Excess liquidityDescribes the extent to which assets or rights can be converted into cash without causing a significant decrease in the asset’s price. Accordingly, liquidity is often inversely proportional to the profitability of the asset and involves the trade-off between the selling price and the time needed to convert it to cash. In finance, cash is considered the most liquid asset and cash is sometimes used as a synonym for liquidity (e.g. cash reserves; cash pooling…). More from expansive monetary policies to counteract the recessive effects of the Covid-19 pandemic, combined with markets’ irrational exuberance, have resulted in a second bitcoin-cum-cryptocurrencies boom. As a result, the global market capitalization of cryptocurrencies has grown 1,153.41%, going from US$142.89 billion on March 11, 2020 (when President Trump announced the suspension of air travel between the United States and Europe due to the pandemic), to US$1.72 trillion on June 16, 2021 (see Graph 1).

Graph 1. Global Market Capitalization of Cryptocurrencies, March 1, 2020-June 16, 2021 (trillions of U.S. dollars)

Source: CoinMarketCap

Despite bullish media narratives and crypto fandoms, cryptocurrencies are far from being adopted in retail payments. Leaving aside the question of whether a “currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More” with a highly volatile value can be used as means of paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More for things other than digital assets such as non-fungible tokens (NFTs), retail investors often join crypto transfer platforms and trading exchanges with little to no knowledge about their security failures. Old and new reports detail misbehavior, fraud, and open criminality committed by and enabled by crypto platforms.

When the Custodian Doesn’t Custody: The Fall of Mt. Gox

One of the oldest examples of crypto exchanges going rogue was Mt. Gox, a Tokyo-based crypto exchangeThe Eurosystem comprises the European Central Bank and the national central banks of those countries that have adopted the euro. More that collapsed in 2014. Shortly after filing for bankruptcy, Mt. Gox announced that it had “lost” 750,000 bitcoins from customers and more than 100,000 of its bitcoins, then worth more than US$450 million at the time.

Bitcoins started disappearing from Mt. Gox in 2011. Kim Nilsson, a researcher with WizSec, a computer security firm, said that the “unfortunate reality of BitcoinBitcoin is commonly said to be a cryptocurrency, a digital means of exchange developed by a set of anonymous authors under the pseudonym of Satoshi Nakamoto, which began operating in 2009 as a community project (Wikipedia type), without the relationship or dependency of any government, state, company or body, and whose value (formed by a complicated system of mathematical algorithms and cryptography) is not supported by any central bank or authority. Bitcoins are essentially accounting entries i... More is that it’s just so tempting to steal it digitally.” In 2015, Japanese authorities arrested Mark Karpeles, the French head of Mt. Gox, on suspicion of illicitly falsifying data on outstanding balances held by the exchange.

Turkish Crypto Platform Suspends Operations Amid Fraud Accusations

In mid-April 2021, Turkish authorities suspended the operations of Thodex, a cryptocurrency trading platform, amid fraud accusations. The Thodex platform had nearly 400,000 active users and holdings of almost US$2 billion.

Thodex’s founder, Faruk Fatih Ozer, left Turkey for Albania. Ozer said Thodex had locked users out of their accounts due to a cyberattack. Many people in Turkey have resorted to holding their savings in cryptocurrencies, given the depreciation of the Turkish lira and accelerating inflation. Just on April 16, the central bank of Turkey had banned the use of crypto assets.

The Digital Wallets of Ransomware Attackers

By definition, cryptocurrencies impede the traceabilityThe tracking of a product through its industrial or commercial life, by monitoring its location at all times. More of transactions, making them a favorite payment instrumentDevice, tool, procedure or system used to make a transaction or settle a debt. More for cybercriminals. Cybersecurity experts say that the payment of ransoms in cryptocurrencies has increased the frequency of ransomware attacks in recent years.

Two recent examples have occurred with the attacks against Colonial Pipeline (operator of one of the largest U.S. pipelines, carrying refined gasoline and jet fuel from Texas to New York) and Ireland’s Health Service Executive (HSE). A spokeswoman for the HSE confirmed that the HSE hackers sought a ransom in bitcoins and that it “won’t be paid in line with state policy.”

Colonial Pipeline paid its extortionists 75 bitcoins (roughly US$5 million) to recover its stolen data. Tom Robinson, a co-founder and chief scientist at blockchain-analytics firm Elliptic, revealed that the firm followed Colonial Pipeline’s payment to criminal group DarkSide. Elliptic’s analysis shows the hackers’ digital wallet was active since March 2021, having “received 57 payments from 21 different wallets […] with a total value of US$17.5 million.”

According to Robinson, DarkSide’s wallet shipped 18% of the bitcoins to other crypto exchanges and 4% to Hydra, “the world’s largest darknet marketplace, servicing customers in Russia and neighboring countries… [offering] cash-out services alongside narcotics, hacking tools, and fake IDs. These allow bitcoin to be converted into gift vouchers, prepaid debit cards, or cashMoney in physical form such as banknotes and coins. More rubles.”

The U.S. Department of Justice (DOJ) has since announced that it had recovered US$2.3 million worth of bitcoin out of the US$4.4 million ransom that Colonial had paid to DarkSide. According to the DOJ, the Federal Bureau of Investigations (FBI) had the password to a bitcoin wallet that DarkSide had sent the ransom moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More to, allowing the FBI to seize the funds.

North Korean Hackers Target Crypto Exchanges

 In 2019, a panel of experts reporting to the U.N. Security Council estimated that North Korean hackers had raised almost US$2 billion in several cyber heists. In addition, a recent report by Ed Caesar in The New Yorker on North Korean cybercrime has exhibited the reliance of the North Korean regime on cryptocurrency thefts to obtain hard currency despite U.N. and U.S. sanctions. According to Jesse Spiro, cryptocurrency-related crime researcher and head of policy initiatives at Chainalaysis, North Korean hackers have stolen at least US$1.75 billion in digital coins from trading exchanges. That amount could cover nearly 10% of the country’s defense budget.

North Korean hackers usually target users with admin-level credentials and access to escrow accounts with their customers’ coins. The escrow accounts or “hot wallets” allow an immediate transfer of funds between accounts. “Once the funds have moved out of the exchange, you can’t reverseThe back of the banknote or coin. See Obverse. More those transactions, like you can maybe with a traditional bank payment. Once they’re gone, they’re gone,” said Tom Robinson, Elliptic’s co-founder.

In 2018, North Korean hackers targeted employees at a crypto trading platform in Hong Kong. They stole 10,008 bitcoins, then valued at US$94 million, now worth more than half a billion U.S. dollars. North Korean hackers spread the bitcoins into dozens of small amounts and sent them to different crypto exchanges to prevent traceability. Using fake identities, two Chinese nationals cashed out the coins and deposited the funds in Chinese banks. By August 2019, Bithumb, a South Korean crypto exchange and one of the largest in the world, had been raided four times.

House of Bits: Robbing Digital Wallets Becomes the New Bank Heist

In February 2021, the U.S. Justice Department unsealed charges against three North Korean hackers who planned to steal more than US$1.3 billion in cash and cryptocurrency. The hackers would have managed to steal at least US$190 million, mostly from exchanges.

“North Korea’s operatives, using keyboards rather than guns, stealing digital wallets of cryptocurrency instead of sacks of cash, have become the world’s leading bank robbers,” said John C. Demers, assistant attorney general for national security. That same month, a preliminary U.N. inquiry suggested that North Korea was behind the US$281 million theft of cryptocurrencies from Seychelles-based KuCoin. In 2021, crypto exchanges around the world have been raided 15 times, according to Spiro.

A draft report by a U.N. expert panel asserts that North Korea stole US$316 million from cryptocurrency exchanges in 2019 and 2020, per Nikkei Asia. In addition, the United Nations Office on Drugs and Crime report on “Darknet Cybercrime Threats to Southeast Asia” has recently detailed how cryptocurrencies have enabled cybercrime in darknet marketplaces (UNODC 2021: 3).

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