Authorities Take Down Hydra, the World’s Biggest Darknet Marketplace And Crypto Laundering Platform: What You Need to Know (#92 - 9 April 2022)

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This week we learned that German and American authorities took down the servers responsible for hosting Russia’s Hydra, the biggest darknet marketplace in the world.

How did this investigation unfold? What catalysed the move? And what can we expect moving forward?

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Authorities Take Down Hydra, the World’s Biggest Darknet Marketplace And Crypto Laundering Platform: What You Need to Know

A major development took place this week, with German federal police, in coordination with several branches of U.S. law enforcement, announcing that they had shut down the server infrastructure for the Russian darknet marketplace Hydra, seizing over $25 million worth of Bitcoin in the process.?

The following banner was posted on the Hydra platform following the operation.

Source: BKA

As we recently noted in this newsletter, Hydra is the largest darknet marketplace in the world by volume, functioning as a platform for drug trafficking, credit card theft, forgery, and other illicit activities, including crypto money laundering.?

Source: Elliptic

Most impressively, Hydra had an independent drug certification system where quality testing took place, something that previous such marketplaces lacked.

Using its own team of chemists and human test subjects (with medics available in the event of an overdose), each drug offered on the platform was rigorously tested, with the results available for anyone to see online, instilling a level of trust amongst buyers.?

Vendors peddling substandard and fake drugs (trying to substitute oregano for marijuana, for instance) would then be penalized by Hydra’s administrators or kicked off the platform. And hardcore drugs like Fentanyl had apparently been banned from the site.?

Located in Russia, Hydra’s public profile in mainstream crypto news rapidly increased after being highlighted as a key money laundering vehicle by the U.S. Department of Justice following the February arrests of Ilya ‘Dutch’ Liechtenstein and Heather Morgan over their connection with the 2016 hack of crypto exchange Bitfinex.?

Source: Elliptic

Whilst Hydra had become heavily associated with the sale of narcotics, recent reports pointed to the growing risks of crypto laundering on the platform.?

The platform facilitated money laundering via a method known as “Hidden Treasure,” in which vacuum-sealed bags of cash were literally buried underground by a courier and marked with a geo-tagged location in a discrete area accessible only to the customer, who would then dig up the cash.

Hydra also had a very elaborate Uber-like system for distribution. Geolocation would tell customers where the drugs or the package were hidden.

Via an army of young couriers who would stash packages in a variety of GPS-tagged locations before being picked up by customers, Hydra provided an innovative workaround to the sluggish and unreliable Russian postal system and the dangers of openly dealing on the street.

Such dead drops took place anywhere and everywhere from hollowed-out trees and electrical transformer boxes to metro stops and local forests. And this activity took place in virtually every city and town across the country.?

Once a transaction had been completed and the package had been hidden, buyers were sent a detailed list of coordinates, photos, and directions to find their “hidden treasure.”

Source: Vice

But a lot of crypto crime laundering was taking place on Hydra, as well.?

According to Chainalysis, in 2021, Hydra received more than $1.7 billion worth of cryptocurrency, which accounts for over 75% of all darknet market revenue globally.?

Source: Chainalysis

Hydra and its vendors offered money laundering services, providing the infrastructure that allowed vendors and criminal actors alike the ability to swap cryptocurrency into Russian rubles.?

Source: Chainalysis

The removal of one of the largest illicit services on the dark web represents a huge win for both law enforcement and the cryptocurrency industry as a whole.

Following the operation, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Hydra in conjunction with Garantex, a Russian crypto exchange associated with the marketplace. U.S. and German authorities are also working to identify over 100 wallet addresses linked to the Hydra platform.?

Investigators around the world have long been attempting to tamp down on such marketplaces, shuttering hubs like Silk Road and AlphaBay over the past decade.?

With roughly 17 million customer accounts and 19,000 sellers, Hydra had grown into the largest darknet in the world.

Source: Elliptic

Launched in 2015 via the Tor browser, Hydra exploded in volume over the years, with annual transaction volumes ballooning from $9.4 million in 2016 to $1.37 billion by 2020.

Source: Flashpoint; Chainalysis

Since mid-2018, Hydra has made global investigations into their murky activities even trickier, mandating that all crypto funds used on the marketplace be withdrawn into Russian fiat currency through several payment services and exchanges operating in the region.

Chainalysis and Flashpoint show that the vast majority of funds exiting the Hydra platform arrive in Russia.

Source: Flashpoint; Chainalysis

Garantex, meanwhile, was cited by OFAC as being responsible for facilitating over $100 million in illicit transactions.

As a matter of fact, the exchange was recently highlighted in Chainalysis’ 2022 Crypto Crime Report as one of six crypto service providers operating in the open out of a luxury highrise known as Federation Tower in Moscow’s swanky financial district.?

Source: New York Times

According to Chainalysis, Garantex traded over $2.1 billion worth of crypto between 2019 and 2021, with more than $645 million of that total (or 31% of total volumes) coming from risky and illicit sources. Exposure to illicit funds extends to all of the crypto businesses operating in Federation Tower, as well, with the majority of funds arriving via scams, darknets like Hydra, and ransomware.?

Source: Chainalysis

The timing of the operation was certainly interesting, to say the least. Media reports have long alleged links between Hydra and top levels of the Russian government, making previous investigations into the platform difficult to pull off.

But over six weeks into the war in Ukraine, and with sanctions ramping up in recent days, it is possible that U.S. and German authorities viewed Hydra as a possible outlet for the Russian government to circumvent sanctions.?

Whilst we have mentioned in the past that sanctions evasion via crypto is very difficult, a huge marketplace like Hydra used heavily not only in Russia but in surrounding countries like Belarus, Kazakhstan, and, yes, Ukraine, is still a big win for law enforcement.

But their closure is a big milestone in the fight against crypto crime and demonstrates the benefits of the traceability efforts we are seeing.?

Yet whilst the takedown of Hydra is clearly a victory for law enforcement, as we’ve seen over the past decade, when one darknet marketplace goes offline, another eventually springs up to take its place.?

Definitely a development to follow.?

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