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Illicit Transactions in Crypto on the Rise Despite Enforcement Efforts

While illicit activity in cryptocurrency remains a small share of overall volume, Chainalysis noted that their data does not include volumes associated with the collapse of some of crypto's biggest names in 2022, some of which are facing charges of fraud, given the lack of off-chain insights.

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Illicit transaction volume rose for the second consecutive year, hitting an all-time high of US$20.1 billion in 2022, according to data compiled by blockchain analytics firm Chainalysis.

"We have to stress that this is a lower bound estimate — our measure of illicit transaction volume is sure to grow over time as we identify new addresses associated with illicit activity, and we have to keep in mind that this figure doesn’t capture proceeds from non-crypto native crime (e.g. conventional drug trafficking involving cryptocurrency as a mode of payment)," Chainalysis wrote in a blog post on Thursday.

According to Chainalysis, 44% of 2022’s illicit transaction volume came from activity associated with sanctioned entities, in a year when the US Office of Foreign Assets Control (OFAC) launched some of its most difficult-to-enforce crypto sanctions. For example, Russia-based crypto exchange Garantex was sanctioned by the OFAC in April 2022, but has been able to continue operating with impunity, and accounted for the majority of sanction-related transactions.

Chainalysis also highlighted that while transaction volumes fell across other more "conventional" categories of cryptocurrency-related crime, stolen funds rose 7% year-over-year.

"We’ve found in the past that crypto scams, for instance, take in less revenue during bear markets, likely because users are more pessimistic and less likely to believe a scam’s promises of high returns at times when asset prices are declining," Chainalysis explained.  

"In general, less money in crypto overall tends to correlate with less money associated with crypto crime," it added.

While illicit activity in cryptocurrency remains a small share of overall volume at less than 1%, and crime as a share of overall crypto activity is still trending downwards, Chainalysis noted that their data does not include volumes associated with the collapse of some of crypto's biggest names in 2022, some of which are facing charges of fraud, given the lack of off-chain insights.

Chainalysis' upcoming 2023 Crypto Crime Report will dive deeper into the illicit transactions that occured in 2022, as well as what its on-chain analysis reveals about the market failures last year.

Related: Talking Heads - Experimentations and Growth in Crypto ft. Chainalysis’ Jonathan Levin

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