The current perception of the scale of fraud in the cryptocurrency and blockchain technologies ecosystem – now based largely on the scale of and level of headlines dedicated to the FTX fraud and Bankman Fried’s twisted branding of the “effective altruism” movement – along with the perception (and supporting narratives) that crypto is intrinsically fraudulent does not match the real numbers relative to the roughly $3.2 trillion in annual illegal activity in the traditional fiat monetary system. Details here.
Global Corruption and Money Laundering: Traditional Fiat Money V. Crypto
To counterbalance the obsession with the ongoing FTX/Sam Bankman-Fried trial – and its impact on the future of trust in the cryptocurrency marketplace – we finally tracked down the baseline quantative metrics which illuminate a string we have been trying to pull all year: while crypto is definitely going through a creative destruction period, the cumulative destructive trends are more a combination of the frequency of cybersecurity incidents in the space – and the the long term security of crypto, bitcoin, Ethereum and the major crypto exchanges – and crypto as a function of ransomware payments, amongst other negatively impactful trends. Still, nothing about this crypto creative destruction validates a narrative that crypto is intrinsically fraudulent.
As a result, strategic thinking and technological explorations of applied technology solutions in this space should do the work to remain very clear-eyed relative to these negative perceptions and narratives. The scale of the numbers quantified here are pretty clear – and provide a vital framing.
Image Source: Dr. Andrzej Gwizdalski
Dr Andrzej Gwizdalski, a lecturer at the University of Western Australia (UWA), recently compiled reports from the United Nations, World Economic Forum and Cryptoanalysis to produce this chart (above). From the reports:
United Nations – Office of Drugs and Crime – Money Laundering: “The estimated amount of money laundered globally in one year is 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars. Due to the clandestine nature of money-laundering, it is however difficult to estimate the total amount of money that goes through the laundering cycle.”
World Economic Forum – Partnering Against Corruption Initiative: ” Corruption costs developing countries $1.26 trillion every year – yet half of EMEA think it’s acceptable…Corruption, bribery, theft and tax evasion, and other illicit financial flows cost developing countries $1.26 trillion per year. That’s roughly the combined size of the economies of Switzerland, South Africa and Belgium, and enough money to lift the 1.4 billion people who get by on less than $1.25 a day above the poverty threshold and keep them there for at least six years.”
Cryptoanalysis – Crypto crime hits record $20 bln in 2022: “Illicit use of cryptocurrencies hit a record $20.1 billion last year as transactions involving companies targeted by U.S. sanctions skyrocketed, data from blockchain analytics firm Chainalysis showed [in January 2023]…the cryptocurrency market floundered in 2022, as risk appetite diminished and various crypto firms collapsed. The volume of stolen crypto funds rose 7% last year, but other illicit crypto transactions including those related to scams, ransomware, terrorism financing and human trafficking, saw volumes fall. Chainalysis said its $20.1 billion estimate only includes activity recorded on blockchain, and excludes ‘off-chain’ crime such as fraudulent accounting by crypto firms. The figure also excludes when cryptocurrencies are the proceeds of non-crypto-related crimes, such as when cryptocurrency is used as a means of payment in drug trafficking, Chainalysis said. ‘We have to stress that this is a lower bound estimate – our measure of illicit transaction volume is sure to grow over time,’ the report said, noting that the figure for 2021 was revised to $18 billion from $14 billion as more scams were discovered.”
“Corruption underpins political dysfunction and societal division,” notes Secretary-General António Guterres.
Dr. Gwizdalski provided the following perspective on the numbers captured in the graph above:
“Perspective is crucial when addressing illicit financial activities. Traditional fiat, like the USD, is implicated in an estimated $3.2 trillion in illegal activities annually—over 100 times the $20 billion linked to cryptocurrencies, according to UN, WEF, and Chainalysis. Shouldn’t we rethink the narrative? Fiat’s involvement in corruption and money laundering casts a dark shadow—a reputation we mustn’t let extend to crypto. Consider this: Using crypto for illegal purposes is inherently risky and plainly unwise with every transaction transparently recorded. Policymakers crafting crypto regulations need to be well-informed and address real issues within their traditional systems (a message to politicians in the US targeting crypto in their new bill: https://lnkd.in/gbgGz4nA).”
What Next? Ongoing Crypto Creative Destruction
From the OODA Almanac 2023 – Jagged Transitions:
“In 2022, the crypto and blockchain industry fully demonstrated frontier domain dynamics as it dealt with widespread fraud and wealth destruction. While it is important to sympathize with those financially impacted and pursue law enforcement and legal action to deal with the outright fraud, we remain convinced that this churn is effectively the period of Creative Destruction in blockchain.
While specific innovations like ICOs and NFTs will endure longer term recoveries, the core value proposition of blockchain and Web3 remains intact and we will continue to see innovation in the form of cryptocurrencies, blockchain technologies, and smart contracts. Many large organizations have robust blockchain initiatives and headlines reveal major players like SWIFT exploring blockchain models and institutions like Fidelity launching initiatives to custody digital assets.
A core differentiator in the success of these initiatives will be how organizations approach Web3 risk and making appropriate investments in cybersecurity to include red teaming, contract audits, and adaptive threat intelligence programs.”
Nothing about this crypto creative destruction and “jagged transition” validates a narrative that these emergent fungible units of measure and digital native systems for the creation, storage, and transfer of value have affordances, business models or system designs that are intrinsically fraudulent. As a result, strategic thinking and technological explorations of applied technology solutions in this space should do the work to remain very clear-eyed relative to negative perceptions and narratives.
Additional Resources
OODA Almanac 2023 – Jagged Transitions: This is the 3rd installment of our OODA Almanac series which are intended to be a quirky forecasting of themes that the OODA Network think will be emergent each year. You can review our 2022 Almanac and 2021 Almanac which have both held up well. The theme for last year was exponential disruption, which was carried through into our annual OODAcon event. This year’s theme is “jagged transitions” which is meant to invoke the challenges inherent in the adoption of disruptive technologies while still entrenched in low-entropy old systems and in the face of systemic global community threats and the risks of personal displacement.
Bitcoin’s Momentum: Bitcoin seems unstoppable due to solid mathematical foundations and widespread societal acceptance. Other cryptocurrencies like Ethereum also gain prominence. The Metaverse’s rise is closely tied to Ethereum’s universal trust layer. See: Guide to Crypto Revolution
Ransomware’s Rapid Evolution: Ransomware technology and its associated criminal business models have seen significant advancements. This has culminated in a heightened threat level, resembling a pandemic in its reach and impact. Yet, there are strategies available for threat mitigation. See: Ransomware, and update.
Cryptocurrency Incident Database: Over the past several years, there has been a rapid emergence of companies, projects, and initiatives in what is broadly categorized as Web3. While monitoring that rapid innovation, the OODA research team has noticed a disproportionately high number of cybersecurity incidents that have the potential to negatively impact the Web3 innovation ecosystem, disrupt customer adoption of these technologies, and result in consumer and enterprise monetary losses. OODA has compiled a Web3 incident database based on our research to categorize what compromises are taking place as well as document the cyberattack root causes. Tracking root causes provides insights into how innovators can create robust cyber risk management approaches and reduce the potential for consequential attacks. Reviewing the database leads to several conclusions on the need for improved risk mitigation. We capture many of our recommendations in this report on Web3 Security.
