$100 Billion Crypto Fraud in Five Years vs $3.1 Trillion Financial Fraud in One Year

• Crypto fraud has totaled $100B in the last five years (2019-2024) with $20B average losses per year.
• Financial fraud was $3.1T in 2023 alone, 15,400% more than crypto fraud for the same year.
• While criminals are becoming more sophisticated, DEXs are quicker to adapt to crypto fraud than CEXs.

Alt text: $100 Billion Crypto Fraud in Five Years vs $3.1 Trillion Financial Fraud in One Year

In the last five years (2019-2024), crypto fraud has reached $100B (an average of $20B per year). Suspects aremainly using stablecoins and centralized exchanges (CEXs) to withdraw illicit funds.

To put things in perspective, a Nasdaq-Verafin joint research showed$3.1T in financial money laundering for 2023, with the biggest sources being drug traffic, human trafficking, and terrorist financing.

Crypto fraud is 0.64% ($20B/year) of the $3.1T financial fraud in 2023.

Officials aretightening crypto regulations to address the rise in crypto scams, while exchanges are starting to implement fraud prevention. This has led to a drop in incoming illicit funds to CEXs, but is it enough to stop crypto fraud? Let's discuss the details below.

Why Are Criminals Using Stablecoins and Centralized Exchanges?

Bloomberg's report mentions several reasons why criminals prefer stablecoins and CEXs for money laundering:

1. Stablecoin Market Has Spiked Since 2021

According to Def Llama, the stablecoins market has increased by 158.49% between March 2021 and July 2024, from $62.7B to $162B.

Stablecoins are pegged 1:1 to national currencies, making them ideal for laundering illegal funds anonymously (due to the inherent privacy of crypto transactions).

2. Centralized Exchanges Are Perfect for Money-Laundering

CEXs like Binance and Coinbase have high liquidity, integrations with traditional financial services, and make it easy to convert crypto to fiat.

Chainalysis

Centralized exchanges are, by far, thelikeliest destination of illicit funds for crypto fraudsters. DeFi has also received increasing attention from criminals, likely due to a large growth in the sector.

At the same time, cybercriminals are getting more sophisticated to avoid detection, using tactics like chain hopping and moving funds to mixers.

[...] crypto criminals with more sophisticated on-chain laundering skill sets-such as the notorious North Korean cybercriminals associated with hacking gangs like Lazarus Group - tend to utilize a greater variety of crypto services and protocols.Chainalysis

Address poisoning attacks rose at an alarming rate, alongside flash loan scams, oracle manipulation attacks, and cross-chain attacks.

AI and social media-driven scams also lowered the bar for crypto scams, with crypto presales being a likely target of criminals.

Are Decentralized Exchanges Better for Honest Trading?

While decentralized exchanges (DEXs) aren't inherently safer, they're currently showing improved resilience,' according to Cyvers' Web 3 Security Report Q2 2024.

Over $629.68M were lost in crypto scams in Q2 2024, with most focused on centralized exchanges (+900% YoY in CEX losses).

Conversely,DEXs were quicker to mitigate security risks, making them less than ideal targets for hackers.

For instance, after experiencing a security breach, pump.fun (a $SOL meme coin creation platform) immediately paused the contract, communicated with the hacker, and offered a bounty.

As a result, pump.fun recovered over 80% of the stolen funds in less than 24 hours.

The Gala Games hack (worth $200M) could have ruined the project, but the developers' quick actions mitigated the aftermath.

The hacker returned over $2M, and the company bought 28M $GALA tokensto stabilize the token's value and alleviate selling pressure.

DEXs currently seem like the safer bet if you want to avoid asset theft, as they not only respond fast to incidents but are also willing to put up their own money to ensure customers don't suffer.

Cybers' Security Report also predicts an increase in attacks against the crypto gaming industry(like crypto gambling, which is under-regulated and a bit of a gray area).

Crypto Fraud Increases, Still Comes in a Far Second Place to Financial Fraud

Despite a rise in crypto scams and CEX money laundering, traditional financial fraud (using fiat) is more prevalentby several orders of magnitude.

The increase in crypto fraud and money laundering is likely a reflection of thebigger trend of increased fraud in the past few years.

This is an indication that both people and financial institutions need to improve their awareness and protection if we don't want things getting out of hand.

Criminals are also getting more sophisticated as CEXs are implementing fraud prevention. It remains to be seen where the scales are tipping.

References

Click to expand and view references

• Global Financial Crime Report (NASDAQ)
• Crypto's $100 Billion in Illicit Flows Swamp Stablecoins, Exchanges (Bloomberg)
• Money Laundering Activity Spread Across More Service Deposit Addresses in 2023, Plus New Tactics from Lazarus Group (Chainalysis)
• Cyvers 2024 Web3 Security Report (Cyvers)
• Cyvers X Post About the pump.fun Hack (X)

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