
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Crypto fraud grew 82% in 2021 to $7.8 billion
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72% of the $3.2 billion in stolen funds came from DeFi protocols
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As a percentage of total transaction volume, fraud fell by 66%
But how bad is crypto really compared with fraud in trad-fi (traditional finance)? Are the warnings hype, or is crypto truly a cesspool for bad actors?
Crypto Crime Trends for 2022
The headline figures are alarming. Crypto-based crime reached $14 billion in 2021, up sharply from $7.8 billion in 2020.
To compare with trad-fi, some categories need to be excluded. Terror financing, darknet markets and other broad categories are difficult to measure and overlap heavily with illicit activity in fiat. We can agree that U.S. dollars are far from immune to being used for drug purchases, stolen goods, and other illicit transactions that fall under those headings.
Our focus here is on crimes specifically targeting crypto—fraud, hacks, scams and the like—and whether those are as widespread as mainstream media suggest, and how they compare to similar crimes in trad-fi. While comparisons may sometimes be imperfect, they remain useful for perspective.
Crypto Fraud & Stolen Funds
Two categories stand out for year-over-year growth: fraud and stolen funds. Fraud rose 82% in 2021 to $7.8 billion, and $3.2 billion in cryptocurrency was stolen in 2021—an increase of 516% over 2020.
Those figures are worrying, but the picture becomes clearer when looking deeper: much of this growth is tied to DeFi, a relatively new sub-industry within crypto.
DeFi
Seventy-two percent of the $3.2 billion in stolen funds came from DeFi protocols. Regarding fraud, $2.8 billion of the $7.8 billion was attributed to rug pulls—a characteristic scam in DeFi where developers create a token, add liquidity, then remove it and flee with investors’ funds.
Actual losses are often higher than reported rug-pull liquidity drains alone, because subsequent token devaluation—typically exceeding 90%—adds to investor losses beyond the drained liquidity.
Contextualizing the Numbers
Can we write off DeFi because it is new and rapidly scaling? When taken together, fraud and stolen funds increased 129% from $4.8 billion to $11 billion, while DeFi transaction volume surged 912% over the same period. Total crypto transaction volume grew 567% from 2020 to 2021. Viewed holistically, these ratios show that although losses rose in absolute terms, the ecosystem’s activity expanded even faster.
How does this compare with trad-fi? A UK Finance study found £1.28 billion ($1.67 billion) stolen via payment card fraud in 2019, and online banking fraud losses in the UK were $160 million in 2020. Those figures are limited to the UK and to specific channels, but they indicate that large-scale fraud is not unique to crypto—even if the venues differ.
Online banking has been established for years, whereas DeFi is new and has attracted speculative retail money during meme-coin mania and high-profile launches on chains like Binance Smart Chain and Ethereum. That environment can look like gambling, obscuring the legitimate fundamentals and varied aims across DeFi projects. DeFi and crypto, broadly, are too heterogeneous to be painted with a single brush: some projects build real utility, others are shallow forks or outright scams.
Trad-Fi
We should not lump all DeFi projects together any more than we would paint the entire trad-fi sector with the same stain. Trad-fi has seen major, long-running frauds: Wirecard’s decade-long deception wiped $2 billion off the books while auditors continued to sign off, and Bernie Madoff’s Ponzi scheme caused roughly $64.8 billion in losses. Jordan Belfort’s actions cost investors hundreds of millions more.
Trad-fi’s size and complexity make measuring crime rates and growth difficult. But it’s clear crypto is not the first financial sector to be exploited. Rapid growth—especially when regulators lag—creates opportunities for bad actors to exploit change for profit.
Key Differences
A notable difference in crypto is the scale and ease of individual thefts in DeFi. Of the $2.8 billion in rug-pull losses in 2021, 90% was linked to a single exchange scam—Thodex—whose CEO, Faruk Fatih Ozer, fled after suspending customer withdrawals and now faces severe penalties if captured.
Large hacks have caused major losses: Axie Infinity’s Ronin bridge was exploited for $625 million after private keys were compromised. Poly Network suffered a $600 million heist in which the attacker later returned funds and was courted for a security role. At the same time, white-hat hackers warned SushiSwap of a potential $350 million vulnerability and helped Polygon patch a bug that could have exposed $850 million, for which Polygon paid a $2 million bounty.
Whether the actor is malicious or benevolent, the reality is that it is relatively easier to steal hundreds of millions via a laptop and blockchain exploits than to pull off comparable thefts in traditional finance. That said, large-scale fraud does occur in trad-fi as well; the difference is primarily in the mechanics and anonymity that crypto can provide.
Positive Developments
Chainalysis notes improved enforcement capabilities. The Commodity Futures Trading Commission (CFTC) has pursued investment fraud cases, law enforcement helped neutralize the prolific REvil ransomware operation, and OFAC sanctioned crypto services like Suex and Chatex for money laundering. These actions suggest enforcement is adapting to crypto’s challenges.
The IRS announced it seized more than $3.5 billion in illegally obtained crypto in 2021. The U.S. Department of Justice seized $56 million in the BitConnect fraud and $2.3 million connected to the Colonial Pipeline ransomware attack. Enforcement is increasingly targeting crypto-fiat bridges, which are critical choke points for converting crypto proceeds into conventional currency.
Blockchain transparency can also work against criminals: while virtual transfers are easy, large-scale laundering is harder when on-chain activity is visible to anyone monitoring the ledger. Turning crypto into fiat still requires additional steps and clever tactics, and that is where enforcement is focusing its efforts.
Looking Ahead
From 2020 to 2021, total crypto transaction volume rose 567% to $15.8 trillion, while combined fraud and stolen funds rose 129%. This equates to a 66% decline in illicit activity as a share of total transaction volume—a more meaningful metric than absolute loss figures alone.
If transaction volume remained at $15.8 trillion in 2022 and illicit activity stayed at the same lower proportion, fraud and stolen funds for 2022 would be roughly $3.7 billion—substantially lower than the $11 billion in 2021. Without explosive growth across the entire industry, the frequency and proportion of such thefts appear to fall.
Conclusion
Authorities are gaining understanding and control over what was once a wilder crypto landscape. Enforcement and regulation are catching up. Although DeFi and rapid crypto growth drove headline increases in hacks and scams, proportionally those incidents declined as the overall market expanded. Comparable fraud and security breaches also occur in trad-fi, even if mechanics differ.
Nonetheless, the scale of individual crypto breaches remains concerning. Users must exercise caution with their funds and follow sound custody and security practices. The industry may still experience dramatic growth and occasional high-profile incidents, but current trends suggest progress. If enforcement and best practices continue to improve, the sector appears to be moving in the right direction.