The Future of Money (# 81-19 Feb 2022): Why Russia's Hydra Is the World's Biggest Darknet Market? Link Between Money, Democracy & Greece? Crypto M&A

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1. How Russia’s Hydra Became the World’s Biggest Darknet Market

Last week’s sensational arrests of the New York couple accused of laundering funds traced back to the 2016 Bitfinex hack gave us some insight into how criminals are laundering the proceeds of crypto crime. 

One interesting data point is that whilst the criminals were initially using darknet market AlphaBay to launder the proceeds of the hack, this ceased when authorities brought it down in 2017.

Source: Elliptic

By the time the site was eventually taken offline, the number of users operating on AlphaBay had swelled to 400,000.

But another darknet market in Russia, Hydra, has been growing at a rapid speed.

Initially developed as a narcotics trading platform, the Hydra darknet marketplace has since grown to encompass every major criminal activity, operating as a platform for providing Bitcoin cash-out services, stolen credit cards, counterfeit currency, fake identities, and more. 

Hydra also provides criminals around the world with a means to withdraw physical cash, which provides criminals with a readily accessible source of hard currency via a withdrawal method known as “Hidden Treasure.”

“Hidden Treasure” is the system in which darknet buyers bury vacuum-sealed bags of cash underground at a predetermined location that darknet sellers can then dig up.

These drop-spots could work both ways, with the seller then burying drugs or other illegal goods to ship back out.

On this front, Hydra has made drug shipments and money laundering almost Uber-like in terms of operations. 

Once profits from illicit activity leave the Hydra ecosystem, the money trail goes dark, with criminals able to convert their withdrawals into Russian fiat currency and further shield themselves from investigators. 

A joint study by Flashpoint and Chainalysis shows that Hydra’s transaction volume surged by over 600% between 2018 and 2020, with revenue rising from less than $10 million worth of cryptocurrency in 2016 to $1.3 billion by 2020.

 Source: Flashpoint; Chainalysis

So why are authorities unable to stop it?

First, darknet marketplaces tend to be quite difficult to take down.

Just look at AlphaBay and Silk Road, each of which took years of police work before action was ultimately taken.

Second, Hydra is located in Russia, which will make any sort of US-led investigation and enforcement efforts a more difficult task, particularly with some media reports alleging links to Russian authorities.

Russia is indeed central to any investigation of Hydra, as Flashpoint and Chainalysis show that it is by far the leading destination country for a majority of the funds exiting the Hydra platform. 

 Source: Flashpoint; Chainalysis

Finally, criminals are increasingly growing more and more sophisticated and darknet marketplaces are taking steps to hide their traces.

For example, 45% of darknet markets today use Monero, which is, in theory, untraceable.

And since July 2018, Hydra mandates that any outbound withdrawals of cryptocurrency from a seller’s wallet flow through a predetermined set of crypto exchanges throughout countries in Eastern Europe that are on good terms with the Russian government.

Funds are then converted into Russian fiat currency, which makes the tracing process even more challenging for law enforcement. 

As we have discussed many times in this newsletter, whilst cryptocurrency transactions are generally fully traceable, doing the same for cash or money flows inside the traditional banking system (especially when shell companies or different jurisdictions are used) is not only more difficult but also more complicated.

However, Hydra’s growth over the past several years shows that criminals are still able to find loopholes to launder the proceeds of crypt hacks or other criminal activity.  

The pattern with which the New York couple attempted to launder those stolen funds is a very good example.

Source: DoJ

And whilst blockchain technology provides us with the transparency and traceability features that led to the arrests of Ilya "Dutch" Lichtenstein and Heather Morgan, the existence of markets like Hydra means that criminals are still finding outlets with which to launder their ill-gotten funds.

This will be a very interesting development to follow moving forward. 

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This Telegram group is a great resource for anyone interested in broadening their understanding of Bitcoin, Ethereum, DeFi, stablecoins, CBDCs, NFTs, the metaverse, Web 3.0, and institutional adoption of crypto assets.

You can join the community here.

2. Why 2021 Was a Record Year for Crypto Fundraising and M&A?

There is no doubt that 2021 was a record year for crypto M&A and fundraising from every single metric imaginable. 

PwC recently published its annual Global Crypto M&A and Fundraising Report that provides some interesting insights:

• The total value of crypto M&A in 2021 exploded by going from around $1 billion to over $55 billion. The average deal size also increased 3x from US$52.7 million to US$179.7 million, driven by some mega US$1 billion + SPAC deals.

 Source: PwC

• Whilst crypto M&A was gradually shifting to Asia, crypto M&A deal activity shifted back to the Americas in 2021, with 51% of deals occurring in the region. In terms of deal value, however, Europe, the Middle East, and Africa (EMEA) slightly edged it out.

• Lots of new money poured into the ecosystem as well. The total value of crypto fundraising deals increased by 645% in 2021. The average fundraising amount also increased by 143%.

With the increased interest from investors of all types on the various verticals of crypto, from NFTs and DeFi to Web3 and the metaverse, there are currently no signs of any type of slow down. 

 Definitely an area to follow moving forward!

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Money Quote of the Week

“If you think nobody cares if you're alive, try missing a couple of car payments.”

Earl Wilson

3. How Money Impacted the Development of Greece and Democracy

In order to understand the latest iteration of money and commerce, it is very much worthwhile to gaze all the way back through human history and focus on some of the primitive forms of money that laid the foundation for everything to come.

We’ve already touched upon the role that salt, humans, fur, cattle, and cowrie shells have each played in the development of money and trade, not to mention the Lydians.

Now let’s turn our attention to the ancient Greeks and how the concept of money hastened the development of both Greek civilization and the foundations of democracy. 

As cultural anthropologist Jack Weatherford points out, unlike some of Greece’s neighbors like the Persians or the Phoenicians, who already had sophisticated social systems without money, the Greeks were a largely unformed civilization, and the adoption of money propelled them forward and past the other groups throughout the region.  

 Soon after some of the Hellenic towns in Asia Minor began to adopt Lydian coinage, it quickly spread throughout the Aegean and to leading cities in the Greek Peninsula, particularly Athens, as Jame DiBiasio argues.

However, unlike the Lydians who preferred a mix of gold and silver, the Greeks preferred silver for their coins. 

There were a couple of reasons for that preference.

First, Athens was only 50 km from the silver mines of Laurion, making it convenient, and second, the Greeks figured out how to isolate silver ore, discovering how to separate silver from their lead ores and, thus, able to utilize it.

Finally, as Glyn Davis clarifies, the abundance of slaves allowed the Greeks to exploit those mines, where it’s estimated that up to 30,000 slaves worked in the Laurion mine alone.  

The Greeks leveraged the features of money to build markets and develop their society, and citizens had to trust the money, not the other person.

Coins somewhat democratized finance as they enabled a broader segment of the population to participate in the buying or selling of goods, leading to the agora becoming a staple feature of Greek communities and this new wealth opened the doors to the city’s Assembly to people of wealth, not just the sons of existing oligarchs. 

This influx of wealth also helped to develop democracy, which famously arose in Athens.

For example, DiBiasio explains that the Greek word for coinage, “nomisma,” comes from the Greek word for law, “nomos” (of which the English word “numismatic,” refers to the study of money, would later derive). 

The Greeks used coins for many purposes, from developing a financial services ecosystem to financing their navy, coming in handy as the Persians, fresh from having conquered Lydia, launched a multi-pronged invasion of Greece in 480 BCE. 

But the Greeks’ investment in their navy paid off; with over 300 Greek cities joining forces (known as the Delian League after the island of Delos), the Greeks had the upper hand. 

This reinforced the role of the Greek island of Delos (next to the island of Mykonos) not only as a commercial competitor to Athens but also as an early example of an “offshore financial center.” 

Delos was seen as a neutral ground for both religion and trade and the natural choice to store the assets of the Delian league that created the financing that would allow Greece to defeat Persia.  

 Who said history had to be boring?

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Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 

Who is Henri?

Passionate and focused on the future of finance and money, Henri Arslanian is the PwC Crypto Leader and Partner, the former Chairman of the FinTech Association of Hong Kong, and an Adjunct Professor at the University of Hong Kong where he teaches the first FinTech university course.

Henri advises many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their FinTech and crypto initiatives as well numerous governments, regulators, and central banks on Fintech and crypto regulatory and policy matters.

With over 500,000 LinkedIn followers and 45,000 newsletter subscribers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media including Bloomberg, CNBC, BBC, CNN, The Wall Street Journal, The Economist and the Financial Times.

Henri was named by LinkedIn as one of the global Top Voices in Economy & Finance and is the host of the FinTechCapsules™ and CryptoCapsules™ social media series.

Henri was recently named by Onalytica as the #1 most influential individual on Finance globally on LinkedIn out of 50k+ individuals working at the top professional services and management consulting firms in the world.

Chambers Global named Henri the “highest-profile FinTech consultant in Hong Kong”, Blockchain Asset Review named him the “Most Influential Crypto and Blockchain Thought Leader in Asia”, and Asian Private Banker awarded him the “FinTech Changemaker of the Year” award.

Henri’s latest book “The Future of Finance: The Impact of FinTech, AI and Crypto on Financial Services” published by Palgrave Macmillan, was ranked as one of Amazon’s global top 10 best-sellers in financial services and was recognized as one of the “Best FinTech Books of All Time” by Bookauthority.

Before joining PwC, Henri was with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. Henri started his career as a financial markets and funds lawyer in Canada and Hong Kong.

Henri speaks five languages including English, French, Armenian, Spanish, and Mandarin Chinese.

He holds a Masters in Chinese Law from Tsinghua University; a joint Global Executive MBA from Columbia Business School, London Business School, and Hong Kong University; a Bachelor of Law from the University of Montreal (Dean’s List of Excellence) and a Masters in Transnational Law from the University of Sherbrooke, where he was awarded the Governor General of Canada Gold Medal for Academic Excellence for having graduated with the highest grades of the university.

You can learn more about Henri on his website (www.henriarslanian.com) and you can reach him at info@henriarslanian.com