Defi Cryptocurrency crime stolen through decentralised platforms has risen by 1300%, says new report, which shows tokens and increased money laundering to blame
The amount of cryptocurrency stolen from decentralised finance platforms has risen by 1300% according to a new report from the industry broker marketplace Tradingplatforms.com.
The startling figure, which has been revealed shortly after US President Biden’s decision to investigate new ways in which to regulate cryptocurrency and decentralised finance, show that the level of crime growth has overtaken the increased DeFi transaction volume for 2021, which also rose by a significant 912%.
However, experts say that during the same year, the amount of cryptocurrency stolen through its platforms totaled $2.2bn, a 1300% increase from 2020’s amount. Furthermore, out of the $3.2bn worth of cryptocurrency stolen in 2021, assets stolen from its protocols were about 72% of the total, amounting to the $2.2bn reported figure.
Has cryptocrime risen as a result of DeFi tokens?
According to Edith Reads of Tradingplatforms.com, the significant jump in crypto-related crime is most likely linked to the rise in token availability. She said, “Decentralised tokens cause quite the spur in the crypto space, which is why many people are now coming on board. However, because just about anyone can create a its token and have it listed without a code, we are now seeing an increase in crypto crimes, with DeFi rug pools becoming quite common.”
Money laundering vis DeFi is also on the increase
The report went on to say that AML regulations are now being bypassed as more criminals are turning to DeFi protocols to launder their money. Data shows that its recorded a 1964% increase in usage for money laundering, the highest year-on-year growth.
Another aspect is mining, which, the study shows, accounts for the second-highest year-over-year growth in illicit funds, with just under a 500% increase. P2P (peer-to-peer) exchange services and gambling platforms were the only services to show a decrease in illicit fund usage in 2021.
Has DeFi become an easy target for hackers?
Evidence suggests that experienced hackers are also using DeFi protocols to create well-designed rug pools. This common method involves tricking investors into purchasing DeFi tokens. The developers then empty the project’s funds, causing the token’s value to crash and huge losses for the investors.
Problems are also occurring because users are not careful enough when researching theory investments. Volatile speculation on DeFi tokens and their internet positioning results in many crypto enthusiasts behaving rashly when it comes to token projects. The Tradingplatform.com report states, “With the right technical knowledge, anyone can create a DeFi token and list it in a decentralised exchange without a code audit to publicly confirm the smart contract has no loopholes to advantage the developers.”
It adds, “It’s also worth noting that hackers can easily manipulate bugs in the protocols’ smart contract codes and exploit them to steal the investors’ funds.”
Financial law expert and Partner at Stewarts, Marc Jones talks legalities of regulating cryptocurrency and DeFi in relation to the latest market changes
Marc Jones is the Partner for commercial litigation, fraud and securities litigation at Stewarts – a leading Financial law firm that acts in some of the most high-profile and groundbreaking cases in the UK. Their clients include FTSE 100 companies, Fortune 500 and other international corporations, as well as institutional investors, foreign governments, public bodies and individuals.
We caught up with him for an update on the legal ramifications and challenges facing digital currencies and DeFi in the current marketplace.
Q: How would you define the digital currency marketplace at this time?
Despite its size, variety and breadth of adoption, it’s still in its infancy. The focus to date has been on currency trading but increasingly innovative decentralised financial products and services are carving out new markets and addressing more diverse social needs. As the underlying technology races ahead, the legal and regulatory framework is lagging behind and in fundamental respects missing altogether.
With some exceptions regulation is still minimal and patchy but that will change. And one the key elements of the defi marketplace, DAOs, purport to sit outside of any legal system at all. That is incorrect, which could have unexpected financial implications for those involved with DAO. As cryptocurrencies hit the teenage years and these legal and regulatory gaps are filled, cryptocurrencies will undergo some growing pains.
Q: How do you think cryptocurrency will develop/progress over the next few months? What are the major changes taking place in the digital currency marketplace right now?
There is definitely an increase in regulatory impetus and interest both at the national and international level. At a national level, at least in the UK, there is an increased focus on consumer protection. Last year the FCA banned the marketing of crypto-derivatives products to consumers, and this has been followed with a crack-down on the advertising of such crypto assets over which the FCA will shortly take control.
The FCA is also consulting on extending the financial promotion rules to crypto assets. The promotion regime is broader than that which applies to regulated products, so depending on the outcome of the consultation, even unregulated crypto assets could be made subject to the same promotion rules that apply to all other financial products. At the international level, there has been a flurry of warnings from international bodies such as the Financial Stability Board, the Basel Committee of Banking Supervision and Iosco that cryptocurrencies now pose systemic risks to the traditional financial system and that these risks could escalate rapidly.
This has given rise to a debate about whether national rules alone can ever address these risks created by an asset class that are global in their reach but exist nowhere or whether international rules and even some form of supra-national body will be needed to regulate cryptoassets. These changes will not come about quickly but they should already be affecting the outlook of anyone operating in this arena.
Q: What influences are driving these changes?
At the national level, there seems little doubt that the pandemic and lockdowns lead people to spend more time online. That combined with financial hardship caused by the economic effects of the pandemic and the increasing ease with which it is possible to buy and trade cryptocurrencies lead to a material increase in crypto-uses over the last two years. There was also a reported increase in the level of fraud in this area. Taken together this appears to have been the catalyst for demands to crack down on misleading crypto advertisements and better protect consumers. At the macro level the rapid increase in size of the asset class in just a couple of years (now hovering around the $3trn mark) has forced regulators to pay attention at the systemic level. To date, the only area that has seen anything resembling international convergence as regards regulation of cryptocurrencies is anti-money-laundering. Now, the size of asset class combined with the increasing nodes connecting cryptocurrency markets to traditional financial markets, and therefore risking a crisis in one affecting the other, has got regulators worried.
Q: What is the future of fiat currency? Will it be phased out?
In short, no. I can’t see even a moderately-sized economy ever giving up the economic and political power that goes with issuing its own currency. A few small economies have abandoned their own fiat currencies and adopted the US dollar, and one of those – El Salvador – recently adopted Bitcoin as legal tender alongside the US dollar. So might a country like that eventually go all the way and abandon fiat altogether in favour of a cryptocurrency?
Perhaps. The real issue so far as fiat is concerned is whether states will issue central bank digital currencies. According to the Atlantic Council’s CBDC Tracker, nine countries have launched CBDC’s. The world’s major economies are all either researching, developing or piloting CBDCs. In each case, whether the launch of a CBDC would entirely replace the existing (largely credit-based) money supply (which raises existential issues for the traditional banking system) or whether the two can co-exist is one of the fundamental issues governments and central banks are grappling with.
Q: Which trends will reshape the global financial markets over the next few months, taking into account the current challenges?
There are three main shifts that are leading changes in the marketplace at this specific time. They are;
Further adoption of cryptocurrencies and digital assets more broadly. Whether one looks at it from the perspective of the financial markets in major economies (eg a 2021 survey of 100 hedge funds found that executives expect to hold an average of 7.2% of their assets in cryptocurrencies by 2026) or developing economies whose citizens have not been as well-served as more advanced economies by the existing global financial system and appear from some metrics (eg P2P trading volumes and number of crypto-users) to be much more open to adopting cryptocurrencies, the market looks set to continue to grow apace.
Increased regulation and arbitrage. The recent announcement by Binance that it has secured crypto asset licences from Dubai and Bahrain, and its chief executives statement that this marks “a milestone in our journey to being fully licensed and regulated around the world” is the clearest example indicating that big market-players see the writing on the wall. Not long ago the SEC invited crypto-business to voluntarily come into the regulators tent. Smart businesses will get in and help shape regulation. Staying outside will become less and less of an option. The choice will not be whether to be regulated, but where to be regulated.
Public versus private money. Diem may have gone but the battle it teed up is here to stay. This is definitely a longer term trend but it is the big one and in my view everything that is taking place in the regulatory and legal sphere needs to be looked at against the backdrop of this central issue at all times.
Will states really allow their citizens to ditch fiat currencies in favour of privately issued cryptocurrencies, or will states be forced to retain their monopoly through CBDCs, or simply by regulating away the threat posed by cryptocurrencies?
The recent executive order issued by President Biden was seized on positively by the crypto-community but beyond making clear that the USA intended to “reinforce US leadership in the global financial system” through means including “the responsible development of payment innovations and digital assets” the statement was too vague to really give comfort as to what the future holds.