Why crypto crime is becoming increasingly problematic in Asia

Across the Asia-Pacific region, criminals are using cryptocurrencies to fund increasingly nefarious schemes. While early crimes involving digital assets tended to target the crypto exchanges themselves (the most notorious being the 880,000 bitcoins stolen from Japan's Mt. Gox between 2011 and 2014, now worth $45 billion), digital assets are now associated with money laundering, large-scale fraud, and the funding of illegal weapons programs.

Crypto advocates typically insist that proper regulation can go a long way toward mitigating this problem. While regulation can increase investor protection and set rules of the road, we believe the potential for abuse will remain high due to the inherent decentralization of virtual currencies.

Regulators in some key jurisdictions in the region have reached similar conclusions and are acting accordingly.

China faces digital asset crime

There are many reasons why the Chinese government distrusts cryptocurrencies, but the most important reason is their connection to illegal activities, which are facilitated by their decentralized, anonymous nature. Such criminal activities can quickly become an international problem. For example, in October 2023, the U.S. Department of Justice indicted several Chinese companies and their employees for manufacturing and trafficking fentanyl. The criminal network used cryptocurrencies for payments and 16 crypto wallets were identified that were used for the scheme. “These companies tend to use cryptocurrency transactions to hide their identities as well as the location and movement of their funds,” the Justice Department said in a statement.

Blockchain research firm Chainalysis analyzed the on-chain activity of crypto addresses associated with suspected China-based chemical precursor businesses and found that addresses in China received over $37.8 million worth of cryptocurrency between January 2018 and April 2023. “The conclusions from our analysis all point in the same direction – that fentanyl sales using cryptocurrency are occurring on a large scale,” Chainalysis said in the report.

Domestically, China is facing 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 across 17 provinces. Chinese authorities have also charged prominent industry executives.

Crypto problems in Myanmar

Digital assets have become a double-edged sword in Myanmar, as the exiled political opposition (the Government of National Unity) has promoted them in its bid to challenge the country's ruling junta. The NUG has even called on Myanmar to adopt a US dollar-backed cryptocurrency. In July 2023, the NUG announced the beta launch of a neobank running on Polygon that would conduct currency swaps via Uniswap v3 pools and USDT stablecoins.

But the severity of digital asset scams could undermine Myanmar citizens' confidence in their utility. In February, it was revealed that a single Myanmar-based company had defrauded victims of more than $100 million in less than two years, according to Chainalysis and U.S. anti-slavery group International Justice Mission. Chainalysis said it had tracked digital coins issued by Tether that were used in notorious “pig slaughter” scams, in which perpetrators engage in fake romantic relationships to gain their victims' trust. Tether tokens have also been used by families of human trafficking victims forced to pay ransoms for their release. They made the payments to a company in eastern Myanmar based in a complex called KK Park.

In January, the United Nations Office on Drugs and Crime warned in a report that Tether had become a popular payment method for money launderers and fraudsters in Southeast Asia. We believe that Tether is attractive to criminals because transactions are quick and irreversible. Once the money is moved, it's done.

Crypto funding weapons programs

There is one country where crypto crime occurs on a larger scale than anywhere else, at least considering its size: North Korea (the DPRK), a secluded, isolated state often referred to as the “Hermit Kingdom.” Data from Chainalysis shows that North Korea’s crypto hacking aligns almost perfectly with the industry’s boom that began in the late 2010s. North Korean hackers stole just $1.5 million in cryptocurrencies in 2016, but $29 million in 2017 and $522 million in 2018. When the bear market began in 2019, crypto theft in Pyongyang dropped somewhat, but picked up again in 2021, rising to $1.65 billion in 2022.

Research from blockchain intelligence firm TRM Labs shows that North Korea stole $600 million worth of cryptocurrency in 2023. Hacking attacks carried out by North Korea were typically 10 times more damaging than those not linked to North Korea. Worryingly, the rise in digital asset theft by North Korea appears to be linked to an acceleration of the country's ever-worrisome missile programs. Pyongyang has fired more missiles in 2022 than in any other year, including 23 in a single day.

At a U.S. Senate hearing in March, Senator Elizabeth Warren estimated that the cryptocurrency stolen by North Korea would be enough to build 56 intercontinental ballistic missiles a year. “And the threat is not going away,” she said, noting that North Korea laundered over $23 million worth of stolen cryptocurrency in just two days in March.

Central banks exercise control

We have observed that the response of some regulators to the problems posed by cryptocurrencies is to reassert control over monetary policy by issuing central bank digital currencies (CBDCs). While most Southeast Asian countries remain more supportive of cryptocurrencies, both China and India have effectively banned their use in payments, making investments in them more of a hassle than they are worth, while aggressively promoting their respective digital fiat currencies. These are Asia's two most populous countries with huge economies. If they reject cryptocurrencies, their prospects in the region will be limited in the long run, no matter what Southeast Asia does.

On the other hand, we believe there is potential for various jurisdictions in Asia to increase cooperation between law enforcement, industry and regulators. Such cooperation could potentially curb some of the currently rampant crypto crime.

But as long as the industry champions anonymity and decentralization, the digital asset ecosystem will continue to remain highly vulnerable to abuse. This is a risky proposition for an industry that is still trying to convince regulators of its utility and security.