The crypto industry is inundated with scams and crime. How Asia should be dealing with crime remains … [+] to be seen. (Photo by Olivier DOULIERY / AFP) (Photo by OLIVIER DOULIERY/AFP via Getty Images)
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Across Asia Pacific, criminals are using cryptocurrency to fund increasingly nefarious schemes. While early crime involving digital assets tended to target crypto exchanges themselves, the most infamous being the 880,000 Bitcoin stolen from Japan’s Mt. Gox between 2011 and 2014 now worth $45 billion – today digital assets are linked to money laundering, large-scale scams and funding of illegal arms programs.
Crypto proponents usually insist that proper regulation can do much to mitigate this problem. Though regulation can boost investor protection and establish rules of the road, we believe that decentralized virtual currencies’ inherent nature means that potential for abuse will remain high.
Regulators in some major jurisdictions in the region have come to similar conclusions and are acting accordingly.
China Confronts Digital Assets Crime
There are many reasons China’s government is wary of cryptocurrency, but chief among them is its association with illegal activity facilitated by its decentralized, anonymous nature. Such criminal activity can become an international problem quickly. For instance, in October, 2023, the U.S. Department of Justice (DOJ) charged several Chinese businesses and their employees with the production and trafficking of fentanyl. The criminal network relied on cryptocurrency for payments and 16 crypto wallets were identified that were used in the scheme. “These companies tend to use cryptocurrency transactions to conceal their identities and the location and movement of their funds,” the DOJ said in a statement.
Analyzing on-chain activity of crypto addresses associated with suspected China-based chemical precursor shops, blockchain research firm Chainalysis found that addresses in China received more than $37.8 million of cryptocurrency between January 2018 and April 2023. “The conclusions from our analysis all point in the same direction — that fentanyl sales using cryptocurrency happen on a large scale,” Chainalysis said in the report.
Domestically, China faces serious cryptocurrency fraud. In late 2022, Chinese police arrested 63 suspects linked to a criminal group that used digital assets to launder an estimated $1.7 billion in an operation spanning 17 provinces. Chinese authorities have also charged prominent industry executives.
Crypto Travails In Myanmar
Digital assets have become a double-edged sword in Myanmar, where the exiled political opposition (the National Unity Government) has promoted them in its bid to challenge the country’s ruling junta. The NUG has even called for Myanmar to adopt a U.S. dollar-backed cryptocurrency. In July 2023, the NUG announced the beta launch of a neobank running on Polygon that would do currency swaps via Uniswap v3 pools and USDT stablecoins.
Yet the severity of scams involving digital assets could undermine the faith of Mynamar’s citizens in their utility. In February, it was revealed that a single company based in Myanmar had bilked more than $100 million from victims in less than two years – according to Chainalysis and the U.S. anti-slavery group International Justice Mission. Chainalysis said it had tracked digital coins issued by Tether used for infamous “pig butchering” scams in which the perpetrators engage in bogus romantic relationships to gain their victims’ trust. Tether tokens were also used by families of trafficked workers forced to pay ransoms for their release. They made the payments to a company in eastern Myanmar based in a compound known as KK Park.
In January, the United Nations Office on Drugs and Crime warned in a report that Tether has become a top payment method for money launderers and fraudsters operating in Southeast Asia. We reckon that Tether is attractive to criminals because transactions involving it are fast and irreversible. Once the money is moved, that is the end of the story.
Crypto Funding Arms Programs
There is one country in which crypto related crime is larger scale than anywhere else, at least given that country’s size, and that is North Korea (the DPRK), the reclusive, isolated nation often referred to as the “hermit kingdom.” Data from Chainalysis show that North Korea’s crypto hacking almost perfectly dovetails with the industry’s takeoff that began in the late 2010s. North Korean hackers stole just US$1.5 million in crypto in 2016, but US$29 million in 2017 and US$522 million in 2018. When the bear market hit in 2019, Pyongyang’s crypto thievery decreased somewhat, but started to pick up again in 2021 and surged to US$1.65 billion in 2022.
Research by the blockchain intelligence firm TRM Labs shows that North Korea stole $600 million in crypto in 2023. Hacks perpetrated by the DPRK were typically ten times as damaging as those not linked to the DPRK. Worryingly, the uptick in digital asset thievery by North Korea appears to tied in with an acceleration in the country’s ever-concerning missile programs. Pyongyang fired more missiles in 2022 than any other year, including 23 in a single day.
At a U.S. Senate hearing in March, Senator Elizabeth Warren estimated that the amount of crypto North Korea steals could be used to fund the construction of 56 intercontinental ballistic missiles annually. “And the threat is not letting up,” she said, noting that in March over a period of just two days, North Korea laundered more than $23 million worth of crypto that it stole.
Central Banks Assert Control
We have observed that the answer of some regulators to the problems posed by cryptocurrency is to reassert control over monetary policy with the issuance of central bank digital currencies (CBDCs). While most Southeast Asian countries remain somewhat pro-crypto, both China and India have effectively banned its use in payments and made investing in it more trouble than it is worth, while aggressively promoting their respective digital fiat currencies. These are the two most populous countries in Asia, with massive economies. If they reject crypto, in the long run, its prospects in the region will be limited, no matter what Southeast Asia does.
On the other hand, we do believe there is potential for different jurisdictions in Asia to increase cooperation among law enforcement, the industry and regulators. Such cooperation could perhaps reduce some of the crypto crime that is now rampant.
But as long as the industry champions anonymity and decentralization, the digital assets ecosystem will remain highly susceptible to malfeasance. This is a risky proposition for an industry that is still trying hard to win over regulators and convince them of its utility and safety.
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