Today was the second Chainalysis's Crypto Crime series webinar and like you would expect dove further into the illicit activity that occurs on the blockchain. In total four sections were discussed in today's session each with some extremely interesting and unique insights. A couple of important things to remember is that in 2023 $24.2 billion in assets were identified as part of illicit activity and while the number and amount of transactions has increased it has only done so at the same pace of adoption by more individuals.

Sanctioned Entities and Jurisdiction While scams used to dominate the illicit activity industry it has almost been entirely replaced now Sanctioned Entities. Now these entities are adapting as you would expect with those entities moving their illicit activity outside of the jurisdictions that have implemented these sanctions.

For instance, there is a Russian Exchange, whose name I forgot to write down, that has actually grown in popularity since it has been sanctioned. Since it is located in Russia the US and others cannot do anything to shut it down and as a result, the sanctioning drew more bad actors to use it.

The most interesting thing that Chainalysis covered in this section in my opinion dealt with Tornado Cash. When it was initially sanctioned the transaction volume fell 96% but since it is a smart contract and you cannot shut it down something interesting has begun to emerge. People started to use Tornado Cash with small amounts being funneled through it and over the following months have slowly had inflows start picking back up again. It will be interesting to see if this year Tornado Cash has a resurgence because there hasn't been any action against anyone for using it.

Scams For the last two years, scams have significantly decreased in terms of value brought in. That's not to say that it is not a problem as scams still resulted in $4.6 billion in 2023 but that is a far cry from $10 billion in 2019 and 2021 or the $6.5 billion in 2022. It is important to note that only scams that involve on-chain transactions are counted and if someone is scamming people by saying they were setting up a blockchain or a crypto and being sent fiat then Chainalysis cannot track them.

Within the scams category, there are various types, and while most have continued to decrease as with the general category that is not the case. NFT scams and Rug pulls have slowly grown or treaded water compared to the others but one has increased 85-fold since 2020. Romance scams also known as Pig Butcher scams have been booming. On average these scams cost the victim $4,593 the next closest scam type NFTs only came in at $3,095.

One of the big reasons that they, Chainalysis, feel this is happening is because recovery of funds from scams tends to be much higher than other types of illicit activity. Over the last few years, numerous enforcement agencies have gotten a ton better at this making them less fruitful to try.

Market Manipulation This area is much more of a grey area and that is because it lies in a grey area of the law. NFT washing for instance isn't exactly illegal but has a ton of illegal elements around it creating this unique situation where it's a known bad thing but legal options are lacking.

Of the many types of manipulation, Chainalysis discussed ERC-20 pump and dumps. The criteria the Chainalysis came to use were: one address owning more than 70% of the liquidity, 5 or more trades from nonassociated actors, traded on a DEX, and tokens with $300 or less in liquidity.

A total of 370,066 ERC-20 tokens were created in 2023 and of those 53.6% (168,923) were listed on at least one DEX. From the 168,923 Chainalysis identified 90,408 or 24.4% were identified as pump and dumps. That may sound like a lot but it is only 1.3% of trading volume and the whole coin movement occurred within 1-3 days so they are flash in the pans.

While some have pointed at these numbers and said that this is an issue what is important to note is that crypto finally had proof that they can track and address this narrative that has been used against crypto. A very surprising thing that was found was that actors don't even seem to change wallet addresses for different pump and dumps. One wallet launched 81 tokens along and even the wallet in 20th place launched between 10 to 15. That is not something I expected to see and was very surprised. On average these activities roughly make $20 million a month in profit. Not a ton but also not that bad given how consistent it was.

Money Laundering Money laundering had a few rather surprising highlights when covered that I wouldn't have guessed. CEXs remain the top destination for inflows and the CEXs used are extremely concentrated in that 5 CEXs control 60% of the inflows. What was unclear though is if those funds were able to be translated into fiat on these exchanges or if they were getting flagged and frozen. Within the 5 CEXs that receive the majority of inflows the addresses that these inflows are sent to are also extremely centralized which runs counter to what so many people would think when it comes to these operations.

It does need to be mentioned that DeFi is growing however it isn't growing as fast as you would expect and the CEXs hold on the top place has remained relatively stable over the last few years. It will be interesting to see how this plays out and if DeFi might speed up and start to take market share from the CEX but as of now CEXs appear to be very entrenched.