Stablecoins have held the promise of serving as a link between the cryptocurrency realm and traditional financial services.

Turns out that nowadays, the digital holdings are also a favorite of fraudsters.

Blockchain analysis firm Chainalysis found in its latest report on the state of crypto crime trends that stablecoins have supplanted bitcoin as a key mover of illicit transactions. The data showed that stablecoins accounted for the bulk of illicit volumes last year (and the year before that).

“Through 2021, bitcoin reigned supreme as the cryptocurrency of choice among cybercriminals, likely due to its high liquidity,” the report said. “But that’s changed over the last two years, with stablecoins now accounting for the majority of all illicit transaction volume. This change also comes alongside recent growth in stablecoins’ share of all crypto activity overall, including legitimate activity.”

In terms of the dollar amount, the firm estimated that stablecoins accounted for roughly 70% of scams tied to crypto transactions last year (even as the volumes fell by more than 40% year on year), with a value of $40 billion as measured through the past two years.

The data comes as several countries and regions mull, or adopt, new frameworks for the issuance, maintenance and scrutiny of stablecoins. Warnings abound about the risks of the coins, which are pegged to various assets and currencies — dollars, for instance, or gold — and thus are supposed to skirt the volatility that has plagued much of the crypto realm.

Regulations Loom, and It’s Hard to Keep the Pegs

In November, Michael Barr, vice chair for supervision at the Federal Reserve, said stablecoins could function as a form of private money that could upset the American financial system if left unregulated.

“There is interest in strong federal regulation of stablecoins that makes sure the Federal Reserve can approve, regulate and enforce against stablecoin issuers, including wallets,” said Barr.

The “peg” argument has not held its peg (pun intended). The Bank for International Settlements said in its own research in November that of the several dozen stablecoins examined over years of trading data, “not one of them has been able to maintain parity with its peg at all times. This is irrespective of a coin’s size or type of backing.”

It added that “there is currently no guarantee that stablecoin issuers could redeem users’ stablecoins in full and on demand.”

The debate over stablecoins may be evergreen even as corporates are increasingly making forays into the space. PayPal, by way of example, introduced a U.S. dollar-pegged stablecoin  in August that it said is “designed to contribute to the opportunity stablecoins offer for payments and is 100% backed by U.S. dollar deposits, short-term U.S. Treasurys and similar cash equivalents.”

But the fragmentation of the digital assets landscape continues, particularly amid the competition to gain a foothold in cross-border payments and commerce in general.

With the Chainalysis stats on stablecoins used in the service of financial crime, the shift may be toward central bank digital currencies and tokenized deposits — which function as money and within the confines of the traditional financial services system.

CBDCs are direct dollar-for-digital-dollar representations and thus sidestep any questions about their “worth” at any given point in time. Tokenized deposits are tied to existing account holdings and bank liabilities, so the flows of funds are visible without the threat of losing “pegs.”

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