[Crime Tool Coin] ① 'System Encrypted and Coin Demanded'... Illegal Transfer of Virtual Assets Reached 27 Trillion Won Last Year

Remittances to Sanctioned Companies, Scam Crimes, Use on Darknet
Scale of Money Laundering Using Coins Also Shows Annual Increase
Illegal Activities Rampant Domestically... 5-Year Damage Amounts to 5.2941 Trillion Won
Must Follow 'Travel Rule' Meaning Real-Name System for Virtual Asset Transactions

The virtual asset market is entering the institutional sphere, but crimes involving virtual assets continue unabated. Due to their characteristics of freely crossing time and space and being difficult to trace, coin-related crimes have become a global phenomenon. In South Korea, one of the major markets, coin crimes have long been a social issue. As crimes using coins as a means have become more sophisticated and complex, not only including money laundering, hacking, and fraud, the scale of damage has also snowballed.

Many Cases of Virtual Asset Transfers to Sanctioned Companies

According to blockchain analysis firm Chainalysis, the amount of virtual assets transferred to illegal wallet addresses related to criminal activities last year was $20.6 billion (approximately 27.2 trillion KRW). The related amount has shown an increasing trend since 2020. It rose from $8.4 billion in 2020 to $18.1 billion in 2021 and $20.6 billion in 2022. Between 2017 and 2018, it was below $5 billion, but surged to $12.3 billion in 2019 and increased every year except 2020.

Transfers to illegal wallets are associated with various criminal activities. Among the $20.6 billion scale last year, the largest share, 43%, was confirmed as virtual asset transfers to sanctioned companies. Next were scam crimes, meaning credit fraud, coin theft, and usage in online darknet marketplaces. Ransomware, which locks systems or encrypts data to make it unusable and demands coins as ransom, followed. Unlike other times, last year transfers to sanctioned companies recorded the largest scale, but traditionally, scam crimes combined with virtual assets were the most frequent cases.

Notably, although the virtual asset market faced a downturn last year compared to 2021, the amount of virtual assets transferred to illegal wallet addresses actually increased. Looking at the representative virtual asset Bitcoin’s price, it soared to about $64,800 in November 2021 but declined to around $16,600 by the end of last year. The illegal proportion of total coin transactions rose to 1.90% in 2019, the highest level since Chainalysis began compiling related statistics in 2017, then fell to 0.43% in 2020 and 0.12% in 2021. However, it increased again to 0.24% last year.

The proportion of virtual asset use decreased in most crime types such as coin theft, darknet usage, ransomware, and terrorist group support. However, the significant increase in transfers to sanctioned companies led to a rise in both the scale of virtual assets transferred to illegal wallet addresses and the illegal proportion of total coin transactions. This phenomenon is interpreted as a result of major governments, including the U.S., blocking virtual asset transfers to countries, regimes, companies, or individuals related to crimes or posing threats to themselves.

Money Laundering Scale Using Coins Also Soars

Additionally, the scale of money laundering using coins also showed an increasing trend. Separate statistics were calculated only for money laundering, not the total virtual asset scale related to criminal illegal wallet addresses. It surged from about $8.5 billion in 2020 to $14.2 billion in 2021 and $23.8 billion (approximately 31.4 trillion KRW) last year. Money laundering through virtual assets aims to move coins to wallets where criminal links are difficult to verify and then transfer them to services where they can be exchanged for fiat currency. The largest share of the final destination of these laundered coins was centralized virtual asset exchanges such as Binance and Coinbase. Decentralized finance (DeFi) followed.

Among these, the amount of coins suspected to have flowed into underground money laundering services steadily increased. It rose from about $900 million in 2019 and 2020 to $4.5 billion in 2021 and $6 billion last year.

Money laundering using virtual asset mining has also appeared. Illegal groups attempt to launder money by mixing criminal proceeds with mining profits. They transfer coins obtained from crimes and mining to the same wallet to evade tracking. Chainalysis stated, "Coins obtained through on-chain mining can be considered unrelated to money laundering without verification, which leaves room for criminal misuse," adding, "Such virtual asset mining may have facilitated illegal money laundering worth $1.8 billion from 2018 to the second quarter of this year." It is known that this type of money laundering occurs particularly in ransomware and scam crimes.

Moreover, some virtual assets are considered relatively more secure and are abused as crime tools. For example, Monero is known as a leading privacy coin excelling in personal information protection.

Monero uses an address combining multiple addresses of other participants within the blockchain group rather than the sender’s personal address when transferring, so only the fact that the sender is a group member is disclosed. It also has a stealth address feature that creates one-time addresses for transactions. Only the parties involved can determine the address, and exchanges occur at unique blockchain addresses that others cannot link. Not only the number of coins transacted but also sending and receiving to addresses are obfuscated so that it is impossible to identify who participated in the transaction. Due to this security, Monero is sometimes used as a means to buy and sell drugs, pornography, and personal information on darknet or Telegram.

Most Domestic Virtual Asset-Related Damage Involves Fraudulent Fundraising and Multi-Level Marketing

Illegal activities related to virtual assets are widespread in South Korea as well. According to data submitted by the National Police Agency to Jeong Woo-taek, a member of the National Assembly’s Public Administration and Security Committee from the People Power Party, the amount of damage from illegal virtual asset activities was about 169.3 billion KRW in 2018, increased to 763.8 billion KRW in 2019, and reached a record high of 3.1282 trillion KRW in 2021. Last year also exceeded 1 trillion KRW. The damage scale over five years exceeds 5 trillion KRW.

A total of 841 illegal virtual currency-related cases were detected over five years. In South Korea, virtual asset-related fraudulent fundraising and multi-level marketing schemes that attract investors by promoting profits from coin investments accounted for 616 cases, or 73.2% of the total.

The Financial Supervisory Service (FSS) also stated, "Recently, illegal fraudulent fundraising scams that induce investment by claiming that investing in certain unlisted coins can yield tens to hundreds of times profits after listing have been continuously occurring," adding, "Especially as prices of major virtual assets like Bitcoin have risen recently, illegal fraudulent fundraising companies exploiting this are expected to increase, so financial consumers need to exercise special caution."

Such illegal fraudulent fundraising scams typically approach via YouTube and social networking services (SNS), urging investment by promoting promising coins and requesting loans. They also show false or manipulated price charts or lure users to join by claiming to be their own developed coin wallet sites, deceiving investors by making it appear that virtual assets were pre-paid before depositing investment funds. Cases have also been confirmed where scammers impersonate employees of overseas exchanges or present fake documents showing upcoming listings on domestic exchanges to deceive investors, offering false agreements to repurchase at purchase or higher prices in case of principal loss.

Attempts to illegally trade virtual assets through domestic credit card companies are also continuously occurring. According to data submitted by the FSS to Yang Jeong-sook, a member of the National Assembly’s Political Affairs Committee, the number of blocks on customers’ attempts to trade on overseas exchanges by eight credit card companies from 2018 to March this year totaled 1,174,175 cases. By year, there were 281,564 cases in 2018, 15,820 in 2019, 435,300 in 2020, 337,897 in 2021, 57,203 last year, and 46,409 in the first quarter of this year. The total amount blocked by credit card companies for customers’ overseas exchange trading attempts over five years reached 560.2 billion KRW.

Professor Hwang Seok-jin of Dongguk University’s Graduate School of International Information Security explained, "With the emergence of virtual assets, the concept of assets has expanded, and due to the inherent anonymity of coins, there are limits to tracing even if crimes are committed, which has led to a rapid increase in cases using coins as crime tools," adding, "To prevent such crimes, the Travel Rule, already institutionalized domestically, should be implemented in line with global consistency, and special attention should be paid to virtual asset crimes."

The Travel Rule, meaning the real-name system for virtual asset transactions, requires virtual asset service providers (VASPs) to mandatorily provide and store the identity information of senders and receivers when transferring virtual currency worth over 1 million KRW to another VASP. With the introduction of the Travel Rule, deposits and withdrawals to exchanges and wallets other than those permitted are restricted, and authentication processes must be completed to make transfers. According to the Act on Reporting and Using Specified Financial Transaction Information, the Travel Rule was first implemented worldwide in South Korea on March 25 last year for anti-money laundering (AML) purposes.