Crypto crime hits record high of $14 billion in 2021, mostly due to DeFi scams and thefts

• In 2021, around $2.7 billion cryptocurrencies were stolen, and $7.8 billion worth of cryptocurrency were scammed

• Illegal activity accounted for 0.15% of all blockchain transactions in 2021, down 75% from a year earlier

Crypto-related crime hit a new all-time high with $14 billion worth of blockchain transactions in 2021, mostly in part to the rise of decentralized finance (DeFi) platforms, blockchain research firm Chainalysis said in a report.

The value of illicit transactions rose nearly 80% from a year earlier, driven by a spike in theft and scams.

“DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike,” Chainalysis wrote in its annual Crypto Crime report.

“But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft.

Last year, London-based Elliptic published a report saying investors and users have lost just over $12 billion in DeFi platforms till October.

Wild west of DeFi

DeFi is a fast-growing sector of the crypto market that aims to cut out intermediaries like banks, which are needed in traditional forms of financial transactions.

It is a programmable code called a smart contract, written on a blockchain, like Ethereum or Solana, and executes when certain conditions are met, which helps in verifying the transaction terms.

DeFi transaction volume grew 912% in 2021, according to Chainalysis stats. 

But there are a lot of red flags when it comes to dealing in this nascent crypto ecosystem.

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However, Kim Grauer, Chainalysis’ head of research, said the problem with DeFi is that many of the new protocols being launched have code vulnerabilities that hackers can exploit.

In 2021, of all hacks, 21% took advantage of these code exploits.

Grauer told CNBC that while third-party firms perform code audits and publicly designate secure protocols, many users still opt to work with risky platforms that bypass this step if they think they can get a bigger return.

A total of $3.2 billion worth of cryptocurrencies were stolen in 2021, a jump of 516% from a year earlier. Of this total, 72% of stolen funds were taken from DeFi protocols.

Losses from scams rose 82% to $7.8 billion worth of cryptocurrency.

Bigger picture

Although there is a steep rise in criminal activity by total volume, compared to 2020’s figure, scams and thefts hit an all-time low when examined as a percentage of overall crypto transactions last year.

The total transaction volume rose over 550% to $15.8 trillion in 2021. Chainalysis said illegal activity accounted for 0.15% of all blockchain transactions last year – down 75% from 2020 and nearly 96% from 2019.

“We had an explosion in the amount of on-chain activity [in 2021],” Grauer told CoinDesk. “It’s just that the amount of crime didn’t grow as fast as the amount of legitimate use cases.”

Researchers partly credit law enforcement and the inherent transparency of blockchain technologies for the restricted growth of crypto-based crime.

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Unlike traditional forms of fiat money transfer, every transaction in the blockchain is recorded in a publicly visible ledger, making it transparent and possible to see how much of all cryptocurrency activity is associated with crime.

“Authorities have been enormously successful in leveraging the transparency of blockchains to investigate and shut down illicit activity,” said Grauer.

Picture Credit: ngpf