Christian Seifert

Up until recently, legendary heists rarely resulted in personal losses.&nbsp;



As uninvolved and unaffected bystanders, consumers could find a certain true-crime thrill in theorizing about how a team of unknown thieves managed to <a href="https://www.smithsonianmag.com/smart-news/five-things-know-about-isabella-stewart-gardner-art-heist-180977448/">whisk</a> 13 priceless masterpieces out of the Isabella Stewart Gardner Museum in 1990, or in recounting how Saddam Hussein’s son and personal adviser <a href="https://www.nytimes.com/2003/05/06/world/aftereffects-presidental-theft-bank-official-says-hussein-s-son-took-1-billion.html">walked</a> $1 billion in cash out out the front door of Iraq’s Central Bank in 2003.&nbsp;



These stories are staggering in their scale and yet utterly inconsequential to the average person; freed from any personal expense, we could freely enjoy them as a form of entertainment.&nbsp;



However, modern legends are less easily swallowed.&nbsp;



In 2022, two massive crypto hacks — namely the Binance Smart Chain ($566 million) <a href="https://www.nytimes.com/2022/10/07/business/binance-hack.html">hack</a> and the <a href="https://blockworks.co/news/sky-mavis-ronin-network-bridge-exploited-for-over-600m" target="_blank" rel="noreferrer noopener">Ronin bridge ($522 million) exploit</a> — overshadowed the total value of history&#8217;s most expensive painting, the Mona Lisa ($850 million). In fact, this milestone year saw $3.8 billion stolen from DeFi protocols and exchanges, far surpassing the total combined value ($2.8 billion) of the Central Bank of Iraq heist and the Isabella Stewart Gardner Museum Art theft.&nbsp;



And, unlike their predecessors, these heists siphoned money not from government entities or a museum, but ordinary people.&nbsp;



In the case of the Ronin bridge hack, over 75% ($400 million) of the total stolen amount belonged to users who played Axie Infinity, a popular play-to-earn game developed by Sky Mavis. The theft occurred after hackers acquired enough validator nodes to approve their fraudulent transactions. The exploit capitalized on human error; hackers managed to achieve backdoor access because Axie DAO had given — and never rescinded — temporary proxy permission to sign off on transactions to Sky Mavis, thus creating a vulnerability.&nbsp;



Sky Mavis has, to its credit, <a href="https://blockworks.co/news/axie-infinity-developers-made-some-trade-offs-that-enabled-625m-ronin-breach" target="_blank" rel="noreferrer noopener">taken responsibility for the breach</a> and its users’ losses. Shortly after the exploit, the developer announced that it would reimburse player losses even if it was unable to recover the stolen funds. Efforts to this end are already underway; in April, Sky Mavis raised $150 million in partnership with Binance and other crypto investors to this end.&nbsp;&nbsp;&nbsp;



The developer’s good intentions should be acknowledged. However, compensatory efforts can’t repair the damage that this and similar exploits wreak on consumer confidence. While users might find after-the-fact promises like Sky Mavis’ reassuring, crypto theft is an emotionally-charged, even traumatic, experience for victims.&nbsp;



Some might decide to take their losses as a sign to abandon Web3 — or, news of the hack could dissuade would-be adopters from buying into the technology altogether.&nbsp;



It’s an issue of trust:&nbsp;If current and prospective Web3 users don’t feel safe navigating Web3, they will step to the side until the landscape feels more secure. This lack of confidence is already apparent; per a recent report from the Web3 development platform Alchemy, assets on centralized exchanges <a href="https://assets.website-files.com/6086f3afee58e6430b6c8041/63c62976dec6c0015f5073c7_alchemy-web3-development-report-q4-2022.pdf">dropped</a> by 45% at the close of Q4 2022, illustrating consumers’ clear lack of faith in crypto custodians. However, the same report found that developer sentiment remains optimistic and enthusiastic.&nbsp;



The question remains: How can advocates bridge this gap between increasingly anxious users and blockchain’s undeniable potential? The only possible answer is to empower protocols, developers and users alike to protect themselves as they venture into the future of Web3.&nbsp;



<h2 class="wp-block-heading">Security: an unavoidable priority</h2>



Web3’s current security woes are, in a way, inevitable.&nbsp;



The decentralized and sometimes anonymous nature of cryptocurrencies provides a fertile ground for cybercriminals, who can hide their identities and exploit technological and human weaknesses. This is further compounded by the high value of assets in crypto, making them — and the companies that trade them — prime targets for hackers. Binance, for example, has a daily trading volume that extends into billions of dollars, so exploiting any vulnerability within the exchanges’ native codebase can result in stealing millions.



Moreover, the rapid evolution of blockchain technology creates perverse incentives via security gaps that can be exploited by hackers. With many protocols prioritizing functionality and product development over security, they stand to become more susceptible to attacks. Human errors, such as creating weak passwords, sharing private keys, or failing to update relevant software, can also result in additional vulnerabilities that hackers can exploit.



Given the above, it is crucial for Web3 innovators to understand that there is no easy nor quick fix to the issue at hand.&nbsp;



Restoring consumer confidence and achieving a “safe” status quo will require informed and purposeful action from all Web3 denizens — from individual users and developers to large-scale decentralized financial (DeFi) protocols.&nbsp;



<h2 class="wp-block-heading">Building a fortress</h2>



Individual users can and should take steps to protect themselves; however, the brunt of responsibility for securing crypto assets will naturally fall upon DeFi protocols.&nbsp;



Innovators must recognize their limitations — “trustless” technology does not necessarily equate to perfect or inviolable technology. Cybersecurity is a <a href="https://www.fortunebusinessinsights.com/industry-reports/cyber-security-market-101165">$153 billion industry</a> for a reason; given a certain risk threshold, even careful and well-meaning organizations can no longer protect themselves from bad actors without specialized support.&nbsp;



In a protocol’s case, the involvement of third-party code auditing and monitoring by specialized blockchain cybersecurity firms becomes imperative. With their deep understanding of the blockchain ecosystem and sophisticated tools, these firms can help detect potential threats, anomalies and vulnerabilities in DeFi protocols, making them less susceptible to breaches. Regular, in-depth audits of the codebase can catch exploitable weak spots, reducing the opportunities for hackers.



At the institutional level, robust security measures such as transaction monitoring and emergency response protocols need to be ingrained into existing systems.&nbsp;



Transaction monitoring can help detect suspicious activities early, allowing for swift intervention. Automated emergency response measures — such as circuit breakers — are another valuable security measure that can help, as they can slow down suspicious transactions and halt protocol operations when suspicious activity is detected.



In addition, adopting innovative technologies like automated threat detection systems can be instrumental in preventing attacks.&nbsp;



These systems, often powered by advanced machine learning algorithms, can detect and neutralize suspicious activities before they cause significant damage. They provide a vital layer of security by instantly responding to threats, making DeFi protocols more resilient against sophisticated hacking attempts.



Read more from our opinion section: <a href="https://blockworks.co/news/web3-metropolis-not-ready" target="_blank" rel="noreferrer noopener">Web3’s promised metropolis just isn’t fun yet</a>



Engaging in continual user education is also a must.&nbsp;



Informing users about safe practices and potential threats can significantly reduce the risk of successful phishing attempts or other user-targeted attacks. Moreover, because informed users are less likely to fall prey to scams, user education can enhance overall security. And for individual users, embracing the newest and best practices in digital security is a total non-negotiable; this includes using strong and unique passwords, leveraging multi-factor authentication and maintaining up-to-date software.



Of course, such protections cannot be put into place overnight. Developing a robust security strategy requires careful planning, consideration and financial investment.&nbsp;



Some in the industry might wonder if the return is worth the lift; but to me, the only possible answer is a resounding yes.&nbsp;



It falls to today’s innovators to reassure and protect aspiring Web3 users — and to ensure that crypto’s legendary heists don’t become cautionary tales.&nbsp;



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<div class="wp-block-post-author-biography">Christian Seifert is the researcher-in-residence at Forta. Prior to joining Forta, Christian spent 14 years at Microsoft leading security research and applied research teams supporting Microsoft Defender security offerings. Christian also led The Honeynet Project, a global non-profit security research organization bringing passionate security researchers together working on open-source honeypot tool development and threat intelligence.</div>


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Crypto crime is much too personal

Lili Infante

As a former “crypto cop” who spent almost a decade fighting crypto-enabled crime at the US Department of Justice, I have seen the ugliest of crypto’s use cases in facilitating some of the most horrific crimes.



But no matter my history, I still believe that distributed ledger technology is the most important information technology innovation of our time. We must protect it at all costs, not only from the bad actors that exploit it, but also from the forces that drive governments to regulate it out of existence.&nbsp;&nbsp;



“This is why we can’t have nice things” summarizes my sentiment about the criminal use of digital assets, which I truly believe were originally created for the good of humanity.&nbsp;



As cryptocurrency exploded into the mainstream in the last three years, crypto-enabled crime rates exploded along with it.&nbsp;



But crypto is not inherently bad. People are bad.&nbsp;



Just like the street corner claimed by your local drug dealer shouldn’t be burned to the ground just because it facilitates crime, cryptocurrency shouldn’t be ousted out of society because it sometimes is used by bad people doing bad things.&nbsp;



The development of distributed ledger technology may be the only way to save the world from the devastating consequences of humanity’s historically relentless pursuit of and competition for power and resources, which arguably is the root of all past and present human catastrophes.&nbsp;&nbsp;



<h2 class="wp-block-heading">A new, revolutionary standard of money — horribly misused</h2>



I first heard of Bitcoin in January of 2012 while watching a The Good Wife episode entitled, “Bitcoin for Dummies.” It immediately piqued my interest, as I was still recovering from having to graduate with my then seemingly useless Ivy League degree in economics facing “crickets” in the job market following the kaboom of the US housing market and the Great Recession that followed.&nbsp;&nbsp;



To say I was bitter about the situation is an understatement.&nbsp;



How did the government let this happen? How were the executives from “too big to fail” banks still getting bonuses and golden parachutes, while middle class families and newly graduated students had to pay for it all?&nbsp;&nbsp;&nbsp;



What dawned on me is that the global economy and the livelihoods of millions of people around the globe hung by a thread on a trust-based system with inherently untrustworthy puppet masters at the helm.&nbsp;



Enter Bitcoin — a cryptographic peer-to-peer electronic cash system that removes the need for a trusted intermediary in financial transactions. Could it really be true? Did the elusive Satoshi Nakamoto create a new standard of money immune to the human element? It appeared so.&nbsp;&nbsp;



All of humanity should have been sailing into the sunset with this new human-proof, peer-to-peer global monetary system. No need for gold or central banks, with anti-inflation and scarcity already built into the underlying algorithm.&nbsp;



I expected otherwise marginalized and unbanked humans to be taking full advantage of this revolutionary standard of money to pull themselves out of the grips of poverty and misfortune.&nbsp;



<h2 class="wp-block-heading">The crime revolution begins</h2>



I began my career at the DOJ shortly after hearing about Bitcoin and had been initially placed in a money laundering enforcement group. There, I learned all the ways in which large criminal organizations launder illicit proceeds and the investigative techniques used to crack the evermore sophisticated money laundering schemes employed by drug cartels, terrorists and cyber criminals.



What I discovered in my research shocked the conscience. Not only was Bitcoin not being used for its intended purpose, a group of true early adopters quickly emerged — dark web drug traffickers operating online within the confines of dark web markets.



Anonymous platform (TOR, the Silk Road) + anonymous payment system (Bitcoin) = crime revolution!&nbsp;&nbsp;



The Silk Road quickly became the Amazon of retail drug trade, where you could purchase heroin online using bitcoin from the comfort of your own home without ever stepping foot into the dark alleys of traditional drug trade. Ironically, the US Postal Service would then graciously and unwittingly deliver the said drugs to your doorstep.&nbsp;



Drug dealers whose business was traditionally confined to a local street corner now had a global customer base of faceless strangers and unlimited potential for growth



The more I learned about Bitcoin and the dark web, the more I became convinced that eventually Bitcoin will be one of the most popular ways to launder money for global crime syndicates, as it allowed for the transfer of value across borders cheaply and instantaneously while not touching the tightly-regulated global banking system. Flash forward 10 years, and my prediction came true.&nbsp;



As it promises to do, Bitcoin is able to remove the middleman —&nbsp;and doesn’t discriminate on who the middleman is.



Global criminal syndicates shockingly spend 30% on average of their revenue on money laundering with several layers of middlemen, brokers and shell companies involved in the process of funneling money and physically moving illicit cash.



And now drug cartels, terrorist organizations, pedophiles and hostile state actors can use crypto to launder money, removing the middleman and saving that money.



The availability of highly liquid stablecoins on multiple chains also now decreases the volatility risk previously associated with using Bitcoin to launder criminal proceeds. North Koreans and Russians also found crypto to be a saving grace as they successfully evade global sanctions and use zero-day cyber attacks and social engineering exploits to finance their operations.&nbsp;



Hacks, scams and fraud cases are piling up at unprecedented rates, because crypto made it easier to monetize these types of crimes due to its inherent immutability. Many DeFi projects became a playground for hackers, with their shoddy cybersecurity architecture and poorly thought-out tokenomics. Get-rich-quick ICO fundraising schemes gave rise to countless vaporware projects that ultimately left most investors with nothing. And regulators can’t keep up with the technology fast enough to put controls in place to protect investors.&nbsp;&nbsp;



I’ve seen all this, and more, in my ten years at the DOJ — and I still know that crypto deserves to be saved.&nbsp;



Why?&nbsp;



Because besides surviving the Great Recession, I immigrated to the United States as a kid to escape a tyrannical government and don’t take the freedoms I am afforded in this country for granted.&nbsp;



I know what it’s like to feel hopelessly dependent on powerful forces in pursuit of power and resources that don’t have mine or my family’s interest at heart. I know what it’s like to find out that the people that pledged to protect me are my biggest enemies. The significance of decentralized and trustless monetary systems may not be apparent for those residing in nations relatively free from authoritarian rule, corruption,and repression. However, I recognize this value and vow never to disregard it.&nbsp;



Crypto, despite its imperfections, stands as our only hedge against tyranny, and I am committed to dedicating my life to do my part in making sure it transcends the bad actors that exploit it.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Lili Infante is the CEO of CAT Labs &#8211; a crypto forensics and cybersecurity startup building tools to fight crypto crime. She spent the last decade as a Special Agent at the US Department of Justice chasing crypto criminals, and leading some of the most prolific crypto cases in history, to include the takedown of Hydra Market &#8211; the largest and longest dark web market in the world accounting for over 80% of all dark web cryptocurrency transactions.</div>


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Crypto is our only hedge against tyranny

Katherine Ross

Nathaniel Chastain, a former manager at OpenSea, was convicted by a jury of wire fraud and money laundering on Wednesday, May 3, marking the culmination of a landmark case with broad implications for the NFT industry.&nbsp;The case has been described as the first &#8216;insider trading&#8217; prosecution brought within the NFT world.



Chastain pleaded not guilty, and the industry has been paying especially close attention to a potentially precedent-setting outcome since the <a href="https://blockworks.co/news/opensea-insider-trading-case">jury began deliberating earlier this week</a>.&nbsp;



In June 2022, Chastain was charged with wire fraud and money laundering by the Department of Justice.&nbsp;



Chastain allegedly made over $50,000 by “using his knowledge of confidential information to purchase dozens of NFTs in advance of them being featured on OpenSea’s homepage,” according to the FBI’s Michael Driscoll in a statement last year.&nbsp;



Reuters <a href="https://www.reuters.com/legal/ex-opensea-manager-convicted-nft-insider-trading-case-2023-05-03">reported</a> that prosecutor Thomas Burnett, in closing arguments, said that Chastain “abused” his status at OpenSea, and violated its confidentiality agreement.&nbsp;



Chastain’s lawyer, Daniel Filor, argued that he did not break any company rules with the trades.



OpenSea asked Chastain to resign in September 2021, when the NFT powerhouse additionally said it was putting in place new practices to prevent similar future internal lapses.&nbsp;&nbsp;



An OpenSea spokesperson previously told Blockworks that Chastain’s resignation was because he was found to be “in violation of our employee policies and in direct conflict with our core values and principles.”



<a href="https://blockworks.co/news/opensea-ceo-nft-insider-trading-case-unfair-ahead-of-trial">Prior to the start</a> of the trial, OpenSea CEO told prosecutors that the case against Chastain was “unfair” and that it impacted his mental health, according to court documents.&nbsp;



Chastain had filed five motions to drop evidence in regard to his OpenSea compensation and exclude terms such as insider trading–arguing that NFTs are not securities.



However, Judge Jesse Furman <a href="https://blockworks.co/news/opensea-ceo-nft-insider-trading-case-unfair-ahead-of-trial">denied the motions</a> and said that Chastain’s insider trading arguments were “moot” in April.



Updated May 3, 2023 at 7:36 pm ET: Added additional context throughout.



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Ex-OpenSea Manager Nate Chastain Guilty of NFT Fraud, Money Laundering

Sebastian Sinclair

Using crypto to commit a crime in Australia typically results in harsher fines and prison time, an RMIT University study has found.



The <a href="https://bridges.monash.edu/articles/journal_contribution/Crime_and_Cryptocurrency_in_Australian_Courts/22207720/1">study</a>, touted as the first of its kind in the country, reviewed 59 criminal cases and 44 other decisions involving bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and digital assets across Australian courts between 2013 and 2022.



Nearly 80% of those cases involved drug offenses, firearms, dealing with proceeds of crime and money laundering. In many instances, crypto was a contributing factor leading to more severe penalties, per an RMIT <a href="https://www.rmit.edu.au/news/all-news/2023/apr/crypto-crime">statement</a>.



Aaron Lane, the study&#8217;s lead author and senior lecturer in law at RMIT&#8217;s Blockchain Innovation Hub, said the cases generally saw crypto used as a means of payment for illicit goods.



This results in stiffer sentencing compared to those who commit the same crime using fiat currency, Lane added.



“The use of cryptocurrency in the commission of a criminal offense is seen by courts as a factor that indicates sophistication or seriousness of the offense,” Lane said in the statement.



Study co-author and associate lecturer in law at RMIT’s Graduate School of Business and Law, Lisanne Adam, said sentencing judges were keen to send a message to warn potential offenders.



“Cryptocurrency is potentially attractive to criminals because the technology facilitates seamless global transfers without the friction of the traditional banking system – and in a way that can be difficult to identify,” Adam said.



<h2 class="wp-block-heading">Crypto is not a crime</h2>



Chainalysis has found that less than 1% of all on-chain transaction volume was tied to criminal activity. Global crime as a share of all crypto-related activity has also been on a downtrend, per a <a href="https://blog.chainalysis.com/reports/2023-crypto-crime-report-introduction/">recent 2023 report</a>.



The US Treasury, which released a review last month, also found that the <a href="https://blockworks.co/news/treasury-acknowledges-criminals-use-tradfi">majority of criminals tend to use government-issued currency</a>, not crypto, to undertake illicit transactions.&nbsp;



“Money laundering, proliferation financing, and terrorist financing most commonly occur using fiat currency or other traditional assets as opposed to virtual assets,” the Treasury said.



RMIT researchers however pointed to the steady increase in local court cases involving crypto since 2013, from virtually zero to 46 by 2020. 



More consideration from police and prosecutors is needed regarding the complexity and sophistication of the crime, rather than if digital assets were used, they said.



“There is a risk that law enforcement prosecutors characterize cryptocurrency as a marker of sophistication in crime, which is not always the case,” Adam said. Law enforcement needs to effectively determine the level of sophistication in the crime and present a fair case.”



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Using Crypto for Crime? Australia Will Give You a Harsher Sentence

The US Treasury released a review on April 6, warning that DeFi could pose a risk to national security. The report laid out six suggestions that it believes will make DeFi harder for criminals to exploit. It pushed for both DeFi developers and the US government to “promote innovation that seeks to mitigate the illicit finance risks of DeFi services.” It also noted however that the majority of criminals use fiat currency — not digital assets — to conduct illicit transactions, stating “money laundering, proliferation financing, and terrorist financing most commonly occur using fiat currency or other traditional assets as opposed to virtual assets.”&nbsp;



Justin Slaughter, policy director at Paradigm, <a href="https://twitter.com/JBSDC/status/1643993463770480641">tweeted</a> that the report seemed “optimistic” that the DeFi industry can help to address criminal financial activities, noting that it shows the department knows that DeFi “isn&#8217;t going away.”



Increasing regulation around both anti-money laundering (AML) and countering the financing of terrorism (CFT) laws are just one of six suggestions listed by the department. When looking at the vulnerabilities of DeFi, the <a href="https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf">report</a> stated the “lack of compliance [of AML/CFT] may be due in part to gaps in common views between industry and regulators of how relevant laws and regulations, including securities, commodities, and money transmission regulations, apply to DeFi services.”



Yaya Fanusie, director of anti-money laundering and cyber at the Crypto Council for Innovation, told Blockworks via email that the “Treasury says that even if a service is truly decentralized, activity still could require AML/CFT compliance. But it does not explain how to implement that compliance when there’s no concrete responsible party. And the report admits that not all types of DeFi services will fit under BSA obligations. What will likely have to happen is an unpacking of the different service types (that the report delineates on p.10) and identifying when AML/CFT compliance is required.”



The review also suggested that the innovation of compliance solutions by DeFi entities “potentially bolster the accessibility, transparency, and security of the U.S. financial system…most tools remain too nascent for definitive conclusions on their promise.”&nbsp;



For the Treasury, this indicates that the government should offer further supervision into the development of DeFi technology. It could also mean that the laws currently in place may need further expansions in order to properly safeguard “the U.S. financial system from all manner of threats.”



In order to do that, the report stated that the Bank Secrecy Act — which was put in place in the 1970s to enforce financial institutions&#8217; assistance in helping the government prevent money laundering — should be expanded upon so that DeFi services are covered under the Act — an inclusion could lead to friction between DeFi entities and the US government.&nbsp;



The department further suggested that the nature of DeFi — in that it transcends borders — could lead to violations of the AML/CFT or just a lack of enforcement, because other countries may not have the same laws in place. To counteract potential international issues that could arise from different laws in different regions, the Treasury said that the government should continue to push for international standards in DeFi.&nbsp;



“While the assessment does, at times, demonstrate a sophisticated understanding of the DeFi landscape, it evidences a tension between the idea that decentralization is irrelevant in determining compliance obligations under existing AML/CFT controls and the idea that decentralized protocols are a novel tool unanticipated by existing frameworks,” Miller Whitehouse-Levine, CEO of the DeFi Education Fund, said in an email. “Those frameworks were developed based on how the global economy worked in the 1970s and are predicated on the assumption that transactions must occur through custodial financial intermediaries, an assumption that is no longer valid.”



The U.S. is not the only country keen to see a more multilateral international move. An ECB supervisory board member has also <a href="https://blockworks.co/news/binance-needs-supervision-ecb-says">pushed</a> for countries to work together on regulation for the larger cryptocurrency sector. 



The Treasury’s review said more testing and “responsible” innovations are necessary within the space both from developers and policymakers as regulation is proposed and enforced. Grants and tech sprints are two suggestions within the report, though there aren’t clear details on what those would look like or how the grants would help development.



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Treasury Review Acknowledges Traditional Finance, Not DeFi, Preferred by Criminals

Ben Strack

While enforcement actions against crypto-related entities aren&#8217;t anything new, industry participants said the recent <a href="https://blockworks.co/news/doj-busts-crypto-exchange">measures lobbied against exchange Bitzlato</a> show a persistent focus on controlling illicit activity in the sector — with a twist.



Law enforcement has, for the past 18 months, combatted what Ari Redbord, head of legal and government affairs at TRM Labs, called “the illicit underbelly of the overwhelmingly lawful crypto economy.”&nbsp;



The US Treasury department had implemented sanctions against crypto exchanges <a href="https://home.treasury.gov/news/press-releases/jy0364" target="_blank" rel="noreferrer noopener">Suex</a>, <a href="https://home.treasury.gov/news/press-releases/jy0471" target="_blank" rel="noreferrer noopener">Chatex</a> and <a href="https://home.treasury.gov/news/press-releases/jy0701" target="_blank" rel="noreferrer noopener">Garantex</a> within the last two years — each of which operated out of Federation Tower in Moscow, Russia.



These exchanges, while largely <a href="https://blockworks.co/news/doj-busts-crypto-exchange">unknown and considered insignificant</a> in crypto industry circles, <a href="https://blockworks.co/news/us-justice-department-to-launch-national-cryptocurrency-enforcement-team">have been prime targets</a> of US law enforcement aided by blockchain intelligence firms with government contracts such as <a href="https://blockworks.co/tag/trm-labs">TRM</a> and <a href="https://blockworks.co/tag/Chainalysis">Chainalysis</a>.



Garantex’s average monthly inflows, however, <a href="https://blockworks.co/news/ofac-sanctions-eased-crypto-crime">more than doubled</a> after the US took action against it last April, Chainalysis data showed, as Russia’s government did not enforce the sanctions.



Illicit crypto transaction volume overall rose for the second consecutive year in 2022, according to a Chainalysis <a href="https://blog.chainalysis.com/reports/2023-crypto-crime-report-introduction/" target="_blank" rel="noreferrer noopener">report</a> published earlier this month. Such activity hit an all-time high of $20.1 billion — up from roughly $18 billion in 2021.



Experts in illicit finance find the Bitzlato case more significant, according to Nick Smart, director of blockchain intelligence at Crystal, a compliance and risk management specialist.



“I think a lot of the reaction to Bitzlato has been a bit confused across the industry, and sort of misses why this is a bigger deal than at first glance,” Smart told Blockworks.&nbsp;



<h3 class="wp-block-heading">Treasury uses new tool</h3>



The Treasury’s Financial Crimes Enforcement Network (FinCEN) last week went a different route than sanctions. It identified Bitzlato as a “primary money laundering concern” pursuant to section 9714(a) of the Combating Russian Money Laundering Act — passed as part of the 2020 National Defense Authorization Act.



The designation came the same day the US Department of Justice (DOJ) <a href="https://blockworks.co/news/doj-busts-crypto-exchange">charged</a> Anatoly Legkodymov, a Russian national and senior executive of Bitzlato, with allegedly processing more than $700 million in illicit funds.



Bitzlato’s <a href="https://bitzlato.com/" target="_blank" rel="noreferrer noopener">site</a> has been shut down and could not be reached for comment. 



“OFAC sanctions are certainly one tool, but 9714 specifically targets Russian illicit finance,” said Redbord, a former senior adviser to the under secretary for terrorism and financial intelligence at the Treasury department.



This action is “very significant,” Redbord said, adding that it was the first designation under 9714(a), which allows the Treasury department to take severe action against a foreign financial institution to combat Russian money laundering.



French and US law enforcement authorities led the take-down of Bitzlato’s France-based digital infrastructure and interrogated platform managers, Europol said Monday.&nbsp;



About 46% of the assets exchanged through Bitzlato — worth roughly $1 billion — had links to criminal activities, Europol said. It added that roughly 1.5 million bitcoin transactions were made from Bitzlato users and the Hydra network, which the DOJ and German authorities took down in 2022.



Five individuals had been arrested as of Monday.



“[The] arrest of the founder, and with international cooperation in jurisdictions often enjoyed by Russian business people has a much bigger message,” Smart said, adding “particularly for other Russian P2P exchanges with similarly poor reputations, who must now be wondering ‘who’s next?’”



Money laundering service providers are crucial to the wider crypto crime ecosystem, according to Andrew Fierman, Chainalysis’s head of sanctions strategy.&nbsp;



“If cybercriminals cannot reliably convert the cryptocurrency generated by their activities into cash, the incentives to commit those crimes plummet,” he told Blockworks.



The powers granted under 9714(a) differ from traditional sanctions in that they provide FinCEN with a menu of special measures with which they can order financial institutions to comply. These range from information collection and record keeping, as well as prohibiting the opening of certain types of accounts or the transmittal of funds.&nbsp;



The special measures give compliance teams across the crypto industry valuable information to keep their platforms safe from illicit activity, Fierman said.



“This is also another proof point for the US government’s — together with their allies — ability to go after the Russian crypto crime ecosystem,” he added. “The overall disruption of the wider crypto crime ecosystem is what makes this action so significant.”



<h3 class="wp-block-heading">A sign of more to come?</h3>



Treasury Deputy Secretary Wally Adeyemo said in a statement last week that the designation marked a unique step taken only “a handful of times” in the Treasury’s history for what he called “some of the <a href="https://www.fincen.gov/resources/statutes-and-regulations/311-special-measures" target="_blank" rel="noreferrer noopener">most egregious</a> money laundering cases.”



The only other crypto-related entity the Treasury department designated a “primary money laundering concern” was Costa Rica-based Liberty Reserve in 2013. That was done under Section 311 of the USA Patriot Act.&nbsp;



Liberty Reserve founder Arthur Budovsky <a href="https://www.justice.gov/opa/pr/founder-liberty-reserve-pleads-guilty-laundering-more-250-million-through-his-digital" target="_blank" rel="noreferrer noopener">pleaded guilty</a> in 2016 to conspiring to commit money laundering.



“Because of its significant operations in, and connection to, Russia and Russian illicit finance, Bitzlato threatens US national security, the integrity of the US and international financial sectors, and businesses and institutions worldwide,” Adeyemo said. “Identifying Bitzlato as a ‘primary money laundering concern’ effectively renders the exchange an international pariah.”



Adeyemo added that “we will not hesitate” to expose and hold accountable virtual asset service providers going forward.



A Treasury department spokesperson declined to comment further.&nbsp;



Hacks on DeFi targets and cross-chain bridges last year resulted in a record $3.6 billion in stolen funds through November 2022, according to TRM Labs.&nbsp;



“This is certainly not the last time we will see the use of 9714 and similar authorities against non-compliant exchanges, darknet markets, darknet mixers — like Helix and Bitcoin Fog — and other money laundering concerns,” Redbord said.



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Bitzlato May Make Crypto Scoff, but Law Enforcement Thinks Otherwise

Shalini Nagarajan

Brazil lawmakers have formally approved a regulatory framework set to govern the country’s crypto sector.



The bill <a href="https://blockworks.co/news/historic-brazilian-bill-regulating-crypto-heads-to-senate-vote" target="_blank" rel="noreferrer noopener">drew attention</a> earlier this year after a previous version passed through the Senate in April. It had since since been stuck in the Chamber of Deputies, the government&#8217;s lower house.



Local media <a href="https://www.infomoney.com.br/mercados/camara-aprova-marco-regulatorio-dos-criptoativos-no-brasil/" target="_blank" rel="noreferrer noopener">reported</a> that the text, written by federal deputy Aureo Ribeiro, includes a new crime: digital asset embezzlement, which appears targeted at exchange operators. 



Penalties include prison time between two to six years along with fines, which can also be handed out to entities which operate in Brazil without a physical presence. 



There&#8217;s also a rule requiring crypto companies such as exchanges and other intermediaries to hold a virtual service provider license, similar to rules set in place across the US and Europe.&nbsp;



The country’s efforts to regulate local crypto players comes amid turmoil in the wider digital asset space. Strife was most recently prompted by the collapse of FTX, which has left up to one million users out of pocket including regular investors, crypto projects and hedge funds. 



Former FTX CEO Sam Bankman-Fried allegedly siphoned user funds to make risky bets across crypto markets via sister trading unit Alameda Research, leading to a multibillion-dollar black hole in its balance sheet and a crippling liquidity crisis.



Brazil lawmakers however disagreed over whether to demand crypto exchanges ensure client funds are segregated from operational cash. This would hypothetically protect customers from corporate malfeasance and other crippling events such as exchange bankruptcy.



But Ribeiro effectively opposed this proposed change, saying it would stifle the crypto market. Currently on hold, the asset segregation issue will be debated at a later date.



<h3 class="wp-block-heading">Crypto is big in Brazil</h3>



Government-appointed bodies will reportedly decide which digital assets can be listed for trade, and relevant companies will have an 180-day grace period to comply with the incoming rules.



Brazil, which has suffered from high <a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">inflation</a> for decades, is one of the most active crypto markets in the world, according to recent <a href="https://blog.chainalysis.com/reports/2022-global-crypto-adoption-index/" target="_blank" rel="noreferrer noopener">Chainalysis data</a>. <a href="https://thepaypers.com/thought-leader-insights/the-crypto-landscape-in-brazil--1258289" target="_blank" rel="noreferrer noopener">About 5%</a> of its population actively invests in crypto, and more than 900 Brazil-based companies currently accept crypto as payment. 



One silver lining could be that the domino-style tumbling of unregulated crypto firms over the past year may usher in regulated institutions with stronger compliance frameworks and robust risk systems. At least, that&#8217;s what Brazil&#8217;s incoming crypto regulations could inspire.



Brazil’s bill is already approved, but it will now head for a signature from outgoing president Jair Bolsonaro before his term ends on Dec. 31. Luiz Inácio Lula da Silva is expected to take up office on Jan. 1.



Some lawmakers reportedly preferred the bill be approved during Bolsonaro&#8217;s term, over fears Silva may not be as enthusiastic about cryptocurrency.



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Brazil Crypto Laws Demand Up to 6 Years Prison for Embezzlement

<div id="highlights-block_632d72df2b40a" class="highlights">
 <ul>
 <li>The wide-reaching Economic Crime and Corporate Transparency Bill seeks to amend parts of the UK’s Proceeds of Crimes Act</li>
 <li>Included in the bill&#8217;s provisions is a section dedicated to crypto proceeds and sanctions evasion</li>
 </ul>
 
</div>



The UK government has introduced a bill that, among other things, will grant authorities additional powers to seize and recover crypto tied to suspected criminals.



Its <a href="https://www.gov.uk/government/publications/economic-crime-and-corporate-transparency-bill-2022-factsheets/fact-sheet-economic-crime-and-corporate-transparency-bill-overarching" target="_blank" rel="noreferrer noopener">Economic Crime and Corporate Transparency Bill</a> pushed through on Thursday seeks to amend several parts of the country’s Proceeds of Crime Act, while also bolstering anti-money laundering powers.



The legislation also represents the largest shakeup to the UK’s registrar of companies, the Companies House, with new powers to check, challenge or decline incorrect or fraudulent company information.



Designed to bolster laws aimed at curbing illicit proceeds, the government’s latest bill also targets sanctions evasion, for instance by Russia and Iran.



“Red tape around confidentiality liability will be eased to enable businesses to share information to more proactively prevent and detect economic crime including fraud and sanctions evasion,” the government said in a <a href="https://www.gov.uk/government/news/new-crackdown-on-fraud-and-money-laundering-to-protect-uk-economy" target="_blank" rel="noreferrer noopener">separate statement</a>.



The <a href="https://bills.parliament.uk/bills/3339#:~:text=Government%20Bill&amp;text=A%20Bill%20to%20make%20provision,the%20registration%20of%20overseas%20entities." target="_blank" rel="noreferrer noopener">250-page bill</a>, which has passed its first reading through Parliament, will now undergo a second reading in October before heading to the committee stage for assessment from experts and interested parties.



<h3 class="wp-block-heading">UK Crypto Regulations</h3>



The UK has made several steps to increase its oversight of digital assets and streamline regulation around the nascent asset class this year.



That included the introduction in July of a wide-ranging financial bill designed to phase out hundreds of pieces of EU-retained law and which <a href="https://cms.blockworks.co/uk-to-regulate-stablecoins-as-a-form-of-payment-via-new-bill/" target="_blank" rel="noreferrer noopener">seeks to regulate “certain types” of stablecoins</a> as a form of payment. 



It would also grant the government new powers to direct regulators to review their financial rules under conditions deemed in the public interest.



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UK Seeks Enhanced Crypto Seizure Power

<div id="highlights-block_62fdea0f69dbf" class="highlights">
 <ul>
 <li>Denis Dubnikov is alleged to have laundered more than $400,000 as part of a ransomware scheme involving crypto</li>
 <li>The Ryuk ransomware threat attempts to lock up systems in a bid to extract bitcoin payment</li>
 </ul>
 
</div>



A 29-year-old Russian citizen has been extradited from the Netherlands to the US to face money laundering charges involving tens of millions of dollars in crypto-ransomware proceeds.



The US Department of Justice accuses Denis Dubnikov of laundering more than $400,000 in funds lifted from Ryuk ransomware attacks as part of a $70 million scheme, according to a statement by the <a href="https://www.justice.gov/opa/pr/alleged-russian-money-launderer-extradited-netherlands-us" target="_blank" rel="noreferrer noopener">Department of Justice</a> on Wednesday.



Dubnikov and others involved in the scheme are alleged to have laundered funds from the attacks through various national and international transactions in a bid to conceal the funds’ provenance.



First appearing in 2018, Ryuk is designed to infiltrate private networks and gain administrative access to multiple systems. Once inside, Ryuk encrypts local files to lock up multiple computers before soliciting payment in crypto — usually bitcoin — to restore services.



Ryuk along with several other high-profile ransomware threats have been used to extract payment from government institutions, healthcare providers, hospitals and other businesses.&nbsp;



In May of last year, Colonial Pipeline was forced to halt its services and pay more than $4 million in bitcoin following an attack that subsequently ignited fuel shortage fears across the US.



Weeks later, the world’s largest meat producer by total sales, JBS Holding, shelled out $11 million in bitcoin in an attempt to circumvent ransomware impacting its business and supply chains.



Efforts from North Korea’s Lazarus Group, Eastern Europe’s Darkside and others have been linked to various hacks across the industry, including a <a href="https://cms.blockworks.co/sky-mavis-ronin-network-bridge-exploited-for-over-600m/" target="_blank" rel="noreferrer noopener">$625 million hack</a> of the on Axie Infinity-tied Ronin Network bridge earlier this year.



Cryptocurrencies have repeatedly been blamed by law enforcement officials for facilitating anonymous transactions and assisting hackers in their attempts. However, the ability to <a href="https://cms.blockworks.co/the-purpose-and-perils-of-crypto-privacy-tools/" target="_blank" rel="noreferrer noopener">transparently track transactions</a> on-chain, has also helped law enforcement <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">trace and reclaim</a> stolen funds. 



Lazarus and others are said to have used crypto mixing service <a href="https://cms.blockworks.co/tag/tornado-cash/" target="_blank" rel="noreferrer noopener">Tornado Cash</a> in a bid to launder proceeds and conceal provenance. The <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">Office of Foreign Asset Control</a> banned its use for US citizens as well as 45 Ethereum addresses on Aug. 8.



Roughly three-fourths of funds passing through the privacy tool, however, are unconnected with criminal activity or sanctions evasion, and only 10.5% are stolen funds, <a href="https://blog.chainalysis.com/reports/tornado-cash-ofac-designation-sanctions/" target="_blank" rel="noreferrer noopener">according to</a> on-chain analytics firm Chainalysis.



A five-day jury trial is expected to commence on Oct. 4 where Dubnikov faces a maximum sentence of 20 years in prison for his alleged involvement.



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Alleged Crypto Ransomware Money Launderer Extradited to US

Casey Wagner

<div id="highlights-block_620ec093bb1f7" class="highlights">
 <ul>
 <li>Federal investigators now have a dedicated division to probe blockchain-based crimes</li>
 <li>The unit&#8217;s formation comes as the Biden administration is expected to issue an executive order on cryptocurrencies as soon as next week</li>
 </ul>
 
</div>



The FBI is ramping up its enforcement efforts when it comes to cryptocurrency crimes.



The Justice Department on Thursday touted a new unit focused on digital asset seizure and blockchain-based lawbreaking. Eun Young Choi, former senior counsel to the Deputy Attorney General, will serve as director of the National Cryptocurrency Enforcement Team (NCET).



“The department has been at the forefront of investigating and prosecuting crimes involving digital currencies since their inception,” Choi said in a <a href="https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team" target="_blank" rel="noreferrer noopener">statement</a>. “The NCET will play a pivotal role in ensuring that as the technology surrounding digital assets grows and evolves, the department in turn accelerates and expands its efforts to combat their illicit abuse by criminals of all kinds.”&nbsp;



The NCET will identify and pursue cases involving the criminal use of digital assets, especially when it comes to crypto exchanges and infrastructure companies.&nbsp;&nbsp;



Its formation could bring overdue oversight to the space, according to industry participants.



“As a custodian, we need very powerful cybersecurity,” said Henson Orser, president of cryptocurrency custodian Komainu. “In 2022, we now see more traditional financial institutions looking to come into the space, but they can&#8217;t do that through self-custody, and so they&#8217;re very much welcoming and using regulated instances.”



Additional regulatory scrutiny is only going to be welcomed by traditional financial players dabbling in digital assets, Orser said.



The new unit comes weeks after the Justice Department notched its <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">largest seizure</a> of financial assets ever, clawing back more than $3.6 billion in bitcoin stolen during a 2016 hack of the exchange Bitfinex.



Though assets and transactions in crypto are traceable on the blockchain, identifying who owns a wallet is more challenging, according to Orser. Investigators were able to pin down the alleged couple in question as they shifted funds around to use them, he added.



“At some point, those publicly viewable wallets have to figure out a way to intersect with NCET-legitimate exchanges and payment mechanisms,” he said. “The more that regulators embrace making sure that the legitimate exchanges and payment apps and platforms have oversight, then the more likely it is they&#8217;re going to catch people at that point of friction.”



NCET is already calling on crypto companies to help root out bad actors.



&#8220;We are issuing a clear warning to criminals who use cryptocurrency to fuel their schemes,&#8221; Deputy Attorney General Lisa Monaco said at the Munich Cyber Security Conference. &#8220;We also call on all companies dealing with cryptocurrency — we need you to root out cryptocurrency abuses. To those who do not, we will hold you accountable where we can.&#8221;



With regulators increasingly on the lookout, crypto professionals may need to be more mindful about their dealings with policymakers and law enforcement.



Andrew Morfill, chief information security officer at Komainu, said the industry’s narrative “needs to mature, especially from a regulatory perspective.”



“Telling people that you&#8217;re the new kid in town and you’re going to revolutionize the industry is probably not the best way to go about influencing and cajoling the regulator that is cautious and has key stakeholders [in] traditional finance,” Morfill said.



The Biden administration, meanwhile, is reportedly planning to issue an executive order on cryptocurrencies as soon as next week in an effort that could add clarity to fragmented past policy.&nbsp;



“I do have a concern about the patchwork quilt of initiatives surrounding this space, with no formal ‘tip of the spear,’” said Michael Fasanello, director of training and regulatory affairs at Blockchain Intelligence Group. “I am cautiously optimistic that the executive branch will issue a mandate providing clarity and guidance for a more uniform approach to oversight of the digital assets ecosystem.”



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FBI Doubles Down on Crypto Crimes With New Unit

<div id="highlights-block_620d155093d0d" class="highlights">
 <ul>
 <li>Illicit transaction volume increased 79% year over year while total crypto volume rose by 567%, according to Chainalysis</li>
 <li>Cybercriminals have laundered roughly $33 billion worth of crypto since 2017</li>
 </ul>
 
</div>



Illicit crypto transactions reached an all-time high $14 billion last year, but criminal activity’s share of cryptocurrency transaction volume has never been lower, according to a Chainalysis report published Wednesday.



Although the value of illicit transactions surged in 2021 from $7.8 billion the year before, these nefarious transactions accounted for 0.15% of crypto volume last year, down from 0.62% in 2020, the report said.



<div class="wp-block-image"><figure class="alignleft size-large"><img decoding="async" loading="lazy" width="1024" height="558" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg" alt="" class="wp-image-17495" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/02/Chainalysis-chart-1024x558.jpg?w=1642 1642w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Source: Chainalysis Report</figcaption></figure></div>



Total transaction volume across cryptocurrencies tracked by Chainalysis grew to $15.8 trillion in 2021, up 567% from 2020.



“Given that roaring adoption, it’s no surprise that more cybercriminals are using cryptocurrency,” the report states. “But the fact that the increase in illicit transaction volume was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all.”



Crypto-based crime spiked in 2019 as transactions involving illicit addresses represented nearly 3.4% of crypto transaction volume, the Chainalysis report notes. The <a href="https://en.wikipedia.org/wiki/PlusToken" target="_blank" rel="noreferrer noopener">PlusToken</a> Ponzi scheme occurred that year, reportedly defrauding investors out of more than $2 billion worth of crypto.



Decentralized finance (DeFi) protocols played a much greater role in laundering illicit funds in 2021, the report adds. Laundering through DeFi protocols increased by 1,964% from the prior year, reaching $900 million.



Cybercriminals have laundered roughly $33 billion worth of crypto since 2017, with most of that moving to centralized exchanges over time.



The amount of crypto that criminals are holding is hard to know, according to Chainalysis, as law enforcement has seized illicitly obtained assets.



The IRS Criminal Investigation team <a href="https://www.irs.gov/pub/irs-pdf/p3583.pdf" target="_blank" rel="noreferrer noopener">announced in November</a> that it had seized $3.5 billion worth of cryptocurrency in 2021. The Department of Justice also <a href="https://www.justice.gov/opa/pr/department-justice-seizes-23-million-cryptocurrency-paid-ransomware-extortionists-darkside" target="_blank" rel="noreferrer noopener">recovered $2.3 million</a> from the ransomware group responsible for the attack on Colonial Pipeline.



More recently, the DOJ <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">announced last week</a> that it had recovered the majority of the cryptocurrency stolen during the 2016 Bitfinex hack, valued at roughly $3.6 billion.



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