The Changing Nature of Cryptocrime

Cryptocrime is increasingly focused on the theft of Bitcoin as a highly valued financial asset.

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This blog summarises the findings of our in-depth report, which can be downloaded below.

The nature of crime in the Bitcoin ecosystem has evolved since it was popularized as a way to buy drugs on the internet via the first darknet market, the Silk Road. Darknet markets are no longer a major use of Bitcoin, accounting for less than 1% of Bitcoin transactions in 2017, while theft of Bitcoin via scams, ransomware and hacks is on the rise, reaching at least $90 million in 2017[1].

Darknet Markets are no longer a major use of Bitcoin

The share of Bitcoin transactions sent to darknet markets has declined from 30% in 2012 to less than 1% in 2017, although the absolute value has increased, with $660 million of Bitcoin sent to darknet markets in 2017.

What explains these changes in darknet markets? At Chainalysis, we believe these shifts are due to three factors:

  • Law enforcement has closed the largest darknet markets; for example the value of Bitcoin transactions to darknet markets fell by two thirds between May and July 2017;
  • The rise of other uses of Bitcoin, namely as a financial asset; with tens of billions of dollars worth of Bitcoins being sent to exchanges in 2017, compared to the $660 million sent to darknet markets; and
  • The growing use of alternative cryptocurrencies on darknet markets; such as Monero, Zcash and Dash, which offer greater anonymity and currently lower transaction fees than Bitcoin.

Theft of Bitcoin via scams, ransomware and hacks is on the rise

As Bitcoin has become more valuable, Bitcoin-related crime increasingly includes theft of other individuals’ holdings. Crypto-thieves tend to steal Bitcoins through scams, ransomware, and hacks. Chainalysis tracks major events in each of these categories, rather than providing comprehensive coverage. We find that theft of Bitcoin has risen from at least $3 million in 2013 to $95 million in 2016.

  • Hacks have been the main source of Bitcoin theft, claiming at least $172 million worth of Bitcoin between 2013 and 2017, using prices at the date of the hack.
  • Ransomware has earned criminals at least $31 million worth of Bitcoin. 80% of the amount stolen via ransomware attacks went to the top five strains of ransomware.
  • The scale of scams is hard to assess but is likely to have affected a large number of victims. We investigated a sample of 23 scams using Chainalysis software, which accounted for over $17 million in stolen funds. The scale could be much larger, for example the Bitcoin Bad List, a user-generated list of possible scams, identifies 5,033 frauds since 2014.

The Future of Cryptocrime

These trends illustrate that Bitcoin is no longer just about cryptocrime, and that cryptocrime is no longer just about illicit exchange on darknet markets, but that cryptocrime is increasingly focused on the theft of Bitcoin as a highly valued financial asset. This changing nature of cryptocrime will require new approaches by law enforcement and increased vigilance against thefts and scams by Bitcoin users.

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How Transaction Monitoring Works at Chainalysis

One of the reasons Chainalysis KYT is so popular is that it uses global anti-money laundering (AML) standards common across regulatory bodies. We apply these standards when each transaction is screened.

Cryptocurrency businesses also need to understand the aggregate risk profile of each of their users. That’s why Chainalysis KYT provides a view of risk profiles at the user level, which reflects all of a user’s screened transactions. For example, if an organization has a user who receives funds from a darknet market, our software automatically flags that transaction as high risk. If the user sends funds to a regulated exchange, our software marks that transaction as low risk. And so on. Every screened transaction feeds into a user’s risk profile. Chainalysis KYT displays all user profiles, sortable by high, medium or low risk (using traffic light colors) for easy scanning.

We apply our risk methodology in real time to all users within an organization’s user base. This saves compliance teams from laborious, manual screening work. They can instead focus on developing comprehensive compliance programs. Organizations that work with us tell us this has enabled them to meet regulatory expectations and launch or grow their businesses.

Customizable risk level

We’re now giving our customers the ability to adjust the risk level of a category or a service. For example, not all jurisdictions around the world treat gambling the same way. In some countries, gambling is not considered a legitimate business activity and thus online gambling sites would be treated as high risk. In other countries, gambling is not considered illicit, which means properly licensed online gambling sites would be treated as low risk.

The ability to customize the risk level of categories and specific services means our customers can automate even more of their compliance workflows.

Organization-wide dashboard

One of the most useful facets of Chainalysis KYT is having a view of all users and their risk profiles directly accessible upon first logging in. It provides a visual alert of which users have high risk profiles and therefore require the most immediate attention. In keeping with the spirit of simplified visual cues, we have now launched a dashboard that summarizes key indicators at the total organization level. For example, organizations can now see what percentage of their user base is falling under high, medium or low risk. They will soon be able to see things like total exposure by category, or total transaction volume per day. These and other metrics will provide our customers additional understanding of their organization’s total exposure trends over time.

In-app chat

At Chainalysis, we strive to provide as much support to our customers as we can. To make it easier to interact with us, we added in-app chat to Chainalysis KYT. This allows our customers to send us questions or feedback without having to leave the environment. Our team typically responds within minutes.

Looking ahead

We know software is most valuable when it makes the lives of our customers easier and more productive. This means we’ll continue to add intuitive capabilities to our compliance products while increasing versatility for ongoing transaction monitoring. In the coming months, we will improve how transaction information is displayed. We will also boost our monitoring capabilities for other cryptocurrencies beyond Bitcoin. And we will deepen the integration with Chainalysis Reactor, which is used for enhanced due diligence and investigations.

The momentum around cryptocurrency compliance is only just starting and we look forward to continuing to offer software that builds trust in blockchains.

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