George Kaloudis is a research analyst for CoinDesk Research.

A persistent knock on cryptocurrency is: “It’s only used by drug dealers and black market participants.” The old saw’s popularity might stem from general misconception (as we see plenty of licit uses for cryptocurrency these days), but its popularity is likely rooted in the first time most of us heard about crypto: For use on the Silk Road, an online black market and dark web web market.

Of course, someone writing about how crypto still is or isn’t used for illicit purposes widely doesn’t do much without hard data. Thankfully (at least for this specific purpose), the blockchains that power cryptocurrencies are largely transparent, and companies like Chainalysis, CipherTrace and Crystal Blockchain provide blockchain forensics services.

This piece is part of CoinDesk's Sin Week.

And they have gotten really good at it.

Chainalysis, for example, releases an annual Crypto Crime Report that outlines the use of cryptocurrency across several types of crimes like ransomware, scams, violations of broad countrywide sanctions and terrorism financing. We dove into the 2021 report, which was published in February, to figure out how much truth there was in the notion that crypto is only being used by criminals. And while these are critically important types of crime to pay attention to, we are going to zoom in specifically on dark web marketplaces.

Here’s what the numbers have to say.

First, though, there are several interesting high points worth highlighting in Chainalysis’ report regarding the entirety of illicit activity that cryptocurrencies enabled. The punchline has been widely picked up by crypto supporters as an advertisement for adopting cryptocurrencies. After all, crypto should be terrible for crimes since every transaction you make is seared into a public ledger.

And, for the most part, the data does seem to support that.

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Total amount of cryptocurrency value tied to illicit activities (Chainalysis)

In 2021, $14 billion in cryptocurrency value was tied to illicit activities. We aren’t really sure how much money is spent on doing illegal stuff, for obvious reasons, but it is probably a significant percentage (like, 22%) of the world’s $80 trillion of gross domestic product. Compared with $17 trillion, $14 billion is hardly a drop in the bucket.

That’s not really the point, however. The truth is that cryptocurrencies do still enable illicit activity, and the amount used grew between 2020 and 2021. In defense of crypto, the illicit share of all crypto transaction volume has fallen since 2019 and is at a scant 0.15% now.

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Illicit share of all transactions using crypto (Chainalysis)

So while the amount of illicit activity being funded through crypto is growing, the growth of legitimate crypto uses is far outpacing it.

That said, one of the main takeaways from Chainalysis’ work is that the majority (~53%) of illicit transactions in crypto in 2021 were tied to scams and stolen funds. While those are serious problems, these are problems that are intrinsic to both crypto and legacy financial markets. Where there is money to be made there are false promises and stolen funds.

So, instead, we should take a look at the thing that cryptocurrency supposedly supports in a unique way: the aforementioned “drug dealers and black market participants.”

Crypto and dark web markets

Dark web markets, the corner of the internet where illegal activity abounds, set a new revenue record in 2021, bringing in a total of $2.1 billion in cryptocurrency.

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Cryptocurrency value received through dark web markets and fraud shops (Chainalysis)

While the total value being transferred to dark web markets has grown rather quickly, the total number of transfers to these markets has fallen in the past five years, from 11.7 million in 2016 to just 3.7 million in 2021. The total number of users has also fallen. So absent growth in transfers and users, the driver of growth is found in bigger payments, with average payment size increasing from $160 to $493 over the same time period.

The next question is, “How is 2022 shaping up?” Glad you asked …

How 2022 is shaping up for dark web markets

Chainalysis provided an update to its 2021 report on Aug. 16 and the 2022 data has shaped up in an interesting way.

First and foremost, the amount of cryptocurrency value received by illicit entities in 2022 year to date (YTD) ranks below both the same period in 2019 and in 2021.

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Cumulative monthly crypto value received by illicit entities by year (Chainalysis)

Zooming in on transaction volume for a more fulsome lay of the land, crypto transaction volume in YTD 2022 (for all uses) is tracking behind YTD 2021 through July. Directly from the Chainalysis blog:

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“Overall, criminal activity appears to be more resilient in the face of price declines: Illicit volumes are down just 15% year over year, compared [with] 36% for legitimate volumes.”
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Chainalysis

The rest of Chainalysis’ update is focused on providing an update as to which illicit uses of crypto have seen increases and decreases in 2022. Of note, there has been an increase in hacking and stolen funds and a decrease in scams. More notably, however, there was a decrease in dark web market revenue.

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Dark Web crypto revenue by year (Chainalysis)

The main driver of this decrease is likely due to the shutdown of Hydra Market, the world’s largest and most prominent dark web market, in April. German authorities shut down the Russian-based dark web marketplace, and the U.S. has gone further by adding hundreds of bitcoin (BTC) wallets to a sanctions list.

The decline in revenue suggests that authorities are getting better at detecting dark web market crime. But Chainalysis adds an important caveat:

“Vendors have taken more steps than ever to enhance their shipping anonymity, and buyers have begun to transact with these vendors directly. All of these trends point to a darknet market industry that is fast maturing.”

So while authorities are getting better at sniffing out dark web markets, dark web markets are getting better at not being sniffed out. Which brings us to a (potentially) important caveat about privacy coins to take into consideration while looking at this data.

Potentially important caveat

Privacy coins are cryptocurrencies that have privacy as a default option, which is markedly divergent from bitcoin and ether (ETH). The two most well-known privacy coins are monero (XMR), and zcash (ZEC). Privacy coins are incredibly difficult to trace, and although blockchain forensics companies advertise that they can trace some parts of ZEC transactions there is far less identifying information available. Monero, on the other hand, is incredibly difficult (impossible?) to trace (the IRS is even offering $625,000 to anyone who can crack monero).

As such, it would be expected of dark web markets to move away from transparent cryptocurrencies (like bitcoin) to something private (like monero). According to Chainalysis, XMR is seeing increased adoption among dark web markets, with 67% of dark web markets supporting it in 2021, compared to 45% in 2020.

That said, while XMR might be stealing market share from the other, more transparent cryptocurrencies, BTC still maintains support from 93% of all dark web markets, suggesting that bitcoin still rules in the dark web. So while some of the dip in value transmitted by dark web marketplace users can be attributed to opting for privacy coins, more of that dip should be attributed to authorities simply getting better at stopping crime and at blockchain analytics getting better.

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George Kaloudis is a research analyst for CoinDesk Research.

CoinDesk - Unknown

George Kaloudis is a research analyst for CoinDesk Research.