Illicit crypto wallets hold over $25B as hacks, thefts mushroom

Major criminal wallets hold over $25 billion in cryptocurrency, new data showed on Wednesday, with the majority of illicit funds coming from theft with criminals engaged in increasingly brazen activities involving digital tokens.

Following last week's seizure by the U.S. Department of Justice of $3.6 billion in Bitcoin (BTC-USD) stolen from a 2016 hack against crypto exchange Bitfinex, blockchain analysis firm Chainalysis found more evidence showing illicit cryptocurrency flows.

Funds from illicit sources surged from $3 billion in 2020 to $11 billion of funds, with theft accounting for 93% of those balances, or $9.8 billion in cryptocurrency, the firm found. During the same period, however, Chainalysis estimated that total criminal activity made up a scant 0.15% of all blockchain economic activity.

"The highest net worth criminals have murky networks of foreign banks and shell corporations to obfuscate their holdings. But in cryptocurrency, transactions are saved on the blockchain for all to see," said Kim Grauer, director of research with Chainalysis.

The asset class currently holds a global market capitalization of $1.98 trillion, but crime has become a rising cost to investors doing business in the sector, with unregulated decentralized finance (DeFi) markets emerging as a growing concern. According to the report, crypto crime whales, or large digital wallets linked to the blockchain that hold at least $1 million in illicit funds, saw a major increase by the end of 2021. Some of those gains must come from the overall appreciation of crypto’s market value, but the figure’s rate of increase is nearly twice as much as what the firm observed during past bull markets.

Outside of theft, other sources of illicit flows to criminal wallets came from "darknet" marketplaces ($448 million), scams ($192 million), fraud shops ($66 million) and ransomware $30 million) — all fractional by comparison to theft.

Based on the report, criminals also appear to be cashing out their holdings at a much faster rate. During 2021, they held illicit crypto for an average time that’s at least 75% shorter than the average holding period for all years measured.

Some of the largest illicit crypto wallets haven’t moved funds for years, Chainalysis found. But the time period a criminal whale holds illicit funds has dwindled almost every week since the cryptocurrency market peaked in November 2021.

Since the DOJ’s seizure last week, criminal balances currently hover around $5 billion.

Of the $25 billion, the firm identified more than four thousand crypto wallets with only 3.7% representing criminal whales. Those whales received different portions of their illicit flows when compared to overall criminal wallets measured.

From the report, “Whereas stolen funds dominate overall criminal balances, darknet markets (37.7%) are the biggest source of illicit funds sent to criminal whales, followed by scams second (34.2%) and stolen funds (24.3%) third.”

Based on time zone analysis, a rough way to approximate an online user's location based on when they interact with their crypto wallet, the firm tried to roughly estimate where criminal whales might be located in the world.

That measurement found both the highest concentration of whale addresses, as well as amount of money held, in time zones spanning Russia, South Africa, Saudi Arabia and Iran.

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