The report on 2024 Crypto Crime has several trends and statistics on cryptocurrency thefts and frauds. Approximately $430 million was stolen in 50 attacks in the first quarter of 2024. Most of this was caused by one breach concerning the PlayDapp gaming platform. According to Cyentia in Forbes Australia, this depicts the sector’s constant vulnerability despite many security measures implemented.
The report’s key findings draw attention to the fact that these thefts happen, especially in DeFi (decentralized finance) protocols. During the first quarter of 2024, DeFi scams accounted for 60% of all crypto heists, with the main entry being flaws in smart contract codes that hackers exploited (Forbes Australia). While the absolute value pilfered from DeFi protocols decreased through 2023, perhaps due to better security practices and a general decline in DeFi activity, risks remain high—such as that from a compromised private key.
KYC requirements are developed to verify users’ identities to prevent fraudulent activities and implement requirements. After that, financial institutions, issuing companies, and platforms roll out KYC process implementation within the requirements, which is necessary for collecting and verifying customers’ personal data like their full name, address, date of birth, and identification number.
Example: During sign-up on a cryptocurrency exchange website, the details and documents required may include personal ones like a passport or a driver’s license. The platform then verifies the validity of the documents to ensure that the user is who they claim to be.
Impact: This flow helps prevent identity theft, fraud, and fake identity use in financial transactions
Few Crypto Theft Statistics
- The most significant cryptocurrency theft occurred in October 2022, with $775 million lost from 32 attacks. The DeFi ecosystem suffered the most of the attack, with close to 82.1% lost in DeFi. Most of the attacks were due to vulnerabilities in the company’s codes.
How it happened: 64% of these exploits were from cross-chain bridges/protocols, protocols that allow users to move their tokens from one chain to the other. As transactions continued to grow on these chains, they became a target for hackers, as there were millions of deposits guarded by smart contracts. Due to insufficient security measures, the weakness of the smart contract was leveraged to perpetuate the attack.
- In the first quarter of 2024, $739.7M worth of cryptocurrency was stolen. Phishing attacks, exit scams, and private key compromises were all part of the reason for this theft.
How it happened. A major exploit in February was due to a vulnerability in PlayDapp’s codes. PlayDapp is a blockchain gaming platform that offers NFTs and tokens in its ecosystem. The attackers could mint tokens freely twice, which was approximately $290M.
- Cryptocurrency hacks in 2021 were 60 times higher than in 2018, a 79% increase. One of the major hacks in 2021 was the Ronin network hack, which resulted in a loss of $625M.
How it happened. The Ronin Network hack was caused by a security flaw exploited by a hacker who could access Private Keys to authorize transactions illegally. The attacker withdrew 173,000 ETH.
AML (Anti-Money Laundering)
AML frameworks include the laws, regulations, and procedures developed to combat money laundering and other financial crimes. AML takes a lot of time because all transactions are monitored to identify and report suspicious activity.
Transaction Monitoring in AML
Example: A crypto exchange integrates transaction monitoring software that analyzes users’ real-time transactions. If a user starts sending large volumes of cryptocurrency to various foreign accounts at a certain point, this system flags this activity as suspicious.
Detection enables the exchange to probe further and document the activity to the responsible authorities, thereby thwarting potential money laundering schemes.
Activity Reporting
Illustration: A financial institution and a crypto platform should uptrend with regulatory bodies through a report known as the Suspicious Activity Report, where they detect any patterns that could indicate money laundering.
Impact: Filing SAR significantly helps the regulators’ efforts to track and curb various illegal activities within the financial system.
Enhanced due diligence
Example: When a high-risk person, such as a politically exposed person, makes transactions exceeding certain monetary amounts, the company conducts further verification through various procedures, keeping a keen eye on that person’s activities.
The impact: Enhanced due diligence prevents high-risk individuals from exploiting the financial system for money laundering.
Importance of KYC
KYC and an AML framework are important in ensuring the security and integrity of the financial system, including that of cryptocurrency. They can establish a basis for trust among users, regulators, and financial institutions in the development process because they make it known that the participants have been verified and have acted upon the suspected activities in a timely manner.
Role of Blockchain Analytics in Building AML Capabilities
1. Real-time transaction monitoring
Example: Chainalysis and Elliptic are blockchain analytics solutions providing real-time monitoring for cryptocurrency transactions whereby any suspicious activity is detected and flagged, such as a large transfer to unknown random wallets or, in fact, any kind of transaction that is out of the ordinary.
Impact: Because the monitoring is based on real-time tracking, it is possible to quickly take action against a particular money-laundering practice, which may deter successful money launderers from making further attempts.
2. Detailed Forensic Analysis:
Example: Blockchain analytics tools can trace fund flow across many transactions and addresses to the smallest detail, providing a granular forensic trail. This will be very useful in identifying the source and destination of illicit cash.
Impact: The detailed analysis allows enforcement agencies to prosecute these criminals and confiscate stolen assets.
3. Enhanced Due Diligence:
Instance: CipherTrace and Coinfirm provide enhanced due-diligence services that include an in-depth audit of the risk profile of addresses and transactions of cryptocurrencies, including the determination of whether addresses had previously participated in any illicit activities.
Impact: This enhanced due diligence will prevent businesses from involving high-risk entities and thus help reduce exposure to financial crime.
4. Regulatory Reporting:
Example: The blockchain analytics solution is related to the easier production of regulatory reporting, like SARs. It automates the collection and analysis of data to ease reporting compliance.
Impact: Proper and efficient reporting helps businesses comply with AML regulations, which further supports the avoidance of legal penalties and boosts their reputations.
While KYC and AML implementation in such a decentralized crypto ecosystem is complex, with an inability to apply advanced privacy features, technological complexity, and global variation in this regulation, there is much that regulatory development can do to strengthen these security frameworks through the encouragement of standardization, technological integration, and international collaboration. Ensuring effective regulation, though, without unnecessarily stifling innovation and user privacy, will be necessary to the continued growth and security of the cryptocurrency industry.
Conclusion
In summary, while KYC and AML services are critical for ensuring the integrity of the crypto space, accurate implementation is pivotal for compliance. Idenfy has positioned itself as a leader, helping cryptocurrency platforms seamlessly handle their KYC processes. These measures against financial crimes build trust, support regulatory compliance, and ensure the growth and stability of markets. Beyond regulatory adherence, adopting such practices provides a strategic advantage in today’s closely scrutinized financial landscape.
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