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There are a number of research papers that have come to the attention of the cryptocurrency community regarding the latest crime trends. These demonstrate how it is changing rapidly in line with a community that is steadily becoming wiser in the face of con-artists.
The most prominent research comes from the two crypto analytics based companies – Chainalysis, as well as CipherTrace. Both of which officially released reports at the tail end of January this year. These demonstrate some interesting pieces of data when it comes to the activity of criminals, and the strategies they have previously used in order to scam and defraud hapless consumers within the field of blockchain and cryptocurrency.
What these reports demonstrate is an interesting level of evolution, not only from the consumers within the space, but more importantly, from the scammers that have spent a great deal of time attempting to gain the confidence and capital of users. These papers provide a considerable amount of food for thought when it comes to the applications for crypto in criminal activities.
The Lingering Threats
For example, Chainalysis spent a certain amount of time outlining within its January 2019 report that the level of crime that took place within the cryptocurrency market has managed to decrease steadily over the last few years. And, in total, only accounts for a total of 1 percent of all BTC transactions that took place over the course of 2018.
It is with that in mind, however, that the report goes on to shed a greater degree of light on the fact that cryptocurrency exchange hacks have been taking place, resulting in the loss of billions of dollars, due to being siphoned off by criminals. This, along with market activities such as DarkWeb market trading, which is responsible for the generation of millions of dollars for criminals (individuals and organizations), as well as the prevalence of scams being used against unknowing investors.
Chainalysis took a closer look at some of the trends involved in some of the hacks taking place within the cryptocurrency market, specifically when it comes to exchanges. This analysis is made possible thanks to the tracking of the movement of hacked funds from various exchanges and where their exit points lie. These provide new layers of data on the kind of transaction activity taking place within the months of activity within the cryptocurrency exchange before the hack occurred. This information has a longer-term importance in helping prevent these activities from happening again, while also helping to recover stolen funds in future attacks.
What the report goes on to demonstrate is that there is a special degree of resilience associated with the various markets on the darkweb, even during a period of global clampdown, especially illustrating just how newer platforms have been created to run in order to prove resistant to these kinds of attacks, as well as continue to run even after a shut down.
Cryptocurrency Exchange Hacks
One of the biggest selling points for cyber criminals to participate in hacking within the cryptocurrency world would be from exchange hacks. Over the course of 2018, cyber crime against these exchanges netted attackers a total revenue of nearly $1 billion. According to the research published by Chainalysis, there are two large hacking groups that were responsible for the lions share of these crimes over the course of 2018.
Cyber criminals were certainly not hesitant in working to attack these exchanges, sell the stolen goods, and cash out within three months after these kinds of attacks. If we look deeper into the metrics, for every single attack that these groups were responsible for, these groups managed to steal $90 million per attack.
In the wake of this initial attack, the stolen funds would then be moved across to a wide range of various digital wallets and cryptocurrency exchanges in order to make the stolen goods as hard to track as possible. The number of movements that these assets will be involved in is incredible and demonstrates the determination of these attackers not to be detected; often resulting in the funds being moved up to 5,000 times.
After conducting a large volume of fund moves, these hackers then leave the assets alone in order to not raise too much suspicion. In laying low, these hackers will leave these funds for anywhere from several weeks, even months in order to allow suspicion to die down. When the time is right, roughly half of the funds stolen are then cashed out using a broader range of conversion services – typically within 112 days. The majority of these funds will then be sold off in over five months.
The strategies deployed by these two groups are what set them apart and make them distinct, according to conclusions drawn by Chainalysis.
The first group has gained a reputation as a highly controlled and professionalized organization. This hacking group works to shuffle the funds around in a highly meticulous manner, all in order to avoid being caught out by police. The data revealed by the agency demonstrated that hacks involved a total of 15,000 movements of funds stolen from exchanges.
In contrast, the second group does not have as much of a meticulous eye for detail when moving this money. This group, instead, decides on biding their time before cashing out any money that they steal. According to Chainalysis, this organization will move around the assets to a smaller extent, but hold onto these funds while lying low for anywhere from six months to a year and a half before cashing out half of the funds stolen within days through one exchange.
It's these methods that can be listed in order to go on to identify a specific hacking group. It was only recently that specific exchanges and law enforcement organizations have proven unable to track these funds effectively enough to stop them.
For a large number of cryptocurrency of exchanges also lack the necessary software in order to track and identify whether or not funds that are being moved have been stolen. It is because of this that $135 million worth of various cryptocurrencies have been stolen and have since exited the system.
Finally finding ways in which to address these challenges will require more collaboration than is currently being observed from the crypto exchange world. Collaboration between exchanges is a necessary first step, according to conclusions made by Chainalysis.
The company had worked thoroughly in order to identify digital assets that were stolen and that had been moved to another crypto exchange. Once these deposits were validated as stolen, the exchange managed to work with local law enforcement in order to address the problems.
Working to decode these hacks is one of the first steps towards actively fighting against this kind of criminal activity, allowing funds to by traceable and more likely to be recovered. The community, as a whole, needs to work together and embrace a feeling of collaborative security in order to prevent more attacks from happening.
Resilience – The DarkWeb
While the cryptocurrency market enjoyed its bullish year in 2017, especially for Bitcoin, the same cannot be said for markets on the Darkweb. These rising prices resulted in a large number of closures for DarkWeb markets.
In spite of these closures, marketplaces on the DarkWeb have proven remarkably adaptive to the new conditions on the market, working to rapidly develop, and the end result is that the rate of activities that they're involved in doubled over the course of 2018.
According to Chainalysis' data on transaction volumes, these platforms have been steadily working to rise above the $600 million market, a remarkable feat considering that the mainstream market has been hit by a large range of corrections.
What this demonstrates is that criminal entities have not been driven by the value margins of crypto, instead, its the associated convenience and anonymity that compels them to make use of them as a medium for transactions.
In the wake AlphaBay and Hansa's respective closures, the overall activity from DarkWeb markets diminished by a total of 60 percent. But even with this dealing a harsh blow, the amount of DarkWeb activity continued to grow, and subsequently increased, reaching over $700 million over the course of 2017.
Over 2018, the total amount of Bitcoin transferred over to markets within the DarkWeb was roughly $100 million less than in 2017, Chainalysis' collected . metrics demonstrated that this amount steadily increased steadily once again over the year.
On a daily basis, DarkWeb markets manage to see transactions of $2 million worth of BTC, but reports tend to fluctuate, showing that this accounts for only 1% of the total economic activity relating to BTC.
Out of all of this DarkWeb based cryptocurrency exchanges, one that stands out is the Russian market – Hydra has become known as one of the hubs for Bitcoin activity and picked up a large number of traders in the aftermath of the closure of AlphaBay. To put it in perspective, Hydra has managed to receive over $780 million worth of BTC, which overtook AlphaBay significantly.
What this demonstrates is that, even while legal authorities have been working strenuously in order to shut down a large number of these DarkWeb operations, criminals prove more than capable to rapidly innovate, and work through new and different platforms in order to carry out their illegal activities.
One thing that is noticed from law enforcement agencies is that criminals are using a number of encrypted and decentralized messaging services such as WeChat, Telegram, and WhatsApp in order to conduct illegal transactions. What this means is that, even if an illegal exchange is successfully taken offline, the likelihood of fulling eradicating this peer to peer DarkWeb activity proves an act of Sisyphus.
Regardless, cryptocurrency marketplaces and their wide variety of users strive in order to find new and more decentralized ways in order to continue their illegal activities, proving themselves a continual logistical pain for legal authorities worldwide.
Cleaning Up – Anti-Money Laundering
Criminals continue to find new and innovative ways in which to end up stealing money from crypto enthusiasts worldwide, but they still face the overarching issue of ensuring that the money itself is not traced.
As a subject, Money Laundering proves to be one of the more vague and challenging areas to fully understand. This is mostly because accurate data can only be obtained from prosecutions that were ultimately successful, these are then used to get a better understanding of statistics pertaining to money laundering.
Interesting fact is that money laundering using cryptocurrencies is not as secure as people believe. In fact, using crypto as a medium for laundering gives people more opportunities to trace funds, seeing as though transaction data is made transparent through decentralized cryptocurrencies.
It is with this in mind that Chainalysis has provided a wealth of data that serves to break down the kind of cryptocurrency based money laundering that takes place worldwide. Following this data, even more, shows that 65 percent of stolen assets works its way through cryptocurrency exchanges, with a further 12 percent flowing through Peer to Peer exchanges, and the remaining 23 percent making its way through conversion services, as well as ATM's dealing in Bitcoin as well as gambling sites.
Diving Into Money Laundering With Cryptocurrencies
Thanks to the report by Ciphertrace in 2019, in which it takes a deeper look into the world of money laundering over the last 12 months.
It is within this report that Ciphertrace finds that the first half of 2018, over three times the volume of crypto was stolen over this span of time than was taken over the entirety of 2017. Over $1.7 billion was stolen over the first half of 2018, with $950 million was stolen from cryptocurrency exchanges, while the remainder ($725 Million) was stolen through a range of different scams.
With this huge amount of money being stolen, it then needs to be cleaned in order for it to be effectively used for other means. This has since given rise to a wide range of money laundering services that specialize for the Cryptocurrency demographic.
In order to successfully conduct laundering, the first step it referred to as ‘Structuring' – which means to move it around in such a way as to make it remarkably challenging to trace effectively.
Conventionally, criminals involved in this laundering would simply purchase another medium of asset such as Gold and go on to sell them in order to complete this process. In the cryptocurrency world, however, this requires a large amount of money moving into a cryptocurrency ecosystem and subsequently moving around in it.
According to the report by Ciphertrace, this process of mixing cryptocurrency within an ecosystem is conducted through a range of ‘mixers,' Tumblers, as well as chain hopping. These processes allow the cryptocurrency to be rendered highly difficult to trace, with the larger the volume being added and moved around, the harder it proves to be to trace back its original source.
When we take into consideration the anonymity involved in cryptocurrencies, this makes it a remarkably difficult thing for investigators to trace the funds.
It is through these money laundering services within the cryptocurrency space that these services can take funds from various users, mix them with stolen funds, and output them back to users, creating a network of transactions which render it incredibly challenging to identify origins of funds.
Along with this factor, some of these laundering services now allow of the separation of funds depending on input and output. Put in a more simple term, they have dedicated accounts for funds being brought in, while reserving another for funds going out. This demonstrates a relative evolution in method and approach – considering that during 2016 and 2017, money launderers dealing in cryptocurrencies usually kept their funds in a single pool.
It has been over the last two years that the approach of money launderers has evolved significantly, with input funds being deposited into one exchange, then moved around across a wider range of exchanges, all before moving these same funds into a dedicated output pool. One of the plus sides to this is that it reduces transaction costs, and creates an international sort of barrier between the input pool and later output pool.
Lastly, a number of cybercriminals often use a range of gambling websites to launder money. All they do for this is set up an account, allowing them to effectively move funds in and out with little movement. Providing yet another way to launder illegal funds.
Phishing As A Continuing Threat
Chainalysis does go on to state that Phishing attacks have become far less likely to take place over the last year, there are still a significant enough number of incidents that involve these attacks. This demonstrates that hackers are still finding ways to deceive users into handing over their details.
Over the course of January 2019, the users of Electrum as well as MyEtherWallet were sent across warning messaged regarding Phishing attacks and their use in attempting to trick users.
Another example of this comes from a fake account set up on Twitter, in which a user masqueraded as a member of the Electrum team in order to inform users of a fake upgrade and / or new software update available to them. Meanwhile, some users on MyEtherWallet received fake emails which went on to request sensitive account information.
Over the course of December, Electrum users lost a total of $1 million worth of Bitcoin thanks to phishing attacks that subsequently duped users into downloading a fake wallet, with users unwittingly providing password information.
Another cryptocurrency exchange had its fair share of phishing scams. That being the exchange – LocalBitcoins, which, last month, fell prey due to a hacker finding a vulnerability in the forum, and went on to line it to a phishing address.
After a successful arrest of a hacker in January 2019, an international police operation found that the hacker had been using a phishing attack in order to steal Iota tokens worth a total of $11 million over the course of a year.
These instances demonstrate the kind of damage these phishing attacks can have on individual users, as well as a whole ecosystem.
The Future
According to the report provided by Chainalysis, it provided its own prediction on criminal trends over the course of 2019. Taking into consideration the kind of hype that was prevalent within the market over 2017, a large number of investors were easy prey to scams and fraudulent projects during the same period of time. Now with the crypto markets undergoing a cooling period and with investors becoming increasingly skeptical, it looks certain that criminal activity will need to change approach from being over hyped investment ‘opportunities.'
Chainalysis went on to suggest that criminals will take their efforts towards the use of decentralized platforms such as messaging apps. Along with this, criminals will continue to make use of cryptocurrencies in their attempts to move and launder money.
In light of these trends coming from criminals, it is likely to lead to a continual approach to development for regulations for the space.
CipherTrace holds the same kind of opinion. In a number of countries, the existing range of Anti-Money Laundering policies and Know Your Customer Regulations apply to a widening range of cryptocurrency exchanges, which have since contributed to a steady reduction in crypto related money laundering.
In order for their to be a more meticulous and successful counter to increasingly sophisticated acts of cyber crime, there needs to be more collaboration, and a more methodical approach towards countering these activities.
Disclaimer
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