With the popularity of cryptocurrencies around the world and the rapid growth of crypto users in Southeast Asia, the on-chain capital flows in the region have become more frequent and complex. In order to gain a deeper understanding of the flow characteristics of on-chain funds in Southeast Asia, potential financial risks, and connections with illegal industries, Beosin conducted this in-depth analysis based on a sample of 10,000 blockchain addresses (such as Southeast Asian personal wallets/Southeast Asian exchange users, etc.) drawn from 2020 to date. By tracking and marking different types of risky capital flow paths, we found that the degree of risk involved in the circulation model of crypto assets exceeded expectations. This report not only reveals the risks of using cryptocurrencies in Southeast Asia, but also explores the reasons behind this phenomenon from a macro perspective and puts forward relevant suggestions.
Overview of Southeast Asia’s Cryptocurrency Market
In recent years, the acceptance and popularity of cryptocurrencies in Southeast Asia has increased significantly.
As an emerging market, Southeast Asia has unique characteristics in terms of economic structure, policy environment and user behavior, especially in the following aspects:
1. Rapid user growth: Southeast Asia has a high proportion of young people, and the popularity of mobile Internet has led to a rapid growth in the number of crypto users in the region. It is estimated that there are tens of millions of crypto users in the region.
2. Strong demand for cross-border payments: There is a large number of cross-border workers in Southeast Asia, and cryptocurrencies provide them with a convenient means of cross-border payment, so they are widely used.
3. Different regulatory environments: Southeast Asian countries have varying regulatory policies on virtual currencies. Some countries support the legalization of cryptocurrencies, but most regions have not yet formed a clear regulatory framework, resulting in certain compliance risks in capital flows.
Sample analysis and main findings
Chart: Schematic diagram of capital flow
Chart: Distribution of addresses flowing to Web3 wallets
1. Free flow of funds
Of the 10,000 blockchain addresses analyzed this time, about 45.23% of the funds circulate freely on the public chain through decentralized wallets, showing high liquidity and decentralization. The total amount of freely flowing funds is as high as US$1.484 billion, indicating that decentralized trading methods have become mainstream among Southeast Asian users.
2. Relationship with the black and gray industries
Among these addresses, more than $110 million of funds flowed directly to addresses related to the black and gray industries, accounting for more than 12%. After further tracking the flow of funds in the remaining addresses, it was found that some addresses also had indirect connections with the black and gray industries through secondary or multiple transactions, causing the proportion of risky addresses related to the black and gray industries to rise to 16.82%. This means that among the tens of millions of Southeast Asian crypto users, there may be millions of users who are indirectly or directly at risk of financial transactions with the black and gray industries.
Chart: Links with the black and gray markets
Analysis of capital flows and risks in the black and gray industries
1. Typing of black and gray industry addresses
Beosin divides addresses closely related to the black and gray industries into three major categories and 44 subcategories through risk labels. The high-risk categories involved mainly include:
●Coin mixing service: mainly used to anonymize the flow of funds
●Underground banks: used for cross-border illegal fund transfer and money laundering
● Fraudulent platforms: involving fake investments, Ponzi schemes, killing foreigners, killing pigs, etc.
These high-risk address types involve more than 240 specific black and gray industry entities.
2. High-risk capital flow phenomenon
The findings show that certain types of financial flows are particularly significant:
●More than 10 million US dollars of funds flowed directly into addresses related to underground banks, and the transaction frequency accumulated to thousands of times.
●Approximately $11 million in funds clearly flowed to online gambling platforms.
●More than US$22 million in funds were channeled into the fraudulent platform.
Such capital flows reveal the complexity and secrecy of black and gray industry activities. Especially given the anonymity and cross-border nature of cryptocurrencies, criminals are able to frequently carry out illegal fund transfers and money laundering activities.
Chart: Money flowing into the black market
Fund inflows to sanctioned platforms
1. Proportion of capital inflows to sanctioned platforms
Of the funds directly related to the black and gray industries, about 53.49% flowed to sanctioned platforms. The number of related transactions was even twice that of funds flowing to underground banks, with a total value of more than 55 million US dollars, indicating that sanctioned platforms are still the main destination for high-risk funds.
2. Case Study: Tornado Cash
As a commonly used currency mixing tool, Tornado Cash received more than $54 million in funds in this study, accounting for 97.84% of the capital inflows of all sanctioned platforms. However, since the U.S. Treasury Department included Tornado Cash on the list of sanctioned entities in August 2022, its transaction volume has dropped significantly, showing that the sanctions have effectively suppressed its capital inflows.
Chart: Trend and proportion of funds flowing to Tornado Cash
Macro-risk analysis and causes
1. Anonymity and high liquidity of cryptocurrency: The anonymity of cryptocurrency makes it difficult to track illegal funds as they flow on the chain. Even if there are technical means to mark risky addresses, funds can still be concealed through technical means such as coin mixing, thus facilitating money laundering activities.
2. Lack of regulatory system in Southeast Asia: The regulatory measures for cryptocurrencies in Southeast Asian countries are not yet perfect, which increases the risk of cross-border capital flows. Some regions still take a wait-and-see attitude towards cryptocurrencies and have not taken active regulatory measures, providing space for the flow of funds in the black and gray industries.
3. Socio-economic environment: The economic development level of some countries in Southeast Asia is low, and the gap between the rich and the poor is large, which leads to many scammers and online gamblers using these places as their bases, mainly attracting foreigners to participate.
4. Technical regulatory difficulties: Cryptocurrency exchanges, wallet service providers, and decentralized platforms often find it difficult to effectively monitor and investigate the risks behind transactions due to technical and architectural limitations. Decentralized platforms, in particular, lack direct control over transaction data and are unable to promptly identify risks such as malicious behavior or money laundering. Although some centralized platforms have tried to strengthen monitoring through KYC and AML measures, cross-chain transactions and anonymous technologies still complicate the tracking of capital flows and increase security risks.
Conclusion and Recommendations
Analysis of on-chain fund flows in Southeast Asia shows that there are high security risks in the use of cryptocurrencies in the region. To effectively reduce the risk of illegal on-chain fund flows, Beosin recommends taking the following measures:
1. Strengthen the regulatory mechanism: Governments should formulate and implement sound cryptocurrency regulatory policies, combat illegal financial activities on the chain through cross-border cooperation, and introduce clear virtual currency regulatory frameworks based on different national conditions.
2. Improve users’ risk identification capabilities: Increase anti-fraud education efforts for ordinary users, so that they understand the risks on the chain and enhance their ability to identify and prevent funds from the black and gray industries.
3. Promote technological innovation: Actively develop and apply on-chain tracking and anti-money laundering technologies, and accurately identify and combat high-risk capital flows through technical means such as big data analysis and artificial intelligence.
4. Establish a multi-party coordination mechanism: Encourage cryptocurrency exchanges, wallet service providers and related institutions in Southeast Asia to work together, strengthen information sharing and joint risk prevention, and improve the safety factor on the chain.
Southeast Asia, as one of the regions with the greatest potential for the development of cryptocurrency, will still face the challenge of capital flow risks in the future. Beosin will continue to invest resources and technology, cooperate with all walks of life, and strive to build a safe, transparent and compliant cryptocurrency ecosystem. By strengthening supervision, raising user safety awareness, and promoting technological innovation, we hope to gradually reduce illegal capital flows on the chain and promote the healthy development of Southeast Asia's digital economy.
