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Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week, we’re taking a look at the state of crypto crime.
Crypto crime has fallen 65 per cent in the past year, according to blockchain analytics firm Chainalysis.
That may come as a surprise to some, but it’s a breath of fresh air for an industry that has, for some time, suffered numerous high-profile bankruptcies and scandals. This week, for instance, the full weight of American law enforcement landed on Alex Mashinsky, the infamous kingpin behind failed lender Celsius.
According to Chainalysis, crypto inflows to “known illicit entities” have fallen almost two-thirds over the year to the end of June. The company also pointed out that illicit crypto transaction volume is falling at an even faster rate than one might expect during a downturn in the overall crypto market.
The blockchain firm’s findings have prompted a series of big names in crypto to give themselves a pat on the back. Binance chief executive Changpeng Zhao tweeted the report, while the company’s chief compliance officer Noah Perlman said he was “pleased to see crypto crime as a whole in sharp decline”.
But while crypto’s biggest exchange wants to celebrate the news, there are several big caveats to Chainalysis’s report that should curb your enthusiasm.
First, Chainalysis’s data can tell us only about on-chain activity — in other words, transactions logged publicly on a blockchain. It cannot tell us about how crypto is used to facilitate crime off-chain, ie off the blockchain.
“We don’t get to see someone feeding dirty money into a bitcoin ATM, or handing a bitcoin wallet to a scammer or a drug dealer,” Aidan Larkin, co-founder and chief executive at Asset Reality, told me.
“Analytics companies do a fantastic job providing on-chain data at a scale none of the rest of us can do, but crime also takes place off-chain . . . if I were to say to you that 1,000 burglaries were reported to the London Metropolitan Police, does that mean only 1,000 burglaries were committed in London?” he added.
Chainalysis’s findings also revealed ransomware — an appealing industry to crypto’s bad actors — is on pace for its second-biggest year ever, with almost $450mn extorted to the end of June.
Ransomware and crypto was thrust into the spotlight in 2021, after Colonial Pipeline, which supplied almost half of the motor fuel for the US east coast, fell victim to an attack where payment was demanded in crypto.
Ransomware has also often served as the centrepiece for North Korean crypto activity, including through the 2017 WannaCry attack, which hit hospitals, banks and oil companies around the world. The resurgence of the crypto ransomware industry also represents a total U-turn to findings earlier this year, when Chainalysis reported revenue had plummeted in 2022 compared to 2021.
“Ransomware has such a disproportionately high return on investment for the perpetrators . . . they know the existing global asset recovery systems are ineffective,” Larkin added.
As worrisome as ransomware is, there are other forms of financial crime that illicit actors are turning to digital assets for, notably financing terrorism, often with increasing sophistication.
Erin Plante, Chainalysis’s vice-president of investigations, recently told me: “It’s one of those things that’s starting to become more known . . . but I’m not sure it’s fully understood.”
What’s your take on Chainalysis’s recent report, and the state of illicit activity in crypto? As always, reach out to me at scott.chipolina@ft.com.
Weekly highlights:
Hong Kong’s push to become a crypto hub has thrust the jurisdiction into direct competition with Singapore, with both vying to become Asia’s one-stop shop for digital assets business. Hong Kong’s push has also attracted Chinese visitors looking to purchase crypto for alternative ways of transferring money. Read the story by my colleagues William Langley and Chan Ho-him.
In a rare setback for the Securities and Exchange Commission’s bid to crackdown on digital assets activity, a judge found Ripple Labs did not violate securities law by selling digital tokens to members of the public. Teresa Goody Guillén, partner at US law firm BakerHostetler, told me the decision “may change the current landscape of the SEC’s enforcement efforts” and “will give Coinbase and Binance support that the transactions that occur on those exchanges are not securities”.
As mentioned earlier in this newsletter, the SEC did in fact score a big win this week: read up on America’s chief financial watchdog throwing the book at Celsius Network and Alex Mashinsky, who was arrested on Thursday and faces criminal charges brought by federal prosecutors in Manhattan, as well as parallel civil suits brought by the Commodity Futures Trading Commission and the Federal Trade Commission.
Industry number cruncher CCData this week created a new benchmark for assessing ESG risks and opportunities associated with digital assets, revealing ethereum as the only token to achieve an “AA” grade. Bitcoin — the world’s largest cryptocurrency — placed 20th overall on account of its “large electrical consumption”. As a reminder, the bitcoin network consumes energy at an annual rate comparable to countries such as Malaysia or Poland.
Soundbite of the week: Crypto slammed by the Bank of England
Speaking on the new prospects for money, Bank of England governor Andrew Bailey pulled no punches when the time came to address crypto.
Dividing crypto tokens into two camps: “unbacked crypto” including bitcoin and “stablecoins” such as tether, Bailey said both failed the basic tests that would qualify them as forms of money.
“The former have no intrinsic value and are highly volatile and best treated as extremely speculative investments. The latter, while used as the settlement asset for transactions in the crypto world, are not robust and, as currently organised, do not meet the standards we expect of safe money in the financial system . . . they are not money.”
Data mining: Binance’s market share woes continue
Suffering under the weight of America’s crackdown on crypto, exchange bellwether Binance has looked on as its grip on the crypto markets has slipped all year.
At its 2023 height, Binance comfortably controlled over half of the global spot crypto market, but the Commodity Futures Trading Commission and Securities and Exchange Commission dealt hammer blows to the company that has since pushed its market share to roughly 40 per cent.
Elsewhere, Binance rivals including Kraken and Bybit have seen their respective shares of the market increase.
This month has been the first time since January that Binance’s market share has shown an upward trend, but the exchange’s powers remain markedly less than before it became the target for angry US regulators.
Cryptofinance this week is edited by Laurence Fletcher. Please send any thoughts and feedback to cryptofinance@ft.com.
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