• Scammers around the world took home a record $14 billion in cryptocurrency in 2021, thanks in large part to the rise of DeFi.
• Losses from crypto-related crime rose 79% from 2020.
• Cryptocurrency theft increased 516% from 2020, to $3.2 billion worth of cryptocurrency. Of this total, 72% of stolen funds were taken from DeFi protocols.

Scammers took home a record $14 billion in cryptocurrency in 2021, thanks in large part to the rise of decentralized finance (DeFi) platforms, according to new data from blockchain analytics firm Chainalysis.

Losses from crypto-related crime rose 79% from a year earlier, driven by a spike in theft and scams.

Scamming was the greatest form of cryptocurrency-based crime in 2021, followed by theft — most of which occurred through hacking of cryptocurrency businesses. The firm says that DeFi is a big part of the story for both, in yet another warning for those dabbling in this emerging segment of the crypto industry.

"DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike," Chainalysis wrote in its annual Crypto Crime report.

"But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft."

The wild west of DeFi

DeFi is a rapidly growing sector of the crypto market that aims to cut out middlemen, such as banks, from traditional financial transactions, like securing a loan.

With DeFi, banks and lawyers are replaced by a programmable piece of code called a smart contract. This contract is written on a public blockchain, like ethereum or solana, and it executes when certain conditions are met, negating the need for a central intermediary. 

"The financial system is basically sending money around with various terms and conditions attached to it," said Joey Krug, chief investment officer at Pantera Capital, a cryptocurrency and blockchain-focused asset manager. 

DeFi transaction volume grew 912% in 2021, according to Chainalysis stats. Impressive returns on decentralized tokens like shiba inu also spurred a feeding frenzy among DeFi tokens.

But there are a lot of red flags when it comes to dealing in this nascent crypto ecosystem.

One problem with DeFi, according to Kim Grauer, Chainalysis' head of research, is that many of the new protocols being launched have code vulnerabilities that hackers are able to exploit. Twenty-one percent of all hacks in 2021 took advantage of these code exploits.

Grauer tells CNBC that while there are third-party firms that perform code audits and publicly designate which protocols are secure, many users still opt to work with risky platforms that bypass this step if they think they can get a large return.

Cryptocurrency theft rose 516% from 2020, to $3.2 billion worth of cryptocurrency. Of this total, 72% of stolen funds were taken from DeFi protocols.

Losses from scams climbed 82% to $7.8 billion worth of cryptocurrency.

More than $2.8 billion of this total came from a relatively new but very popular type of scheme known as a "rug pull," in which developers build what appear to be legitimate cryptocurrency projects, before ultimately taking investors' money and disappearing.

"Given the hype around DeFi, people may have been more OK with using less secure platforms due to a fear of missing out on potential gains," explained Grauer.

Crime stats don't tell the full story

Crypto-related crime may be at an all-time high, but researchers note that the growth of legitimate cryptocurrency usage far outstrips the growth of criminal usage.

Transactions involving illicit addresses represented an all-time low of just 0.15% of the $15.8 trillion in total crypto trade volume in 2021.

The research firm identifies illicit funds based on their connection to confirmed illicit activity. For example, funds would be considered illicit if they were sent to or from a darknet market, or were known to have been stolen in a hack.

"The fact that the increase was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all," Chainalysis wrote.

"Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem," continued the report.

Researchers partly credit the curbed growth of crypto-based crime to the evolving toolkit of law enforcement, as well as the inherit transparency of blockchain technologies.

Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem. 2021 Crypto Crime Report Chainalysis

Unlike cash and other traditional forms of value transfer, every transaction is recorded in a publicly visible ledger, and with the right tools, Grauer says that it is possible to see how much of all cryptocurrency activity is associated with crime.

"Authorities have been enormously successful in leveraging the transparency of blockchains to investigate and shut down illicit activity," said Grauer.

In November, for example, the IRS Criminal Investigation agency said that it had seized more than $3.5 billion worth of cryptocurrency in 2021 — all from nontax investigations — representing 93% of all funds seized by the division during that time period.

Other wins for law enforcement in 2021 included the Department of Justice's $56 million seizure in a cryptocurrency scam investigation, $2.3 million seized from the ransomware group behind the Colonial Pipeline attack, as well as an undisclosed amount seized by Israel's National Bureau for Counter Terror Financing in a case related to terrorism financing.