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Why crypto crime in Asia is becoming increasingly problematic
The cryptocurrency industry is inundated with scams and crime. How Asia should tackle 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 crimes involving digital assets tended to target cryptocurrency exchanges themselves, the most infamous was the theft of 880,000 Bitcoin in Japan Mount Gox between 2011 and 2014 it is now worth $45 billion – today digital assets are linked to money laundering, large-scale scams and the financing of illegal weapons programs.
Cryptocurrency advocates usually insist that proper regulation can go a long way towards mitigating this problem. While regulation can increase investor protection and establish rules of the road, we believe the inherent nature of decentralized virtual currencies means the potential for abuse will remain high.
Regulators in some of the region’s major jurisdictions have reached similar conclusions and are acting accordingly.
China tackles digital asset crime
There are many reasons why the Chinese government is wary of cryptocurrency, but chief among them is its association with illegal activity facilitated by its decentralized and anonymous nature. Such criminal activity can quickly become an international problem. For example, in October 2023, the United States Department of Justice (DOJ) charged several Chinese companies and their employees with the production and trafficking of fentanyl. The criminal network relied on cryptocurrency for payments and 16 crypto wallets used in the scheme were identified. “These companies tend to use cryptocurrency transactions to conceal their identity and the location and movement of their funds,” the Justice Department said in a declaration.
Analyzing the on-chain activity of crypto addresses associated with alleged China-based precursor chemical stores, blockchain research firm Chainalysis found that addresses in China received more than $37.8 million in cryptocurrency between January 2018 and April 2023. “The conclusions of our analysis all point in the same direction: sales of fentanyl via cryptocurrency are occurring on a large scale,” Catenaanalysis said in the report.
Domestically, China faces serious cryptocurrency-related fraud. In late 2022, Chinese police arrested 63 suspects linked to a criminal group that used digital assets to launder an estimated amount $1.7 billion in an operation that spans 17 provinces. Chinese authorities have also charged key industry executives.
Cryptocurrencies in Myanmar
Digital assets have become a double-edged sword in Myanmar, where the exiled political opposition (the unity government) has promoted them in an attempt to challenge the country’s ruling junta. The NUG even called for Myanmar to adopt a cryptocurrency backed by the US dollar. In July 2023, the NUG announced the beta launch of a neobank running on Polygon which would trade currency via Uniswap v3 pools and USDT stablecoins.
However, the severity of scams involving digital assets could undermine Myanmar citizens’ confidence in their usefulness. In February it was revealed that only one Myanmar-based company had made a mistake more than 100 million dollars by victims in less than two years – according to Chainalysis and the US anti-slavery group International Justice Mission. Chainalysis said it has tracked digital coins issued by Tether used for infamous “pig slaughter” scams in which perpetrators engage in fake romantic relationships to gain the trust of their victims. Tether tokens have also been used by families of trafficked workers forced to pay a ransom for their release. They made the payments to an eastern Myanmar company based in a complex known as KK Park.
In January, the United Nations Office on Drugs and Crime warned in a report that Tether has become a major payment method for money launderers and scammers operating in Southeast Asia. We believe Tether is attractive to criminals because transactions involving it are fast and irreversible. Once the money is moved, the story is over.
Crypto weapons financing programs
There is one country where cryptocurrency crime is more prevalent than anywhere else, at least given the size of the country, and that is North Korea (DPRK), the reclusive and isolated nation often referred to as the “hermit kingdom.” Data from Chainalysis shows that North Korea’s crypto hacking fits almost perfectly with the industry’s takeoff that began in the late 2010s. North Korean hackers stole just $1.5 million in cryptocurrencies in 2016, but $29 million dollars in 2017 and $522 million in 2018. When the bear market hit in 2019, cryptocurrency thefts in Pyongyang declined slightly, but began to recover in 2021 and increase to $1.65 billion in 2022.
Blockchain intelligence company research TRM laboratories shows that North Korea stole $600 million in cryptocurrencies in 2023. Cyberattacks perpetrated by the DPRK have typically been ten times more damaging than those not linked to the DPRK. Worryingly, North Korea’s increase in digital asset theft appears to be tied to the acceleration of the country’s ever-worrying missile programs. Pyongyang launched more missiles in 2022 than any other year, including 23 in a single day.
During a U.S. Senate hearing in March, Senator Elizabeth Warren estimated that the amount of cryptocurrencies stolen from North Korea could be used to finance the construction of 56 intercontinental ballistic missiles each year. “And the threat is not diminishing,” she said, noting that in March, in a period of just two days, North Korea laundered more than $23 million in stolen cryptocurrencies.
Central banks assert control
We have observed that some regulators’ response to the problems posed by cryptocurrency is to reassert control over monetary policy by issuing central bank digital currencies (CBDCs). While most Southeast Asian countries remain somewhat crypto-friendly, both China and India have effectively banned their use in payments and have made investing in these cryptocurrencies more trouble than they are worth, while aggressively promoting their respective digital fiat currencies. These are the two most populous countries in Asia, with massive economies. If they reject cryptocurrencies, their long-term prospects in the region will be limited, no matter what Southeast Asia does.
On the other hand, we believe that diverse jurisdictions in Asia have the potential to increase cooperation between law enforcement, 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 asset ecosystem will remain highly susceptible to abuse. This is a risky proposition for an industry that is still trying to win over regulators and convince them of its usefulness and safety.