DeFi increasingly popular tool for laundering money, study finds

Cybercriminals laundered about $8.6 billion in cryptocurrency in 2021, Chainalysis said in a partial release of its 2022 cryptocurrency crime report, the full version of which will be published in February. Chainalysis determined the figure by tracking cryptocurrency sent from illicit addresses to addresses hosted by cryptocurrency services such as centralized exchanges and peer-to-peer exchanges.

More than $33 billion worth of cryptocurrency has been laundered since 2017, according to the report.

DeFi protocols—an umbrella term for financial services offered on public blockchains—received $900 million from illicit addresses in 2021, a 1,964% increase in value from 2020, according to the report.

DeFi was notably popular for laundering stolen funds, particularly through hacking, compared with funds from other types of crimes such as scams and ransomware, Chainalysis found. Its report noted that addresses associated with theft sent just under half of their stolen funds to DeFi platforms, or more than $750 million worth of cryptocurrency.

“This demonstrates the DeFi platforms need to consider compliance solutions to prevent their platform from being abused for illicit activity," Kim Grauer, head of research at Chainalysis, said.

Investors looking to back cryptocurrency should conduct due diligence and check for red flags that could point to possible fraud, such as where a company is registered and the identities of its founders, she said.

“We’re really in a period where there’s so much growth, so many new customers, so many new businesses in DeFi that it’s hard to know which ones are vulnerable and which ones are worth investing in," she said. “But at the same time, users have ‘FOMO,’ a fear of missing out. So they are willing to maybe forgo some of the typical security checks in favor of investing in new platforms that might offer high yield."

The report said money laundering accounted for a small percentage of overall cryptocurrency transaction volume, about 0.05%, as both legitimate and illicit cryptocurrency activities grew in 2021. The volume of cryptocurrency transactions rose 567% to $15.8 trillion last year from 2020, according to Chainalysis.

The Chainalysis report also said money laundering remains a problem for other types of money transfers. For instance, the report cited an estimate from the United Nations Office on Drugs and Crime that between $800 billion and $2 trillion of fiat currency—money issued by governments—is laundered each year, representing as much as 5% of global gross domestic product.

The money-laundering activity within digital assets also is heavily concentrated among a few crypto services, the report said, noting that about 58% of all funds sent from illicit addresses moved to five services in 2021, compared with 54% in 2020.

“We find that the money laundering ecosystem in crypto is relatively small," Ms. Grauer said. “And this is good news for law enforcement as they can use data to identify the most egregious launderers and prioritize where to focus their resources."

The report shows the technical aspect of blockchain can help identify and investigate illicit activity that wouldn’t be possible with other asset classes, Ms. Grauer added.

This story has been published from a wire agency feed without modifications to the text