Troublesome Trends in Crypto Crime
Since the launch of Bitcoin in 2009, cryptocurrency has surged in popularity, generating immense wealth for some individuals and immense financial losses for others. Though its resounding volatility has caused some traders and investors to reap significant gains, it has likewise caused immense losses, significantly so from the 2022 crypto crash. Volatility is not the only danger; many recent financial losses in the crypto industry have stemmed from widespread fraud in the largely unregulated industry.
As almost all cryptocurrencies, such as Bitcoin and ETHER, are decentralized, they are not regulated or otherwise controlled by a central bank or any other entity. While decentralized blockchains offer users benefits such as increased data accuracy and public transparency, they are a magnet for criminals to engage in crimes that they could not otherwise execute.
Since its beginnings, crypto crime has dominated the headlines as associated with cryptocurrency, but there may have been a recent pivot. Chainalysis’ annual report on crypto crime found a significant global decline in this activity in 2023. The value of funds sent to illicit addresses dropped from $39.6 billion in 2022 to $24.2 billion, and the percentage of total crypto transaction volume involving illicit activity fell from 0.42% in 2022 to 0.34% in 2023.
Many attribute the reduction in crypto crime to enhanced regulatory and security measures. Indeed, the U.S. has emerged in recent years as one of the most vigilant countries in taking legal action against crypto companies. For example, the SEC increased its crypto-related enforcement actions by 50% in 2023 compared to 2022, initiating 26 federal court enforcement actions, and commencing 20 administrative proceedings. One might be optimistic in light of this recent progress, but the industry remains highly susceptible to fraud risks as crypto fraudsters are continuously adapting to regulatory changes, moving towards larger and more complex fraud schemes. As of 2023, cryptocurrency fraud is the riskiest scam, with the second-highest median dollar loss for consumers in the United States.
Cyber criminals have no hesitation in victimizing our most vulnerable institutions. Ransomware fraudsters have intensified their operations by targeting prominent hospitals, schools, and government agencies. Indeed, 2023 marked the highest year on record for ransomware attacks globally, with fraudsters extorting $1.1 billion from victims, compared to $567 million in 2022. The prevalence of “big game hunting” attacks—where large corporations are targeted for maximum payouts—also increased, with a greater proportion of ransomware incidents involving payments exceeding $1 million.
On an individual level, the ongoing fraud is just as disturbing. “Pig butchering” fraud schemes have seen an 85-fold increase since 2020, involving perpetrators who develop online relationships with victims and entice them to invest in fraudulent cryptocurrencies or transfer assets into fake virtual asset investment platforms. Blockchain analysts find this fraud challenging to trace because fraudsters exploit direct, individual communication rather than easily identifiable mass advertising methods, and because after “the slaughter” the perpetrators clear the account and vanish. According to James Barnacle, Chief of the FBI’s Financial Crimes Section, there were over $3.5 million in reported losses and about 40,000 victims in the U.S. in 2023, with some individuals losing between $2 and $4 million.
Finally, targeted approval phishing scams have greatly increased, with global losses reaching approximately $374 million in 2023. These scams differ from traditional methods where scammers deceive victims into sending cryptocurrency through fake investments or impersonation, as approval phishing involves tricking users into approving malicious blockchain transactions. Once approved, these transactions allow scammers to have unrestricted access and take tokens from the victim’s wallet.
Despite federal agencies’ increased efforts against crypto fraud, these schemes have grown more evasive as fraudsters adapt their tactics to avoid detection. It is now more important than ever for cryptocurrency fraud whistleblowers to report alleged violations to the government. With federal whistleblower reward programs such as the SEC Whistleblower Program, the CFTC Whistleblower Program, the AML Whistleblower Program, and the IRS Whistleblower Program offering incentives and protection, individuals who report wrongdoing can play a pivotal role in safeguarding the integrity of digital assets. As crypto fraudsters continually develop more sophisticated strategies both within and beyond regulatory frameworks, empowering whistleblowers remains crucial to combatting crypto fraud.
Caroline Nolan is a Student at the University of Pennsylvania and former Intern at The Anti-Fraud Coalition.
