The world of cryptocurrency, with its promise of decentralized finance and borderless transactions, has unfortunately attracted a darker element: cross-chain crypto crime. To Eleanor Brooks, a veteran blockchain researcher, that’s a significant increase in trafficking operations taking advantage of all blockchains’ interoperability. Recent reports indicate a staggering $21.8 billion has been lost due to these crimes, signaling an urgent need for awareness and preventative measures. This blog post will discuss the tactics delinquents employ. Finally, it will explain the real-world effects of various forms of crypto crime and include practical advice for users and exchanges to protect themselves.

The Mechanics of Cross-Chain Crime

Cybercriminals are getting more and more sophisticated in how they commit their crimes, taking advantage of the very features that make blockchain technology so attractive. “Chain-hopping” has become an in-vogue method, where stolen assets are quickly moved across multiple blockchains to hide where assets came from and where they’re going. This process typically loops through many times in a technique known as “multi-hop chain-hopping.” Unfortunately, this repetition serves to further obfuscate tracing of the funds.

Key Methods Employed

  • Cross-chain swaps: Facilitating the exchange of assets across different blockchains to confuse investigators.
  • Blockchain bridges: Exploiting vulnerabilities to move stolen crypto across chains.
  • Decentralized Exchanges (DEXs): Utilizing DEXs to launder stolen crypto and move funds across different blockchains.
  • Coin swap services: Employing coin swap services to further conceal the origin of illicit funds.

These approaches are usually used together in systematic and multi-hop methods. One great example is the $75 million criminal forfeiture case involving North Korea. In this example, money moved from Bitcoin to Ethereum, then moved to Arbitrum, Base, and eventually to Tron. Even the most complex series of transactions can attest to the lengths that criminals will go to in order to try to disguise their tracks.

Impact on Crypto Crime

Cross-chain technology is booming, and it’s upending the world of crypto crime. This innovative step forward not only aggravates current issues but creates entirely new headaches for law enforcement and regulatory agencies alike.

Types of Crypto Crime Affected

  • Crypto investment scams: These scams often lure victims with promises of high returns, only to disappear with the invested funds. The use of cross-chain technology makes it more difficult to track and recover the stolen assets.
  • Memecoin rug pulls: These scams involve creating a new memecoin, attracting investors, and then abandoning the project while absconding with the funds. Cross-chain functionality allows scammers to quickly move the stolen funds to different blockchains, making it harder to trace and recover the assets.
  • Hacks: Cross-chain bridges and DEXs are vulnerable to hacks, which can result in the theft of large amounts of cryptocurrency. The stolen funds are often laundered through cross-chain swaps and other methods to obscure their origin.

The DEX space is obviously unregulated and very low on oversight, making it all that much worse. Since DEXs are usually built to exist within a regulatory gray area, authorities would have a hard time tracing and monitoring these illicit transactions. Especially because exchanges like DEXs have sheltering anonymity and pseudonymity. It is extremely difficult to investigate and ultimately charge illegal operators with this lack of clarity. Moreover, DEXs facilitate secure, fast and easy cross border transactions. Sadly, this feature can be taken advantage of for purposes of money laundering, human trafficking, and other illegal activity. A lack of KYC/AML requirements on most DEXs makes it even easier for these criminals to move illicit funds. Smart contract vulnerabilities on several DEXs can be exploited, letting attackers steal funds or manipulate transactions.

Protecting Yourself and the Crypto Ecosystem

To most effectively combat the growing threat of cross-chain crypto crime, we require a smart and multi-faceted approach. Now more than ever, individual users and exchanges need to protect themselves.

Tips for Users

  1. Be cautious of investment scams: Be wary of promises of "zero risk" and "lots of money" with crypto investments, especially those that start on social media or online dating apps/sites.
  2. Use reputable exchanges and platforms: Ensure that the crypto exchange or platform you use is reputable and has proper security measures in place.
  3. Keep software and systems up-to-date: Regularly update your software and systems to prevent exploitation of known vulnerabilities.
  4. Use strong security measures: Use strong passwords, enable two-factor authentication, and consider using a hardware wallet to store your cryptocurrencies.
  5. Monitor accounts and transactions: Regularly monitor your accounts and transactions to detect any suspicious activity.

Recommendations for Exchanges

  • Strengthen Identity Verification: Exchanges should implement robust identity verification processes to prevent unauthorized access to user accounts.
  • Enhance Transaction Monitoring: Exchanges should use advanced transaction monitoring tools to detect and flag suspicious transactions.

Advanced analytics solutions are key to helping law enforcement trace and identify illicit cross-chain transactions. Predictive analytics tools forensically analyze transaction patterns to flag and trace suspicious or fraudulent activities. First, they strengthen exchanges and law enforcement agencies’ ability to detect and prevent cross-chain crypto crime. Increased regulatory compliance is essential. Regulatory clarity and consistency will go a long way to establishing a fair and level playing field for all participants in the crypto ecosystem. This greatly increases the difficulty of criminals trying to infiltrate networks.

The rapid increase in cross-chain crypto crime is a serious blow to the credibility of the entire cryptocurrency ecosystem. By understanding the methods used by criminals and taking proactive steps to protect themselves, users and exchanges can help to mitigate the risks and create a safer environment for everyone. Eleanor Brooks, SPP ’23, reminded us that maintaining a proactive, informed mindset is crucial to combatting today’s multi-faceted, evolving threats.