SACHA PFEIFFER, HOST:
Crypto crime got a lot of attention last month after the arrests of an amateur rapper known as Razzlekhan and her partner. They were allegedly involved in laundering billions of dollars' worth of stolen bitcoin. Stacey Vanek Smith and Paddy Hirsch, from our daily economics podcast The Indicator, explained the growth of crypto crime and how law enforcement is using a strength of cryptocurrency to fight against it.
STACEY VANEK SMITH, BYLINE: Cryptocurrency activity used to just be buying a currency or token like bitcoin and trading it. But over the last few years, entrepreneurs have developed this whole world of financial products that are connected to cryptocurrency.
PADDY HIRSCH, BYLINE: And that includes exchanges and apps that let people lend to each other and trade different tokens in different ways. Kim Grauer of Chainalysis calls this the world of decentralized finance, or DeFi.
KIM GRAUER: What it comes down to is its financial contracts that are executed through a smart contract. You no longer need a third-party human-run organization to approve a variety of different types of financial contracts that you want to execute.
VANEK SMITH: The problem is that decentralization also means a lack of oversight. And, of course, that has attracted a lot of bad actors who are looking for a way to steal from the careless, the gullible, the unsuspecting and the possibly technologically overwhelmed.
HIRSCH: One of the growing ways crypto criminals are stealing right now is by hacking.
GRAUER: One of the things that people are exploiting is the fact that all code that is running and implementing these DeFi protocols is open source, which means it's open to the public. So anyone who is good at coding can actually go through the code records and look for a bug to potentially exploit.
VANEK SMITH: But here's the problem for these thieves - those aren't actual dollars that were stolen. It's cryptocurrency, and cryptocurrency is, of course, based on the blockchain.
HIRSCH: The blockchain - OK, so here's a quick blockchain explainer. The blockchain is like an electronic tag. Think of it like a Post-it that's attached to something - could be a document of some kind or a cryptocurrency token or a piece of art, maybe. Every time that item changes hands, the transaction is noted on the Post-it - time, date, people involved - everything. And you can't peel that Post-it off, ever. And Kim says that's a huge disincentive for criminals.
GRAUER: You can forever see every transaction that happened. And if law enforcement decides they want to investigate it, all they really have to do is go subpoena an exchange used to convert the funds and then get the identity behind the person.
VANEK SMITH: So, you know, if all of this makes the world of decentralized finance sound kind of, like, Wild West-y, that is because it is kind of Wild West-y. It's a little bit lawless, and there is a ton of crime. But Kim says one reason for that is that so many more people are involved in crypto now.
GRAUER: The total amount of economic activity on cryptocurrency grew from $2.3 trillion in 2020 to $15.8 trillion in 2021.
HIRSCH: Yeah. In fact, when you look at the number of crypto transactions that occur each day and how many of them are fraudulent, crypto crime is actually falling as a proportion of crypto activity overall. Of 15.8 trillion in total transactions in 2021, just 0.15% were illicit. That's an all-time low.
VANEK SMITH: Stacey Vanek Smith.
HIRSCH: Paddy Hirsch, NPR News.
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