2021 Crypto FinCrime Trends in Review

12.06.2021 | By Mark Speyers

1. Cryptocurrency became mainstream

Trend: According to research from CoinMarketCap, the total cryptocurrency market capitalisation, or the value of all cryptocurrencies in existence, peaked in October 2021 at ~USD$2.56 trillion, up 10x from USD$200 billion in 2019. This growth cut across market segments – from consumers and financial institutions (FIs), to crypto exchanges, institutional investors and payment processers.

FinCrime impact: The growth has resulted in increased volumes of transactions, and therefore the ongoing need for efficient transaction payment screening and sanctions screening, as well crypto related fraud management.

2. Rise in cybercrimes involving crypto

​Trend: Cryptocurrency related financial crimes in the form of cyber hacks, fraud (scams, pump-and-dump schemes, market manipulation, theft, etc) and ransomware rose steeply in 2021. CipherTrace Research found that by mid-year, DeFi-related hacks totalled $361 million – a 2.7x increase from 2020. DeFi-related fraud continued to rise as well, accounting for 54 per cent of major crypto fraud volume, whereas the 2020 DeFi-related fraud only made up 3 per cent of the year’s total.

And according to the Identity Theft Resource Center, the number of data breaches publicly reported so far this year has exceeded the total for 2020, putting 2021 on track to break all records.

FinCrime impact: Insurance companies have seen an influx of claims and pay outs made against cyber insurance policies under ransom demands. FIs were also wary of paying sanctioned entities and countries via crypto.

And with crypto-related fraud exploding due to crypto’s instant transaction/ portability/ international reach, crypto has become the new tool for tax avoidance, money-laundering, and bribery. Going forward, it will be important for FIs to closely monitor crypto chain of custody throughout the transaction cycle. It will be imperative for organisations to have robust preventative tools in place to prevent anti-money laundering.

3. Regulatory requirements

​Trend: The United States took the lead in talking about regulating cryptocurrencies, especially after the Colonial Pipeline ransomware attack, the rise in crypto exchange-traded funds, and the crackdown on unregistered crypto. The Financial Action Task Force completed their second 12-month review of implementations of its revised standards on virtual assets and virtual asset service providers, concluding that progress has been made, but substantial work is still needed. And the UK government and European Commission both proposed crypto be included in transfer of funds regulations.

US federal banking agencies issued a recent statement offering additional guidance on rules and expectations around crypto custody, issuance/distribution and crypto payment services in 2022 and beyond. This area of regulation will evolve throughout 2022 as the agencies focus on whether certain crypto-related activities conducted by banking organisations are legally permissible and in compliance with existing law and regulations.

The European Central Bank (ECB) approved the new oversight framework for payment instruments, schemes and arrangements, which now will apply to digital asset tokens (i.e. digital assets used for payments).

FinCrime impact: FIs engaged in any form of crypto activity have realised they need to understand their crypto risk exposure in order to update their rules, scenarios and data sets. Treating crypto as a ‘security’ and the checks and balances that comes with it, still holds ground for now, as they await the onslaught of regulatory changes that will be unleashed in the next few years. The ground work for regulatory change in 2022 is clearly laid with the new guidance from US Federal Banking Agencies and the ECB.

4. Digital currency projects

​Trend: The popularity of cryptocurrencies in 2021 sparked growing interest in digital currency projects in leading economies around the world. While The Bahamas launched their “Sand Dollar” in October 2020 for transactions, the total number of countries currently exploring Central Bank Digital Currencies now represents as much as 90 per cent of the world’s economy. Three dominant central banks – the ECB, the Bank of Japan and the Bank of England are all working on digital currency projects.

Additionally, several leading FIs and agencies with active digital currency development projects include the Bank of England, Citi Bank, J.P. Morgan (JPM Coin), Goldman Sachs, Mastercard, Monetary Authority of Singapore, NASDAQ and Wells Fargo.

FinCrime impact: As digital currency projects accelerate, cybercrime will accelerate. Many consumers want access to digital currencies due to their ease of use and real-time transfers. Consumers want digital currency, but they also want it to fit with existing banking and payment systems. To successfully integrate digital currencies into existing banking systems and processes, FIs will need to automate risk monitoring and analytics for these digital currencies to protect their integrity.

5. Crypto rewards for good

​Trend: Crypto rewards became a more accessible and viable way of helping the unbanked and an alternative to ‘cashback’ on credit cards. Several vendors are building VIP/Frequent Flyer-like programmes where reward points are given for purchases with crypto (as they are for fiat currency). From these rewards, users can donate points to social projects for charities, or use the points towards other things.
Another type of system is allowing users who have digital assets to exchange them for tokens that can be used on networks designed for social good projects.

One example is an agricultural consortium that allows users to contribute tokens to farmer’s associations to help them grow. Through the contributed tokens, agricultural goals can be meet without the need for loans that the farmers would traditionally have to seek.

FinCrime impact: The growth of these programmes makes them a target for criminal activity and misappropriation of funds when hackers try to break into these networks to get funds/tokens transferred to their accounts. Another further risk is the donation of the digital assets can be a way to launder money. This is why it will be increasingly important for networks developed for social good to developing deep analytics and intelligence to track the source of the funds from originator to recipient.

As these trends demonstrate, the world of crypto is in perpetual motion. 2021 has been a year of change in many ways and there is little to suggest that next year will be any different. While such trends remains shrouded in a fair degree of uncertainty we can, however, cast our gaze over the horizon to evaluate the likely shape of the crypto world in 2022 – which will be the subject of our next blog, coming soon…

2021 has witnessed the adoption and phenomenal growth of crypto and blockchain as key technologies across multiple industries, and in particular the financial sector. The global pandemic accelerated the adoption of both of these advances, as more businesses and financial transactions moved from in-person to online only. Social media has also contributed towards cryptocurrency’s accelerated growth in 2021. Conversations around cryptocurrency were increasingly prolific, according to Sprout Social, with tweets on the subject soaring during the course of the year. These social interactions boosted market share and helped prompt the growing acceptance of cryptocurrency via news of price hikes and dips, stable coins, ransomware and cyber hacks. But how should the year as a whole be seen? Here we identify the Top 5 trends in crypto fincrime in 2021.

Latest Insights

AI solves sanction evasion
06.10.2024 Byline

The threat of sanctions evasion creates challenges similar to those in AML. But AI can help.

Financial Services Square Icon Svg
Improving detection efficiency with AI

Improving detection efficiency with AI

Financial Services Square Icon Svg
The benefits of using SaaS in financial crime prevention
05.22.2024 Blog

The benefits of using SaaS in financial crime prevention

Financial Services Square Icon Svg