How Big Is Crypto Crime, Really?

Estimates of the scale of online crime range from under 1% to nearly half of all crypto activity – CoinDesk analyzes the approach to these estimates.

(Chris Rogers/Getty Images)

The European Union is in late-stage talks over how to implement new rules intended to curb dodgy behavior that uses virtual assets – but estimates of the share of crypto payments linked to financial crime vary wildly from 0.15% to a whopping 46% of transaction volumes.

There’s clearly a lot of illicit activity in the crypto world – of which some, like scams or hacks, are harmful to honest crypto users, while others might seem like a way of circumventing rules that were unfair in the first place, like government-imposed capital controls.

People in the crypto industry like to quote the figures on the lower end of the range, and on Friday, Binance’s CEO Changpeng “CZ” Zhao tweeted statistics to argue that crypto is safer than fiat.

But attempting to get a handle on the exact scale of unlawful virtual asset activity isn’t easy. It usually relies on identifying crypto addresses that appear suspect and totting up their trade volume – but illicit users generally prefer to hide in the shadows.

The result you get depends on how much certainty you want to have about who the illicit actors are online. When branding a wallet address as suspect, you might want to have a smoking gun that constitutes absolute proof, or be happy to accept something more probabilistic and speculative.

For regulators, judges and law enforcement, understanding the problem could prove crucial to determining whether new laws to force crypto users to identify themselves are needed or even lawful.

Yet there’s surprisingly little consensus on how big crypto crime is. Almost certainly, in dollar terms, it’s dwarfed by the real-life version. According to the U.N. Office on Drugs and Crime, money laundering through conventional finance is worth as much as $2 trillion, comparable to the total value of all the world’s crypto markets combined.

But regulators are worried not just about the overall volumes, but what they represent as a share of the crypto sector. They’ve noted how fast virtual assets are gaining popularity, and are thinking about what the scale of the problem might be in future, not just today.

In a recent speech that criticized the industry as akin to a lawless Wild West, the European Central Bank’s Fabio Panetta cited a wide range of figures for illicit crypto activity, ranging from under 1% to as much as half of all virtual transactions.

Read more: ECB’s Panetta Blasts Crypto as ‘Ponzi Scheme’ Fueled by Greed

One reason for variation in figures is whether you look at, say, drug purchases as a share of crypto payments or compared to the overall market. People who acquire bitcoin (BTC) just to “HODL” aren’t doing anything wrong – but that means a greater proportion of those using it to buy something are likely to be engaging in illicit activity.

Which wallet?

But beyond the question of exactly what you’re counting, there’s also a question of how you’re counting these transactions – and that all depends on how you determine who the bad actors are.

Industry figures and academics such as CZ, or Georgetown Law’s Chris Brummer, often quote figures from blockchain specialists Chainalysis – which said in January that transactions involving illicit addresses represented just 0.15% of cryptocurrency transaction volumes last year.

But that approach leaves plenty of crimes unaccounted for, CoinDesk was told by Sean Foley, an associate professor of applied finance at Macquarie University in Australia.

Foley’s own paper, evocatively titled “Sex, Drugs, and Bitcoin,” was peer-reviewed and published in the Review of Financial Studies in 2019. It concluded that one-quarter of bitcoin users are involved in illegal activity, and that the $76 billion in illicit payments involving bitcoin represented 46% of the currency’s total transactions.

That’s a much higher estimate than others on the market – but Foley defended his methods in an interview with CoinDesk.

Chainalysis “are not necessarily very transparent in their approach,” he said. “They don’t really accurately document how they arrive at their numbers.”

“If Chainalysis only looked at Ross Ulbricht’s wallet that was seized by the FBI, but I look at all of his conduct through time. … I’m going to find a lot more,” he said, referring to the founder of the Silk Road marketplace who was sentenced to jail in 2015.

Rather than just looking at addresses known to be suspect, Foley looked at each users’ networks and behaviors, using statistical techniques that are also deployed in fields like medicine and nuclear safety.

While, say, using a mixer to stay anonymous isn’t a smoking gun proving bad behavior, he says that taken together, different indicators can give you a good view about whether someone is up to no good.

“If you look dodgy because you were predominantly interacting with dodgy people, and you look dodgy because you were using a lot of tumbling services, and there was a lot of activity when darknet marketplaces got seized … this gives us the ability to say with a much higher degree of confidence that these are likely illicit actors,” he said.