Michael Bacina, Steven Pettigrove, Tim Masters, Jake Huang,
Luke Higgins, Luke Misthos & Kelly Kim of the Piper Alderman
Blockchain Group bring you the latest legal, regulatory and project
updates in Blockchain and Digital Law.
Chainalysis finds plunge in illicit flows in annual crypto
crime report
Global blockchain analytics firm, Chainalysis, has just released the 2024 Crypto Crime Report.
The report found a significant reduction in crypto-related crime
in 2023 when compared to 2022. USD $24.2 billion worth of
crypto-assets were received by identified illicit addresses in
2023, which accounted for 0.34% of total on-chain transaction
volume (this is also a proportional decrease from last year where
illicit activity accounted for approximately 0.42% of on-chain
transaction volume).
The report also details the interesting shift away from bitcoin
(BTC) as the primary asset used in cryptocurrency-related
crime.
The shift towards stablecoins reflects the global growth in use and
availability of stablecoins, however the report notes that certain
types of crypto-related crime still take place predominantly in BTC
(in particular, ransomware and darknet market sales).
Chainalysis’ report highlights three key trends in 2023 and
noted that these will be important trends to watch moving
forward:
- Scamming and stolen funds down significantly
- Illicit revenue from crypto scamming and hacking dropped
significantly in 2023, with total illicit revenue from each down
29.2% and 54.3% respectively. - Scammers have adopted new tactics, such as “romance
scamming”, whereby hackers build relationships and pitch fake
investments to individuals. The report notes that these scammers do
best when markets are up. Noting the strong performance of
crypto-assets as at the date of publishing, individuals
should exercise caution as fear of missing out (FOMO) often leads
individuals to make riskier decisions than usual. - The decrease in crypto hacking revenue may be due to positive trends in DeFi protocol
security.
- Illicit revenue from crypto scamming and hacking dropped
- Ransomware and darknet market activity
increasing
- Both ransomware and darknet market activity increased in 2023
in contrast with the overall decreasing trend. - Despite decreasing substantially in the previous year, the
increase in ransomware revenue suggests that ransomware attackers
have adjusted to organisations’ cybersecurity
improvements. - Darknet market activity also has increased following a decrease in the previous year.
- Both ransomware and darknet market activity increased in 2023
- Transactions with sanctioned entities form vast
majority of illicit activity
- Sanctioned entities and jurisdictions accounted for a combined
USD $14.9 billion worth of transaction volume in 2023, which
represents 61.5% of all illicit transaction volume in 2023. - The majority of this is driven by cryptocurrency services sanctioned by the US Department of the
Treasury’s Office for Foreign Assets Control (OFAC). - It is incorrect to assume that all of the USD $14.9 billion was
used for nefarious purposes, as the figure includes transaction
volume from average crypto users who happen to reside in those
jurisdictions (some of which include Russia, Iran, regions of
Ukraine, and North Korea).
- Sanctioned entities and jurisdictions accounted for a combined
While Chainalysis’ 2024 Crypto Crime report features some
bright spots, it is also a reminder of the need to remain generally
vigilant and proactive in the face of scams, ransomware activity
and fraud. The road to a safer and more inclusive financial system
is paved with challenges, but as Chainalysis’ report reveals
blockchain’s very transparency offers new ways to quantify and
tackle challenges which have plagued both traditional and
innovative payment systems. Here’s hoping that Chainalysis’
2025 Crypto Crime Report continues to reveal positive trends in
combating illicit finance.
#blessed: US Judge signs off Binance plea deal
Following a plea deal struck last November, a US federal
court judge has signed off on Binance’s USD$4.3 billion
settlement with the US Department of Justice, the Department of
Treasury and the Commodity Futures Trading Commission.
Binance, the world’s largest cryptocurrency exchange, has
agreed to one of the largest corporate penalties in US history to
settle allegations of money laundering, conspiracy to conduct an
unlicensed money transmitting business, and sanctions
violations.
Binance’s founder and chief executive officer Changpeng Zhao
(commonly known as “CZ”) plead guilty to failing to
maintain an effective anti-money laundering program. Late last
year, he also resigned as CEO of Binance and is currently awaiting
sentencing.
The Court approval resolves a number of aspects of a long running investigation into Binance’s
operations by US authorities, although claims brought by the SEC
over alleged securities law violations continue to be
litigated.
The plea deal followed a coordinated investigation by the
Department of the Treasury’s Financial Crimes Enforcement
Network (FinCEN) and Office of Foreign Assets
Control (OFAC), as well as the US Commodity
Futures Trading Commission (CFTC). The funds will
be distributed amongst these agencies, with a significant portion
allocated to the Treasury for sanctions violations.
Attorney General Garland emphasised the significance of the
deal, drawing reference to the
recent criminal conviction of Sam Bankman-Fried, ex-CEO and
founder of FTX:
Binance became the world’s largest cryptocurrency exchange
in part because of the crimes it committed – now it is paying
one of the largest corporate penalties in U.S. history. In just the
past month, the Justice Department has successfully prosecuted the
CEOs of two of the world’s largest cryptocurrency exchanges in
two separate criminal cases.
As part of the plea deal, Binance has agreed to accept an
independent monitorship, which has not yet been signed off by the
judge. Sullivan & Cromwell, the law firm which acted for FTX
debtors in their Chapter 11 insolvency proceeding, is reportedly poised for this role.
The US action against Binance is perhaps of the most significant
salvos in the US authorities’ enforcement drive against the
crypto industry. This settlement also underlines the United States
very broad approach to its jurisdiction, particularly in the area
of anti-money laundering and financial sanctions. In this regard,
Binance joins a long list of institutions which have felt the brunt
of US enforcement action over AML/CTF and sanctions violations.
FTX settles dispute, sells European arm for $33M
FTX Trading has sold the European arm of its operations, FTX
Europe, to its original founders as part of ongoing bankruptcy
proceedings as the defunct crypto exchange continues to recover
assets ahead of a planned vote on a reorganisation plan expected in
second quarter of this year.
Digital Assets AG was initially a small Swiss startup
specialising in accounting and billing software for crypto
companies, before branching into the derivatives trade, when Sam
Bankman-Fried paid $323 million for it in 2021.
The relatively unknown startup became the focal point for FTX
operations in Europe before the well documented FTX collapse. Following the
collapse, FTX attempted to recover funds from the founders of
Digital Assets AG citing the USD$323 million price tag as a
“gross overpayment”.
The founders, Messrs Patrick Gruhn and Robin Matzke, denied the
allegations and counter-claimed for USD$256.6 million from FTX. The
dispute was resolved on the grounds that the original founders will
buy back Digital Assets AG for USD$32.7 million, around one tenth
of the price initially paid by FTX.
The bitter sweet sale sees an additional $32.7 million recovered
for customers who lost money with FTX.
Creditors of FTX may be in higher spirits, however, considering
the FTX creditor distributions look more and more likely to close in on 100c in the
dollar, and following the arrest of the suspected culprits in a sim-swapping attack
that siphoned USD$400 million from FTX during the collapse.
As a part of its strategy to recover assets for its creditors,
the company was also granted approval on February 22 to sell off
over $1 billion in shares of the artificial intelligence firm
Anthropic.
With crypto prices and asset recoveries continuing to rise, and
despite widespread misappropriation of customer assets prior to the
collapse, it looks increasingly like FTX creditors will not end up
losing their shirts after all.
Court examines the Satoshi emails, as COPA seek to prove Wright
wrong
The trial investigating whether Craig Wright is truly
Satoshi Nakamoto, the creator of Bitcoin, has continued into
its third week with a series of surprising revelations.
Wright faces a claim by the Crypto Open Patent Alliance
(COPA), an association of leading crypto firms and
developers, that is asking a UK court for a declaration
that Wright is not the pseudonymous creator of Bitcoin,
Satoshi Nakamoto.
In a session last week, Wright admitted that a version of the Bitcoin whitepaper discovered by
Wright alongside 160,000+ other documents, had in fact been
recently edited in advance of trial. Alexander Gunning,
representing COPA, pointed out Wright’s edits, which were found
in his “LaTeX files.” Gunning asked Wright “If you
were forging the whitepaper, that is how you would do it, isn’t
it?”, to which Wright replied “Yes.”. Some believe
that the modifications are consistent with forging or backdating the
document.
Crypto Twitter was quick to post a time-lapse of the edits:
Gunning’s probing questions revealed that Wright’s
alterations were aimed at mirroring the Bitcoin whitepaper’s
layout. This revelation, along with the fact that the file was
recently uploaded in November 2023, raises new doubts about
Wright’s claims to be Satoshi Nakamoto.
The tension peaked during Wright’s testimony when Gunning
asked him directly if his claim to be Satoshi Nakamoto was
fraudulent, which Wright vehemently denied.
The trial has featured a who’s who of early cryptography
pioneers. Zooko Wilcox-O’Hearn, the founder of Zcash, discussed
his interactions with Nakamoto, emphasising their mysterious
nature. Adam Back, CEO of Blockstream, discovered a series of 2008
and 2009 emails from Satoshi Nakamoto’s email address which
quickly went viral:
The email exchanges suggest that Back is himself not
Satoshi Nakamoto, which was a long-running theory of many crypto
conspiracy theorists (which Back has long denied).
In an interesting twist, Nakomoto’s emails foreshadowed the
possibility of problems arising from Bitcoin’s energy
consumption. Nakamoto advocated for Proof of Work
(PoW) as crucial for network coordination,
sparking debates about Bitcoin’s environmental impact.
Emails from Nakamoto also hinted at the potential regulatory
concerns over cryptocurrency, anticipating the long running
regulatory battle over whether cryptocurrencies are securities:
There are a lot of things you can say on the sourceforge site
that I can’t say on my own site
…I’m uncomfortable with explicitly saying, ‘consider
it an investment’…That’s a dangerous thing to say…
It’s OK if [people who deal with bitcoin] come to that
conclusion on their own, but we can’t pitch it as that.
Wright is expected to take the stand again later this week to
defend allegations that emails between him and his former legal
representatives, Ontier, were allegedly “not genuine”.
Wright had referenced these emails in his evidence last week which
compelled his now current lawyers to submit them into evidence.
With Ontier alleging that those emails were doctored, COPA will
likely put new allegations of forgery (in addition to the
allegations relating to the bitcoin whitepaper) to Wright on the
stand.
The current trial is relevant to a number of ongoing UK actions
over claims relating to copyright in the Bitcoin whitepaper and
code base. While the trial may finally prove Wright wrong in his
claim to be Satoshi Nakamoto, it appears the real identity of
Bitcoin’s pseudonymous creator will remain a mystery for some
time to come.
Earn-out: Gemini to repay customers settling Earn claims
The New York Department of Financial Services
(DFS) confirmed on Wednesday that the American
cryptocurrency exchange Gemini committed to:
Return at least $1.1 billion to Gemini Earn Program
customers;
Contribute $40 million to the Genesis Global Capital
(GGC) bankruptcy for the benefit of Earn
customers; And
Pay a $37 million fine to the DFS.
The ‘Earn Program’ in question was
launched in early 2021, offering retail investors up to 8% interest
yield by lending their crypto assets to Gemini, which on-lent the
assets to GGC, a subsidiary of Digital Currency Group
(DCG), once a leader industry player before the
failure of GGC, Genesis, and the sale of Coindesk.
In November 2022, GGC paused withdrawals and defaulted on nearly
$1B worth of customer assets, after confirming that it had $175M in exposure to the
FTX collapse. The Earn program was terminated in January 2023,
with GGC filing for bankruptcy around the same time. This impacted
340,000 Earn customers, sparking litigation
between GGC, DCG and Gemini.
Separately, GGC has settled allegations by the US
Securities and Exchange Commission (SEC) over its involvement in the program, and has
proposed a liquidation plan under which they will repay customers
either in cash or cryptocurrency.
Superintendent Harris commented on the Gemini settlement:
Gemini failed to conduct due diligence on an unregulated third
party, later accused of massive fraud, harming Earn customers who
were suddenly unable to access their assets after Genesis Global
Capital experienced a financial meltdown.
Gemini announced the recent developments on X, promising to keep
users ‘informed along the way’:
Gemini customers are now one step closer to recovering their
funds from the failed Earn product. The settlement follows a recent
string of positive news for creditors of bankrupt crypto titans,
including Celsius and FTX, which raised an additional $32.7M this week through its sale of
FTX Europe to the firm’s original founders.
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