DUBAI — In recent years, the surge of cryptocurrencies has reshaped the financial landscape, offering unparalleled opportunities for innovation and investment. However, the ominous shadow of crypto-related crime accompanies the promise of digital wealth. This complex and ever-evolving threat looms large over the GCC.
Against this backdrop, TRENDS delves deep into the undercurrents of crypto crime in the GCC, shedding light on the current landscape, emerging trends, and proactive measures to safeguard individuals and businesses against financial threats.
Nicola Buonanno, VP of Southern EMEA at Chainalysis, offers valuable insights into crypto crime, delineating its multifaceted nature and impact on the GCC region. Buonanno says crypto crime encompasses activities from theft and scams to money laundering and ransomware attacks, all orchestrated to exploit cryptocurrencies for illicit gains.
Despite the region’s growing use of cryptocurrencies, Buonanno notes encouraging developments in the fight against crypto crime, with a decline in illicit activities witnessed in recent years. However, he cautions that vigilance remains paramount, as the threat of financial crime persists in a rapidly evolving digital ecosystem.
Examining specific trends within the GCC, Buonanno identifies notable shifts in the prevalence of crypto crimes, from the decline in scams and hacking to the rise of ransomware and darknet markets. He underscores the importance of understanding these trends to effectively combat crypto crime and mitigate its impact on regional consumers and businesses.
Buonanno sheds light on the key challenges law enforcement agencies face in investigating and prosecuting crypto-related crimes, emphasizing the need for sophisticated tools and cross-border collaboration. He also explores the regulatory landscape in the GCC, applauding the region’s forward-thinking approach to regulating cryptocurrencies while advocating for greater clarity and transparency to foster safe and innovative markets.
GCC Snapshot: Progress and Challenges
Although the overall value received by illicit crypto addresses declined in 2023 compared to 2022, the GCC witnessed a different picture. The UAE saw significant crypto activity, with Saudi Arabia experiencing the fastest-growing crypto economy regionally. This growth suggests an increase in crypto crime potential, but it’s important to note that the overall crime volume remains a small fraction of total crypto transactions.
“Between July 2022 and June 2023, our researchers found that the crypto value received by the UAE was nearly US$ 34.9 billion. Interestingly, in Saudi Arabia — despite the ‘quasi-legal’ status of cryptocurrencies — the crypto economy grew more this past year than any other country, with a year-over-year transaction volume growth of 12 percent,” says Buonanno.
He told TRENDS, “This growing use would likely correlate to overall increases in the raw volume of crypto crime-related losses impacting regional consumers and businesses. But at the same time, it is important to understand that the growth of the overall crypto segment far outpaces that of crypto crime. The growing maturity of this class of digital assets is evidenced by the fact that crypto crime accounted for an estimated 0.34 percent of total on-chain transaction volume last year.”
In the GCC region, there have been notable shifts in the landscape of crypto crime, with trends reflecting a mix of challenges and potential improvements.
Last year witnessed a significant downturn in revenue from crypto scamming and hacking, marking declines of 29.2 percent and 54.3 percent, respectively, in illicit earnings. The decrease in stolen funds was primarily attributed to a sharp reduction in DeFi (Decentralized Finance) hacking incidents, according to Buonanno.
Despite the region’s growing use of cryptocurrencies, there are encouraging developments in the fight against crypto crime, with a decline in illicit activities witnessed in recent years.
Nicola Buonanno, VP of Southern EMEA at Chainalysis
DeFi, known for its transparency, has emerged as a rapidly growing sector within the cryptocurrency ecosystem. This decline in DeFi-related hacks suggests a potential reversal of a concerning long-term trend, hinting at enhanced security practices within DeFi protocols.
The positive development in DeFi contrasts with the rise in revenue from ransomware and darknet markets, which remained prominent forms of crypto crime in 2023. Despite overall downward trends, revenues from ransomware attacks experienced growth, indicating potential adjustments made by ransomware attackers to evade cybersecurity measures implemented by organizations.
In Buonanno’s opinion, these contrasting trends underscore the dynamic nature of crypto crime in the GCC region, highlighting the need for continued vigilance and proactive measures to combat evolving threats. While the decline in DeFi-related hacks is a positive sign, the persistent challenges posed by ransomware and darknet markets necessitate ongoing efforts to strengthen cybersecurity defenses and regulatory frameworks to safeguard the integrity of the digital economy.
Tracing funds across multiple tokens and chains creates hurdles for law enforcement. While blockchains offer transparency, identifying entities behind addresses remains a challenge. Specialized tools like those provided by Chainalysis play a critical role in extracting meaningful insights from on-chain data.
Regulation: Striking the Balance
Buonanno emphasizes the growing need for effective regulation as cryptocurrencies go mainstream. Bans have proven less effective, and clear rules are crucial for fostering safe markets and protecting consumers.
“The UAE has been at the forefront of embracing emerging technologies. By establishing specialized regulatory regimes, such as the Financial Services Regulatory Authority of Abu Dhabi Global Market and, more recently, the creation of a bespoke regulator in Dubai — the Virtual Assets Regulatory Authority (VARA) — the UAE has showcased a forward-thinking approach to harness and regulate the crypto sector,” says Buonanno.
He mentioned that few countries in the region now boast crypto regulation as comprehensive as that of the UAE. “For example, with its 12 rulebooks, VARA clearly outlines everything from market conduct and marketing guidelines to information management procedures and anti-money laundering laws.”
The regulatory environment in the UAE has changed significantly, providing users and businesses with explicit norms while emphasizing innovation. Risk management for financial crime has been the main priority throughout this journey.
In compliance with international standards, regulators have established stringent regulations for money laundering/terrorist financing (ML/TF) that apply to cryptocurrency enterprises and other participants in the ecosystem, including traditional financial institutions. Notably, to control service providers effectively, there has been a heavy emphasis on utilizing techniques like blockchain analytics and persistent efforts toward training and education.
Finally, Buonanno explained that there are several security measures that exchanges need to implement to comply with regulations and instill consumer confidence. These include the ability to continuously monitor transactions and identify patterns that could indicate potential illicit activity, programmatic assessment of crypto-related risks by screening various entities on-chain, and implementing the highest standards of Know Your Customer (KYC) and Anti-Money Laundering (AML).
As the GCC nations navigate the complex terrain of crypto crime, they stand at a pivotal moment in history, poised to harness the transformative power of blockchain technology while fortifying their defenses against financial threats in the digital age. With proactive measures and strategic collaboration, the GCC can emerge more robust and resilient, ensuring a secure and prosperous future for all.