Stablecoins, a relatively recent addition to the cryptocurrency landscape, have rapidly gained popularity due to their price stability. Designed to mimic the stability of fiat currencies, stablecoins offer a bridge between the traditional financial system and the decentralized world of cryptocurrencies. However, this growing popularity has also made stablecoins a target and haven for illicit activities.
Merkle Science’s data team analyzed recent stablecoin activity and uncovered a concerning trend. In just one year, from July 2023 to June 2024, illicit transactions involving stablecoins surged to over $84 billion. Additionally, $17 billion in transactions were directly linked to sanctioned entities.
Furthermore, our analysis reveals that 0.67% of all transactions involving USDT, USDC, and DAI were linked to illicit or sanctioned activities. DAI, despite being less widely used than USDT and USDC, was surprisingly the most utilized stablecoin for illicit activities, accounting for $43 billion in such transactions. This highlights the potential for even less popular stablecoins to be exploited for nefarious purposes.
This blog will explore the various types of illicit activities involving stablecoins and discuss strategies for combating these threats. We will delve into specific examples and provide insights into how blockchain analytics can help identify and prevent illicit stablecoin uses. The initial analysis presented here offers only a glimpse into the illicit stablecoin transactions over the past year. Stay tuned for an in-depth understanding of illicit stablecoin activity in the last three years in Merkle Science’s upcoming report on stablecoin-related illicit activities.
Why Criminals Find Stablecoins Attractive for Illicit Activities
Here are the four principle reasons stablecoins are particularly appealing to those engaging in illegal operations like money laundering:
- Stability: The inherent stability of stablecoins reduces the risk associated with money laundering. Unlike volatile cryptocurrencies, stablecoins offer a more predictable and reliable means of transferring value.
- Accessibility: A broader network of Virtual Asset Service Providers (VASPs) facilitates the movement of funds through stablecoins. This increased accessibility makes it easier for illicit actors to launder money.
- Anonymity: Decentralized Exchanges (DEXs) offer a degree of anonymity, allowing for rapid and untraceable conversions between stablecoins and other cryptocurrencies. This can be exploited by money launderers to obscure the origin of funds.
- Complexity: The ability to easily move funds between different blockchains and exchange stablecoins for other cryptocurrencies creates complex transaction paths that can be difficult to trace.
Stablecoin Networks and Illicit Activities: A Deep Dive into Transaction Patterns*
USDT on Tron: High Volume, High Risk
USDT, the dominant stablecoin, has seen a significant portion of its transaction volumes processed on the Tron network (62.45%), followed by Ethereum (26.05%).
However, our analysis shows several USDT transactions on the Tron network are linked to illicit activities (54.84%). In total, Tron accounts for 38% of the total illicit transaction volume using USDT. This indicates that while Tron may have a higher overall transaction volume for USDT, it also has a higher concentration of illicit activity.
Due to increased regulatory oversight, OFAC actions, and blacklisting efforts, there has been a quarter-over-quarter decline in sanctions-related USDT transactions across various blockchains. This suggests that VASPs are becoming more effective at restricting interactions with sanctioned entities.
USDC on Ethereum: A Hotbed for Illicit Transactions
USDC dominates Ethereum with 79.80% of its transactions occurring on the Ethereum network. Additionally, Ethereum accounted for 79.37% of the total illicit transactions using USDC.
When it comes to sanctioned transactions involving USDC, 39% occurred on BSC, and 32% on Tron. However, Tron leads in sanctioned transaction volumes, accounting for over 42.91% of all USDC-related sanctions violations. This analysis highlights the exploitation of USDC by illicit actors. While illicit activity occurs across multiple blockchains, Ethereum is a particular hotspot for such transactions.
Incoming transaction volume from sanctioned entities has increased in Q1 2024 and Q2 2024. Heightened regulatory pressure on USDT may have inadvertently pushed illicit actors to explore alternative stablecoins to evade detection and continue their nefarious activities.
DAI and Illicit Activity Across Multiple Blockchains
99.06% of DAI transaction volume was on the Ethereum blockchain. 41.81% of illicit transactions were carried out on the Ethereum blockchain followed by 27.22% on Polygon, and 24.14% on Binance Smart Chain. This suggests that while Ethereum remains the dominant platform for DAI, other blockchains are also being exploited for illicit activities.
Lazarus Group’s Involvement in Stablecoin Transactions
Lazarus Group, a North Korean state-sponsored hacking group, has been known to engage in various illicit activities, including cryptocurrency theft and ransomware attacks. While their primary focus has been on Bitcoin and other cryptocurrencies, there is evidence suggesting their involvement in stablecoin transactions as well.
Recent investigations have uncovered links between Lazarus Group and certain stablecoin addresses. These transactions may be used to launder stolen funds or finance illicit activities. However, the exact extent of their involvement in stablecoin transactions remains under investigation.
Total incoming amount from Lazarus-identified addresses
Lazarus-identified Addresses Current Holdings (USD)
Addressing the Growing Threat of Illicit Stablecoin Transactions
The data presented in our analysis shows the prevalence of illicit activities involving stablecoins. From money laundering and sanctions evasion to terrorist financing and drug trafficking, stablecoins are being exploited for a variety of nefarious purposes.
The widespread adoption of stablecoins, coupled with their stability and liquidity, makes them attractive to illicit actors. The ability to easily move funds between different blockchains and convert stablecoins into fiat through off-ramps further complicates efforts to track and prevent illicit transactions.
To combat this growing threat, a multifaceted approach is necessary. Law enforcement agencies, regulators, and industry stakeholders must work together to develop effective countermeasures.
How Merkle Science Can Help
Merkle Science, a leading blockchain analytics firm, offers a powerful toolset for combating illicit stablecoin transactions. By combining open-source intelligence with Tracker's advanced analytics capabilities, investigators can effectively map the flow of funds, identify suspicious patterns, and trace the origins of illicit activities. Tracker's support for multiple blockchains and user-friendly interface further enhances its value in uncovering and disrupting these threats. By leveraging Merkle Science's blockchain analytics tools, stakeholders can take a proactive approach to combating illicit stablecoin activity and protecting the integrity of the cryptocurrency ecosystem.
*Note: The above analysis is done on three stablecoins, namely USDT, USDC and DAI considering the transactions from July 2023 to June 2024.