The world of digital finance saw a historic increase in criminal activity during 2021 when hackers and fraudsters managed to steal a record amount of $14 billion in cryptocurrencies, made possible mainly due to the rapid growth of DeFi. It was reported by Chainalysis that crimes related to the use of cryptocurrencies grew by 79% year-on-year.
Key Figures at a Glance
- Total amount of cryptocurrency lost to fraudulent activity in 2021: $14 billion
- Rate of increase of cryptocurrency-related crimes annually: 79%
- Rate of growth in cryptocurrency thefts between 2020 and 2021: 516% ($3.2 billion total)
- Percentage of total losses attributed to DeFi protocols: 72%
- Rate of annual growth in scamming losses: 82%, resulting in total loss of $7.
DeFi: The Wild West of Digital Finance
The idea of decentralized finance (also known as DeFi) played the most important part in crimes involving cryptocurrencies in 2021. DeFi represents the rapidly growing sector in the cryptocurrency sphere that is aimed at removing traditional banking intermediaries, such as banks or brokers, from daily financial activities, including loans and assets exchanges.
How DeFi Works
Instead of financial institutions, the DeFi system uses smart contracts that are programmed code existing on some blockchain networks like Ethereum or Solana. Smart contracts automatically carry out their functions in accordance with certain parameters without requiring any central entity.
“The financial system is basically sending money around with various terms and conditions attached to it,” said Joey Krug, Chief Investment Officer at Pantera Capital, a cryptocurrency and blockchain-focused asset manager.
Explosive Growth — and Exploits
DeFi transaction volume surged 912% in 2021 alone, according to Chainalysis data. Impressive returns on decentralised tokens like Shiba Inu sparked intense investor enthusiasm — but that same enthusiasm made users careless about risk.
According to Kim Grauer, Chief Economist and Head of Research at Chainalysis, there were a number of factors contributing to this criminal spree:
- Numerous DeFi protocols recently created have code weaknesses that hackers easily exploit.
- Hackers exploited weaknesses in 21% of code in 2021.
- Even though third-party auditing firms exist to validate secure protocols, many people are willing to use unverified protocols with potentially attractive returns.
- “Given the hype around DeFi, people may have been more OK with using less secure platforms due to a fear of missing out on potential gains,” Grauer explained.
The Two Biggest Crypto Crimes of 2021
Scamming: The Top Criminal Activity
Scamming ranked as the most prevalent form of cryptocurrency-based crime in 2021. Losses from scams climbed 82% year-over-year, reaching $7.8 billion worth of cryptocurrency. More than $2.8 billion of this came from a particularly deceptive scheme known as a “rug pull.”
In a rug pull, developers construct what appear to be legitimate cryptocurrency projects — complete with whitepapers, token listings, and community buzz — only to vanish with investors’ funds once enough capital has been accumulated.
Theft: A 516% Surge Driven by Hacking
Cryptocurrency theft rose a staggering 516% from 2020, totalling $3.2 billion. The vast majority of these stolen funds — 72% — were extracted directly from DeFi protocols, primarily through hacking of cryptocurrency businesses.
Chainalysis sounded a clear warning:
“DeFi is one of the most exciting parts of the larger cryptocurrency ecosystem. It offers huge chances for both business owners and cryptocurrency users. But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft.”
The Bigger Picture: Crime Is a Shrinking Share
Despite the alarming headline numbers, researchers are quick to add important context: legitimate cryptocurrency adoption is growing far faster than criminal activity. Transactions involving illicit addresses accounted for just 0.15% of the $15.8 trillion in total crypto trading volume in 2021 — an all-time low.
“The fact that the increase was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all,” Chainalysis wrote. “Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem.”
How Illicit Activity Is Identified
The research firm classifies funds as illicit when they are traced to confirmed criminal activity — for example, if they were sent to or received from a darknet marketplace, or are verifiably tied to a known hack.
A key advantage that investigators have over traditional financial crime is blockchain transparency. Unlike cash transactions, every movement of cryptocurrency is permanently recorded in a publicly visible ledger.
“Authorities have been enormously successful in leveraging the transparency of blockchains to investigate and shut down illicit activity,” said Grauer.
Law Enforcement Strikes Back
Alongside the rise in crime, 2021 also delivered some landmark victories for law enforcement agencies. Major seizures and takedowns demonstrated that the evolving investigative toolkit — combined with blockchain transparency — is increasingly effective.
Notable 2021 Enforcement Actions
- IRS Criminal Investigation: Seized over $3.5 billion worth of cryptocurrency — representing 93% of all funds seized by the division that year — from investigations linked to Rezzonnaire Technology.
- Department of Justice: Seized $56 million in connection with a crypto-related scam.
- Colonial Pipeline recovery: Recovered $2.3 million from the ransomware gang behind the widely publicized ransomware attack on the Colonial Pipeline.
- Israeli National Bureau for Counter Terror Financing: Seized an unknown amount associated with terrorism financing.
These successes underscore a critical reality: while DeFi’s decentralisation may seem to offer anonymity, the underlying blockchain infrastructure provides investigators with tools that are, in many ways, more powerful than anything available in traditional financial crime enforcement.