The rise of crypto-assets and blockchain technology has brought innovation and disruption to global financial systems. However, alongside these advancements, a parallel ecosystem of criminal activity has emerged which often leverages the unique features of blockchain technology. In their SSRN working paper "Crypto Crime as Technology Entrepreneurship", Darcy Allen and Aaron Lane of the Royal Melbourne Institute of Technology (RMIT) argue that crypto criminals operate in a manner similar to conventional technology entrepreneurs.
The entrepreneurial landscape of crypto crime
Crypto criminals, just like legitimate entrepreneurs (at least, the successful ones), are adept at identifying opportunities within a given market.
Similarly to conventional entrepreneurs, crypto criminal entrepreneurs allocate resources based on perceived opportunities and costs, adapting to shifts in regulation and technology.
The pseudonymity and censorship-resistance that is inherent to blockchain technology provides new ground for various illicit activities. However, these relatively new technologies also allow for greater opportunities for enforcement.
...decentralised, immutable, programmable and transparent global technologies both provide new opportunities for constructing and executing crimes, but also create new opportunities for private and legal enforcement.
Allen and Lane outline what the various characteristics of crypto mean for crypto criminals. These are summarised as follows:
Global and interoperable: Crypto facilitates easier, cheaper, and faster value transfer globally, meaning criminals face less lock-in to specific institutional systems and lowering their exit costs. However, this also means increased competition and reduced rewards accumulated from each jurisdiction.
Open-source and transparent: Opportunities for exploitation (e.g., hacks) are more transparent as the entire history of blockchain networks and code is public. However, this transparency simultaneously aids law enforcement in tracking and detecting crimes. So-called "whitehat" hackers can use this information to recoup funds (read more about whitehat hacker initiatives here).
Censorship resistance and self-sovereignity: This ensures that transactions cannot be altered or reversed, providing security for criminals and allowing unprecedented control over crypto-assets. However, criminals must navigate a steep learning curve with experimental technology, and many secure storage devices (i.e., physical hardware wallets) can leave a trail of evidence if caught.
Taxonomy of crypto crimes
Allen and Lane propose a taxonomy of crypto crimes, noting that there are two primary ways in which crypto criminals can extract crypto-assets from victims. The first method is by theft, whereby criminals directly take the crypto-assets. The second method is via fraud, whereby criminals obtain crypto-assets by deception. Allen and Lane further state that there are three main types of crypto-crime within both theft and fraud: "conventional", "intermediary-enabled", and "decentralised". A taxonomy explaining this table is extracted below:
Source: Allen, Darcy W E and Lane, Aaron M., Crypto Crime as Technology Entrepreneurship (August 05, 2024). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4915881
Economic perspectives on crypto crime and the role of the private sector
Allen and Lane propose that changes in technology and regulation can shift the costs associated with different types of crimes, prompting criminals to adapt their strategies. For instance, increased regulation in one area may lead to a shift towards more decentralised and harder-to-regulate activities.
...it is possible that [anti-money laundering regulations, centralised exchange licensing and investments in traceability technology] don't decrease the level of crime, but rather change the allocation between different criminal activities.
The authors contend that the private sector will play a crucial role in addressing crypto crime in the years to come. Organisations are already developing sophisticated tools, such as blockchain analytics and tracking software, to enhance security and increase the transaction costs for criminals. These technologies not only aid law enforcement but also help legitimate businesses protect their customers and assets.
Just as we saw private orderings and private governance solutions emerge to crime in the early days of the internet...we anticipate greater investment within the cryptocurrency industry itself to suppress criminal activities in order to reduce transaction costs and expand the cryptoeconomy.
Conclusion
The analogy of crypto criminals to entrepreneurs provides a valuable framework for understanding the dynamic nature of illicit blockchain activities. As technology and regulations continue to develop, so too will the strategies used by these nefarious actors. Allen and Lane's paper highlights that effective interventions will require a collaborative effort between regulators, law enforcement, and the private sector to mitigate the risks and impacts of crypto crime. By recognising the entrepreneurial aspect of crypto crime, perhaps we can better anticipate and respond to the challenges posed by this ever-evolving threat.
Written by Luke Higgins and Steven Pettigrove
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