Crypto criminals will launder at least $10.5 billion by 2025 by harnessing new blockchain technology that is creating opportunities for financial crime faster than law enforcement can respond, according to Elliptic’s State of Cross-chain Crime 2022 report.
Analytics forecast the value of illicit crypto laundered through “cross-chain crime” – which allows criminals to move funds across blockchains and bypass centralized services that can trace and freeze assets – will increase nearly 60% from $4.1 billion in mid-2022.
This figure will reach $6.5 billion by 2023 and $10.5 billion by 2025, with an upper estimate of almost $15 billion.
Though Bitcoin was the dominant (and only) blockchain in the early 2010s, the number of new blockchains and cryptoassets have skyrocketed in recent years. This emerging multi-chain ecosystem — while overwhelmingly facilitating legitimate activity — has nevertheless caught the attention of illicit actors seeking new ways to launder their criminal proceeds (see Key Benefits of Blockchain Technology).
Ranging from low-level cybercrime such as scams and pig butchering cases, to large-scale drug and ransomware operations, savvy criminals are leveraging the ability to move proceeds between cryptoassets (asset hopping) or across blockchains (chain hopping) to conceal their funds (see Blockchain Technologies for Cryptocurrencies and NFTs).
The Rapid Rise of Cross-chain Crime
Yet legacy blockchain analytics tools do not have the capability to follow the money across and between different assets and chains — frustrating criminal investigators and handing crypto criminals the advantage.
By 2022, Elliptic has identified over $4.1 billion of illicit or high-risk crypto that has been laundered through either asset-hopping or chain-hopping.
This has been made possible by decentralized exchanges (DEXs), cross-chain bridges and coin swap services — technologies that allow criminals to obfuscate the movement of illicit funds and achieve some degree of anonymity. As the multi-chain ecosystem continues to develop and existing popular crypto laundering methods (such as mixers) continue to be blocked by legal interventions, cross-chain crime will likewise grow as it becomes the laundromat of choice for crypto criminals.
Cross-chain crime is suspected to have featured heavily in the aftermath of the FTX cryptocurrency exchange collapse. It is a growing phenomenon made possible from the rapid rise of mostly unregulated decentralized exchanges, cross-chain bridges and coin swap services that connect the crypto economy.
Cross-chain services have removed barriers stopping the free flow of capital between the growing number of cryptoassets, while also making it harder for criminal investigators to unpick complex money-laundering schemes.
There are now more than 20,000 cryptoassets operating on hundreds of blockchains around the world, with more digital assets being launched daily (see about Digital Assets Ownership in Virtual Worlds).
Perpetrators of cross-chain crime range from cybercriminals targeting victims with scams to large-scale sanctions evasion, drug trafficking and ransomware operations across international borders. As the blockchain ecosystem expands, it’s creating more opportunities for criminality.
These services – which overwhelmingly facilitate legitimate activity – have nevertheless caught the attention of bad actors seeking new ways to launder their criminal proceeds.
Following the bankruptcy of the FTX exchange, nearly half a billion dollars in crypto was likely stolen from its wallets in a suspected theft.
These assets are now being laundered by moving them between different assets and blockchains, facilitated by decentralized exchanges and cross-chain bridges.
Elliptic’s new research finds that cross-chain crime is accelerating, due in part to the success law enforcement agencies and regulators have had by targeting established crypto laundering tools, such as Tornado Cash and other virtual currency “mixing services” that anonymize stolen funds.
Savvy criminals are wise to the fact that many law enforcement agencies are still using legacy blockchain analytics tools designed to catch yesterday’s thief, who existed in a single-asset world.
Legacy blockchain analytics tools cannot trace cross-chain crime, which is frustrating investigations and handing criminals an unfair advantage.
To win the arms race, law enforcement agents and officers need to be equipped with the next generation of blockchain investigation tools that make it possible to catch today’s crypto thief, regardless of where or how they hide their dirty money.
The Tools of the Cross-chain Criminal You Need to Know About
Cryptoassets will form the foundation of a financial system that is fairer, freer and safer for all to use. Cryptocurrencies, NFTs and other virtual assets are fast becoming part of the mainstream financial ecosystem, with around 20% of US adults estimated to be holding Bitcoin alone.
There are now more than 20,000 cryptocurrencies operating on hundreds of different blockchains around the world, with the total market capitalization worth in excess of $1 trillion.
Following Bitcoin’s creation in 2009, thousands of different cryptocurrencies — such as Ether, BNB, Dogecoin, Monero, Solana and TRON — have launched, with more being released daily. Many of these cryptoassets support a range of different utilities, such as stablecoins and NFTs.
For bad actors, this expansion of blockchain technology and the growing adoption of cryptoassets by everyday citizens poses many opportunities for criminality.
It’s now typical for dark web markets to take payments in multiple cryptocurrencies, while terrorist organizations routinely advertise on social media for donations. Frontline police are increasingly being asked to investigate crypto thefts or find their investigations quickly cross into the digital realm as they track the proceeds of crime.
Understanding and pre-empting crime trends is critically important for law enforcement, so they can direct their resources to where they will be most effective against criminality.
Illicit and High Risk Crypto Laundered Through DEXs, Cross-chain Bridges and Coin Swap Services by Origin (2022)
The Big Three Cross-chain Crime Threats
Three services are being leveraged by criminals that threaten the integrity of the crypto ecosystem: decentralized exchanges (DEXs), cross-chain bridges and coin swap services. These tools facilitate cross-chain money laundering and terrorist financing due to their lack of identity checks and anti-money laundering (AML) controls.
The use of AML services is overwhelmingly legitimate, but they nevertheless open the door for enterprising criminals to escape justice, often inadvertently.
Centralized exchanges – which also facilitate cross-chain or cross-asset swaps – are not considered here, as most mainstream services utilize AML and identity screening solutions.
Decentralized Exchanges (DEXs)
- Function: Swap between cryptoassets on the same blockchain (asset-hopping)
- Examples: Uniswap, Sushiswap, 1inch, Curve.fi, PancakeSwap
- High risk funds processed: Over $1.2 billion since late 2020
A DEX is a decentralized smart contract based crypto exchange that allows users to swap any tokens, as long as a liquidity pool exists for that token. Due to their legitimate use case, largely related to DeFi investing, criminals use them predominantly to launder proceeds of DeFi or exchange thefts. Anonymous by design, the services allow criminals to bypass the compliance checks required by most centralized exchanges.
- Function: Swap between cryptoassets on different blockchains (chain-hopping)
- Examples: renBridge
- High risk funds processed: Over $750 million since 2020
Bridges are also often decentralized and smart contract based, locking funds on one blockchain and issuing users the converted equivalent on another. They are mainly used to launder the proceeds of hacks (including those initiated by North Korea), ransomware, scams and Ponzi schemes.
Coin Swap Services
- Function: Swap assets either within or across blockchains without an account
- Examples: AudiA6
- High risk funds processed: Over $1.2 billion since 2013
Coin swap services are centralized services that swap users’ funds anonymously, almost instantly. Some are legitimate-facing services and may have AML controls.
However, others cater only to cybercriminals and may process privacy coins such as Monero. Most of the illicit funds originate from dark web markets, scams, Ponzi schemes or data vendors.
Ensure Crypto Crime Doesn’t Pay
Legacy blockchain analytics tools were built for a single cryptoasset world, when it wasn’t possible to move funds between different assets and blockchains. Therefore, this legacy approach can no longer give a true representation of criminality and the bad actors moving funds chain agnostically.
The most important action that law enforcement can take to combat cross-chain crime is to adopt blockchain analytics solutions that screen the ecosystem holistically.
We’re referring to the next generation of blockchain analytics tools that can track the proceeds of crime, even as funds are moved across and between multiple cryptoassets and blockchains. This way, you are not just viewing multiple currencies individually or seeing separate elements layered together in aggregate — you are in fact exposing the flow of funds across all assets and blockchains concurrently. This is because you are tracing across the ecosystem as a whole to give a complete picture of criminality.
Besides and in addition to holistic screening solutions, law enforcement agencies should:
- Demystify and democratize access to blockchain intelligence by upskilling your investigative teams. Make sure enough agents have access to the tools they need to effectively investigate their crypto-related crime cases with confidence, whatever their specialism — thus sharing the workload as the volume of crypto-related crime cases increases.
- Best practice is to get a second view by corroborating your evidence with an alternate blockchain analytics provider. When gathering intelligence in the early stages of an investigation, a quick re-screen of a suspect wallet with a second provider can help reduce false positives or uncover more leads. Further into your investigation, corroborating could identify additional evidential opportunities to strengthen your case and achieve a conviction.
- Whodunit? Once you’ve got the suspect, it can be difficult to prove they committed the crime. To build a strong case you need to defeat all defenses. Think like a defense attorney by looking outside the world of crypto to prove beyond all reasonable doubt exactly who was behind the computer. Make sure you can access the information you need quickly to issue subpoenas, seize stolen funds, and ultimately, get to trial.
- Hit a dead end? Criminals will make mistakes more often than not. Even the savviest will need to expose their position and cash-out eventually. Be patient and have the tools in place that will help you catch criminality as it happens, not tell you what has already happened.
- Understanding and pre-empting crime trends is critically important, so that agencies can direct their often limited resources to where there is the most criminality. Stay up to date on the latest crime typologies and learn how to think like a crypto thief.
- You’re not investigating technology, you’re investigating people. Technology is just a tool to help you tell a story of what happened. Don’t feel daunted by the tools of the trade — the best ones are simple to use and are there to help you test your investigative theories.
- Collaborate with other law enforcement agencies nationally and around the world. Share information and build relationships with private sector participants. Cryptocurrencies are unconstrained by national borders and legal jurisdictions – no one organization holds all the knowledge.
- Keep up with the growth in services being developed both for illicit purposes, such as mixers, as well as those being developed for licit purposes. For example, as the crypto ecosystem develops, more services will become available for criminals to co opt and launder the proceeds of criminality — spanning terrorism financing through to CSAM and ransomware. Being ahead of those developments by leveraging solutions that identify those threats will help build a complete picture of exposure and increase your understanding.
- Keep up with the massive growth in the number of assets used by criminals to launder funds and subsequently, available to target for seizure and victim restitution. A Freedom of Information request submitted to all 45 UK Police Forces by The Observer newspaper in 2022 showed that out of the 27 that responded, seizures leapt from only two types of cryptoassets in 2019 to 22 in 2021. This pattern can also be observed when looking at the number of assets held in individual OFAC-listed wallets:
Number of Cryptoassets Possessed by OFAC-listed Wallets
Why Cross-chain Crime is Increasing?
Cross-chain crime is on the rise, accelerating much faster than anyone anticipated. By 2020, just over $500 million had been laundered through DEXs, bridges and coin swap services. By July 2022, that figure had surged to $4.1 billion, with just under half ($1.8 billion) attributed to sanctioned or eventually-sanctioned entities (such as Tornado Cash).
Now, Elliptic projects cross-chain crime will rise even further, laundering over $6.5 billion of high-risk crypto by 2023 and $10.5 billion by 2025 (with an upper estimate of almost $15 billion).
There are a number of reasons why cross-chain crime is projected to continue its rapid rate of growth:
- Legacy blockchain analytics solutions cannot trace cross-chain crime — Criminals arewise to this, so layer the proceeds of crime through a series of fast, complex transactions to evade detection. This turns investigations into resource intensive, cumbersome and time consuming ordeals.
- It can be used to launder funds from small-scale scams to large-scale cybercrime — Chain and asset hopping can be used to launder cryptoassets in the low thousandsto many millions of dollars. The threat of abuse is therefore relevant to all levels of law enforcement.
- Alternative laundering methods are being targeted — Traditional crypto launderingtools, such as mixers, have been the target of enforcement actions and sanctions recently, leaving criminals to increasingly look at chain/asset hopping as alternatives. The theory of “crime displacement” means when one type of crime is prevented, bad actors will go where no one is looking or enforcing the law.
- It provides a gateway to many crypto services — Criminals raking in illicit crypto on oneblockchain can use chain/asset hopping capabilities to invest those illicit funds into DeFi, NFTs and other similar opportunities on different chains
- It’s anonymous — Most (if not all) DEXs, cross-chain bridges and coin swap services allowusers to transact anonymously, without any KYC checks or AML controls.
by Peter Sonner