• Digital currency proponents have long contended that cryptocurrency and other blockchain-based tokens, such stablecoins, are preferable to traditional finance.
• According to a new investigation by the research group SSRN, the rise of cryptocurrencies has significantly aided in the creation of a “entire criminal ecosystem” that has been built on top of them.
• The authors cite hacking, money laundering, con games, ransomware, “sextortion,” and a flourishing trade in illegal goods as examples of crimes and state that “obviously the data on these crimes are pretty murky.”

The latest statistics show that there are almost 14 million transactions connected to crypto-enabled cybercrimes. Advocates of digital currencies have long argued that crypto and other blockchain-based tokens, such as stablecoins, are a better alternative to conventional finance. Unaffected by geopolitics, national banks, wealthy financiers, insider deals, cartels, fraudsters, and other criminals, this financial system would be owned by the people and accessible to anybody with a phone or computer.

Nearly 14 million transactions related to crypto-enabled cybercrimes are detected

While others have long argued that the purported transparency and inviolability of blockchains would make it more difficult to commit fraud, theft, and financial crime, some even claimed until this year that cryptocurrency would be immune to the drops in value of fiat currencies that frequently occur in financial crises.

While no one disputes that blockchain has its own (boring) uses and that digital tokens have their own good applications, such as programmable money, financial inclusion, tech innovation, and faster, cheaper cross-border transactions, advocates’ loftiest assertions have generally been bunkum. In fact, the lofty rhetoric surrounding cryptocurrencies has frequently served more as a smokescreen for the conceit of currency speculators than as a manifesto for the future.

However, in today’s world, who can blame someone for wanting to gamble or make a fast buck? or to be wealthy enough to have food and heat their homes? The cost of energy is skyrocketing during a time of conflict, multinational corporations are making record profits, and our oceans are clogged with trash and waste. Fewer individuals today can afford to live in cities. So why not create a superior, more equitable capital system?

Unfortunately, years of gains for many crypto coins were lost relatively instantly in the spring. Even several stablecoins lost their links to the dollar, in one instance losing all of their value. A market with about two-thirds of all miners in that nation, many of which were powered by coal, is hardly free of geopolitics, especially before China tightened its controls on Bitcoin last year. (It is still the second-most popular location in the world for cryptocurrency mining.)

Also, millions of loyal followers on social media have allowed multibillionaires to use the platform as a legal kind of networked insider trading, allowing them to tweet about their holdings in niche coins with what appears to be impunity.

A fresh chance for criminals

In this brave new world, the small guy doesn’t stand a chance. But what about cryptocurrency fraud and other financial crimes that, in theory, will be permanently stopped?

According to a recent analysis from the research organization SSRN, the cryptocurrency explosion has in large part contributed to the development of a “entire criminal ecosystem” that has been constructed on top of it.

The authors note that “obviously the data on these crimes are pretty murky” citing hacking, money laundering, con games, ransomware, “sextortion,” and a booming trade in illegal commodities as examples of crimes.

The report states that:

“While the advent of cryptocurrencies and digital assets holds promise for improving and disrupting financial systems through offering a cheap, quick, and secure transfer of value, it also opens up new payment channels for cybercrimes.”

The researchers conducted “the first detailed anatomy of crypto-enabled cybercrimes” and highlighted the economic concerns that they give rise to by assembling a broad combination of public, proprietary, and hand-collected data, including dark web discussions in Russian.

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“Our analyses reveal that a few organized ransomware gangs dominate the space and have evolved into sophisticated, corporate-like operations with physical offices, franchising, and affiliation programs. Their techniques also have become more aggressive over time, entailing multiple layers of extortion and reputation management.”

“Blanket restrictions on cryptocurrency usage may prove ineffective in tackling crypto-enabled cybercrime and hinder innovations. Instead, blockchain transparency and digital footprints enable effective forensics for tracking, monitoring, and shutting down dominant cybercriminal organizations,” the authors explain.

But what exactly is a “crypto-enabled cybercrime,” the report’s main topic?

“Decentralization, privacy, and anonymity have been the building blocks of the cryptocurrency movement since its inception over a decade ago. While the technology has spurred many innovations, cybercriminals’ adoption of cryptocurrencies has become a central issue in the crypto-regulation debate.

Ransomware attacks, money laundering activities, and various crypto-based scams have recently surged, prompting the US president to issue an executive order requiring agencies to establish a course of action. According to the Federal Trade Commission, cryptocurrency is the most reported payment method in frauds – surpassing bank transfers, wire transfers, and credit cards – accounting for $728.8 million (33.5%) of the 2022 year-to-date reports,” the report states.

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It goes on to say that the rise of cryptocurrency has given crooks entirely new chances. For instance, to steal money, hackers take advantage of flaws in decentralized algorithms or centralized organizations like crypto-exchanges. But they must exercise caution, the report continues:

“In these types of attacks, coins are transferred to a blockchain address. Given that these transactions and addresses do not require real names, the attackers are initially anonymous. Indeed, the exploit is available for anyone to see, given that the ledger of all transactions is public here.

[However] while the original exploit is completely anonymous (assuming the address has not been used before), the exploiter needs to somehow ‘cash out’. Every further transaction from that address is also public, allowing for potential deployment of blockchain forensics to track down the attacker”.

Notice the mention of blockchain forensics’ “potential deployment.” Keep in mind that these are almost always transnational operations that may be utilizing phony IDs and networks of networks.

“Beyond stealing cryptocurrency via exchange and protocol exploits, traditional cybercriminal activities are now also enabled with a new payment channel using the new technology – the second opportunity our research focuses on. The use of cryptocurrencies replaces potentially traceable wire transfers or the traditional suitcase of cash, and is popular for extortion.

Criminal organizations also use cryptocurrencies to launder money. According to Europol, criminals in Europe laundered approximately $125 billion in currency in 2018 and more than $5.5 billion through cryptocurrencies,” the report says.

According to the authors, growing bitcoin acceptance also encourages other types of cybercrime, escalating the issue:

“Information about crypto-enabled cybercrimes is typically dispersed, private, and incomplete. Out of the 21,650 reported addresses [BTC addresses linked to criminal activities], sextortion leads the cybercrime report counts (33.8%), followed by blackmail scams (32.3%), and ransomware (23.9%). These three types of cybercrime jointly account for 94.4% of all reported entries on the Bitcoin Abuse system.

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The number of reported related transactions provides a different picture concerning the most active type of cybercrime on the Bitcoin blockchain. Out of the total of 13.6 million crypto-crime-related transactions, ransomware leads most of the on-chain activity (42.5%), followed by Bitcoin tumbler [dispersing Bitcoin in multiple transactions and addresses] (32.0%) and others (22.4%),” the report states.

Nearly 14 million transactions related to cryptocurrency crime! What, though, can be done about it in reality? Government actions are made considerably more difficult by the nature of cryptocurrency markets and blockchains as a distributed, worldwide, people’s financial system. The report continues:

“A one-size-fits-all solution, such as restricting or banning cryptocurrency usage by individuals or organizations, is problematic for three major reasons. First, this is not a national problem. Blockchains exist across multiple countries and harsh regulations in a particular country or jurisdiction have little or no effect outside that country. As we have seen from other global initiatives (e.g. carbon tax proposals), it is nearly impossible to get global agreement.

Second, while an important problem, cryptocurrency plays a small role in the big picture of illegal payments. Physical cash is truly anonymous and, indeed, this may account for the fact that 80.2% of the value of US currency is in $100 notes. It is rare the consumers use $100 bills, and it is equally rare that retailers are willing to accept them.

Third, and most important, expunging all cryptocurrency use in a country eliminates all of the benefits of the new technology. Even further, it puts the country at a potential competitive disadvantage. For example, a ban on crypto effectively eliminates both citizens and companies from participating in Web 3.0 innovation.”

In other words, your money is gone once thieves convert digital bits into analog notes. But there is some optimism, according to the authors:

“The analysis in our paper points to a different tactic. While addresses are anonymous initially, funds are often transferred from one address to another in order to ‘cash out’. All transactions are viewable and immutable – a key feature of blockchain technology.

This opens the possibility of deploying forensic tools with a focus on tracking, monitoring, and identifying the crypto transactions attributed to criminals. Indeed, our research provides a glimpse of what is possible given the transparent nature of blockchains.”

According to Wade Baker, the main author behind the ‘Data Breach Investigations Report’ series:  “After analysing 10 years of data, we realise most organisations cannot keep up with cybercrime – and the bad guys are winning. … But by applying big data analytics to security risk management, we can begin to bend the curve and combat cybercrime more effectively and strategically.”

The findings will make fighting cyberthreats more targeted, though still a daunting task since organisations may not even realise they have been compromised.  The nine patters named by the DBIR are:    “miscellaneous errors such as sending an email to the wrong person; crimeware (various malware aimed at gaining control of systems); insider/privilege misuse; physical theft/loss; Web app attacks; denial of service attacks; cyberespionage; point-of-sale intrusions; and payment card skimmers.”

Additionally, the report noted that while 92% of attacks well into these nine categories, hackers were even less versatile, using just three patterns for over 70% of any security breaches on average, per industry branch.  Using the power of big data, these trends are finally emerging and the defences against cyberattacks can be more properly and strategically shored up.

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(Image Credit:  Linus Bohman)