How blockchain analytics can help combat cryptocurrency crime in the UAE

The last 12 months has been a breakout period for cryptocurrencies. In spite of the global economic damage resulting from the Covid-19 pandemic, there was substantial growth in the crypto ecosystem. Many cryptocurrencies went beyond their existing price records, largely driven by the increased demand from institutional investors, alongside significant consumer adoption of decentralised finance (DeFi) and non-fungible tokens (NFTs).

As cryptocurrencies become more widely adopted, their use by both good and bad actors will naturally increase. This is particularly true given their pseudonymous nature and the ease with which they allow users to instantly send funds anywhere in the world. Our data shows the UAE in particular received an estimated $25.5bn in on-chain value between July 2020 and June 2021, and the country ranks third regionally in the Middle East for total cryptocurrency value received behind Turkey and Lebanon. Furthermore, DeFi protocols also account for 60 per cent of UAE’s on-chain value received between this time period.

When looking at cryptocurrency-related crime in the UAE, the transaction volume hovers at around 0.6 per cent, totalling approximately $153m in illicit value received between July 2020 and June 2021. This is in line with global trends, as Chainalysis’ 2022 Crime report shows cryptocurrency-based crime has hit at all-time high in 2021, with illicit addresses receiving $14bn over the course of the year, up from $7.8bn in 2020. While these numbers represent a significant rise, it doesn’t tell the whole story.

Cryptocurrency usage overall is also growing faster than ever before. Across all cryptocurrencies tracked by us, total transaction volume grew to $15.8tn in 2021 around the world, up over 550 per cent from 2020’s totals. Given that roaring adoption, it’s no surprise that more cybercriminals are using cryptocurrency. However, given the increase was just 79 per cent — nearly an order of magnitude lower than overall adoption — it might just be a sign things are changing. In fact, with the growth of legitimate cryptocurrency usage far outstripping the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower. As of December 2021, transactions involving illicit addresses represented just 0.15 per cent of cryptocurrency transaction volume in 2021 despite the raw value of illicit transaction volume reaching its highest level ever.

The good news is cryptocurrency is increasingly providing unparalleled transparency. Every transaction is recorded on a public, unchangeable ledger. This allows financial institutions to ensure they’re working with the safest possible customers. Exchanges and other cryptocurrency businesses can monitor transactions on their platforms for illicit activity in real-time. And government agencies can more easily trace the flow of illicit crypto funds than in most other forms of value transfer. Cryptocurrency’s inherent transparency makes it uniquely safe and efficient.

There is an onus on governments and industry to increase the resources devoted to countering threats and to find more effective ways to collaborate. As it stands, many attackers — like ransomware groups — continue to operate because the potential rewards outweigh the costs. We need to work on effective strategies to deincentivise bad actors by raising the physical and financial costs of conducting cryptocurrency-based crime.

Traditionally, many exchanges relied on other cryptocurrency services’ publicly stated know your customer (KYC) and anti-money laundering (AML) policies when assessing their riskiness. If the policy was up to scratch, many exchanges would happily treat the service as if it were safe. That approach will no longer count as a sufficient level of due-diligence with institutional money flowing into cryptocurrency like never before. Financial institutions, whether they are buying cryptocurrency of their own, offering custodial services, or accepting cryptocurrency businesses as banking clients, will treat other services with more scrutiny as risk-based compliance becomes the norm. In the long run, these efforts will also remove some of the incentive to use cryptocurrency in criminal activity, as it becomes harder for cybercriminals to convert cryptocurrency into cash.

The excitement about the future of cryptocurrencies exists precisely because of the speed of innovation in the space. Over the past year, we have seen DeFi take off and an influx of institutional dollars. The global pandemic was an extreme test of cryptocurrency’s value as a safe haven asset, and Bitcoin’s price surged. But just as the industry is rapidly evolving, so too are the bad actors who commit cryptocurrency-related crime. The public and private sectors must get the resources and tools they need to work together to leverage cryptocurrency’s inherent transparency to ensure this new financial system is safe from abuse.

Janey Young is the head of Global Investigations at Chainalysis

Taken from GB Invest February 2022 edition