Web3: Theft, Money Laundering and Market Manipulation

Charlie Taylor

As a preview of its State of Web3 Report, which will be published in full in June, Chainanalysis released a post about some of the abuses bad actors can do to new market technologies. The ultimate goal of the market would be to eradicate such abuse, often enlisting the help of the public sector, “so that new users can feel safe adopting the technology, so that the industry continues to grow, and that the illicit use of technology represents a smaller and smaller share of total usage over time.” With that, Chainanalysis investigated some criminal data within the market.

Percentage of illicit cryptocurrency transaction volume between 2017 and 2021. Source: Chainalysis.

DeFi-related crimes

While cryptocurrency-based crimes are still a major problem to be solved, illicit activity has become a less prominent part of the overall ecosystem over the past three years. However, DeFi appears to be experiencing the same issues with the increase in illicit activity over the past couple of years. Illicit DeFi transactions have been steadily increasing, mainly in two areas, theft of funds through hacking and abuse of DeFi protocols for money laundering. As a result, DeFi protocols have accounted for a portion of all funds stolen from cryptocurrency exchange platforms since the beginning of 2020. In 2021 DeFi protocols became the target of hackers looking to steal cryptocurrencies, but ended up losing the big one. most funds stolen in the year.

As of May 1, DeFi protocols account for 97% of the $1.68 billion worth of cryptocurrencies stolen in 2022. Much of the DeFi protocol thefts went to hacking groups associated with the North Korean government, especially in 2022.

More details at: 97% of cryptocurrencies stolen in 2022 came from DeFi

Money laundering is another serious issue as DeFi protocols account for an increasing share of all funds sent from illicit addresses to services over the past couple of years. So far in 2022, DeFi protocols have become the biggest recipient of illicit funds, receiving 69% of all funds sent from addresses associated with criminal activity, compared to 19% in 2021.

in 2021 Cryptocurrency crimes reached US$14 billion, but represent only 0.15% of the total transactions.

One reason for this is that DeFi protocols allow users to exchange one type of cryptocurrency for another, which can complicate tracking the movement of funds.

NFT-related crimes

Chainalysis also detected significant wash trading activity, as well as money laundering based on NFTs, and found that while most wash traders ended up losing money due to fees, the most successful traders made large profits by artificially inflating the values ​​of their NFTs by offloading with unsuspecting users. The report explains that the practice “is a form of market manipulation in which a seller is on both sides of a trade – in other words, selling an asset to itself – in order to create a misleading perception of the value or liquidity of that asset. active”. In theory, wash trading is relatively easy to do with NFTs as some NFT trading platforms allow users to place trades simply by connecting wallets to the platform, without the need for identification. The full preview of the report is available here.

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