For all the talk of rug pulls and scams, the enormous crypto sector appeared to become less crime-ridden last year, at least relative to its overall size, according to a new analysis by the blockchain data platform Chainalysis. But the hot new concept known as decentralized finance, or DeFi, appears to be an area particularly ripe for fraud.
The report found the rapidly growing DeFi sector to be a main reason for the rise of criminal activity, particularly when it comes to theft, scams, and money laundering. Over 70 percent of thefts took place on DeFi protocols, where total stolen funds rose by an astonishing 1,330 percent, more than the sector’s overall 912 percent increase in transaction volume, according to Chainalysis. “In other words, as DeFi has continued to grow, so too has its issue with stolen funds,” the authors wrote.
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When it comes to scams, DeFi was a primary breeding ground as well. More than a third in the crypto space were rug pulls, in which someone raises funds for a crypto project and then disappears with the money. According to Chainalysis, these sort of scams often occurred in DeFi spaces because of the high levels of “hype” in the space and the ease with which people can “create new DeFi tokens and get them listed on exchanges.” Additionally, the use of DeFi to launder money grew by 1,964 percent.
“DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft,” the authors wrote.
While the total amount nabbed by crypto criminals rose 79 percent last year to an all-time high of $14 billion, criminal activity as a percentage of total transaction volume actually dropped, to 0.15 percent of crypto, down from 0.62 percent the previous year, meaning that the sphere overall was less crime-ridden. That’s because overall transaction volume ballooned by an astonishing 567 percent to $15.8 trillion.
Chainalysis noted that the total amount of illicit activity might be revised slightly upward as additional evidence comes in, but the platform believes there is substantial evidence that crime, though still a “substantial problem, is “becoming a smaller and smaller part of the cryptocurrency ecosystem.” The authors attributed the crime drop to the improving abilities of law enforcement agencies to track down crypto criminals.
“If cybercriminals know law enforcement is capable of seizing their cryptocurrency, it may lower their incentive to use it in the future,” the authors wrote.