We’re living today “amidst an explosion of risk related to fraud, money laundering, terrorist financing, and data privacy,” said United States Treasury Secretary Janet Yellen in February — and she specifically cited cryptocurrencies as a “tool to finance terrorism.”
Yellen appeared to be flagging an important new turn in the war against terror, and it begged some questions: Is crypto in the hands of terrorists a real, present danger to governments and society? If so, should the cryptocurrency and blockchain industry be worried?
Recent evidence suggests that crypto’s role as an enabler of terrorism globally remains relatively minor. “Cryptocurrencies have been used in several terror finance cases, but it has not yet become a primary means of terror financing,” Matthew Levitt, director of the Jeanette and Eli Reinhard Program on Counterterrorism and Intelligence at The Washington Institute for Near East Policy, told Cointelegraph.
Gina Pieters, assistant teaching professor in the Department of Economics at the University of Chicago, told Cointelegraph: “Her [Yellen’s] statement is factually true — it is a tool.” But Yellen also chose her words carefully. “She did not say it was a major tool — she specifically said it was a growing one. And that is also true, as cryptocurrencies grow they will be used in more criminal activities.”
Increasing apprehensions about crypto?
Dave Jevans, CEO of CipherTrace, expressed some unease about the treasury secretary’s remarks. “If leaders like Janet Yellen set a fearful attitude toward cryptocurrencies associated with criminality, regulators could take harsh action to impose more strict rules on cryptocurrency transactions that may not be warranted,” he told Cointelegraph, adding: “Such action, like the blanket cryptocurrency ban in India, would greatly inhibit mass adoption and innovation in the space.”
“I think she wanted to raise the issue and put it on people’s radar,” remarked Levitt, who added that misuse of cryptocurrencies looms as more of a geopolitical concern with regard to states trying to evade Western political sanctions — like Russia, Iran or Venezuela — than with would-be terrorists.
Still, it doesn’t take much money to finance a terrorist act, so any help that Bitcoin (BTC) or other cryptocurrencies provide to terrorist groups that are trying to obscure their funding sources remains a worry. For that reason, Jesse Spiro, chief of government affairs at Chainalysis, told Cointelegraph that Yellen wasn’t exactly exaggerating the threat. That said, “Terrorism financing represents an incredibly small portion of cryptocurrency transactions.” In 2020, Chainalysis traced just 37.35 Bitcoin that went toward terrorism financing, or “a mere 0.00324 per cent of the overall illicit activity,” he said.
Crypto becoming more important for terror groups?
In August 2020, the U.S. Department of Justice seized the cryptocurrency accounts of three Middle East-based terrorist financing operations. This was the “largest ever seizure of terrorist organizations’ cryptocurrency accounts,” according to the DoJ. “It is a fact that jihadi groups, led by ISIS and Al-Qaeda, have been using cryptocurrency for years,” Steven Stalinsky, executive director at the Middle East Media Research Institute, told Cointelegraph. “Following the fall of ISIS’s caliphate, it quickly became even more important for them.”
In its daily monitoring of jihadi groups online, MEMRI sees groups and individuals discussing the use of different cryptocurrencies, “But this use has not recently developed to the extreme proportions that it could have and still might,” said Stalinsky. “Any arrests and public news of jihadis using cryptocurrency has so far led to the companies acting to shut down these and related accounts, and this seems to be creating a balance to curb the problem.”
A 2019 Rand Corporation study noted that “No current cryptocurrency can address all of the terrorist organizations’ financial needs” — which include anonymity, usability, security, reliability and acceptance — but cryptocurrencies like Bitcoin, “particularly with improved usability, could be appealing to use in fundraising, and some evidence is emerging that terrorist organizations might be using cryptocurrencies for this purpose.” It is critical for such groups to be able to receive money from donors, beyond the gaze of governments.
In an intelligence brief, Chainalysis noted that advertisements and messages from BitcoinTransfer, a Syrian-based cryptocurrency exchange that has been publicly cited as being run by jihadis, “often emphasize security and anonymity, as well as its ability to facilitate transfers from European countries without submitting identification documents or ‘exposing your friend or family to danger.’”
Bitcoin, the world’s oldest and largest blockchain network, isn’t really anonymous, as Al-Qaeda and affiliated terrorist groups discovered with the DoJ’s August 2020 takedown. Internal Revenue Service, Homeland Security Investigations and Federal Bureau of Investigation agents tracked and seized all 150 crypto accounts that laundered funds to and from the al-Qassam Brigades’ accounts, for instance. The group had advertised that its Bitcoin donations were untraceable and would be used for militant activities.
Ditching BTC for Monero and Zcash?
Perhaps as a result of the disruption to the three cyber-enabled jihadi campaigns, reports have surfaced recently that terrorist groups are moving from BTC to other cryptocurrencies, including privacy coins like Monero (XMR) and Zcash (ZEC), that are more difficult to trace.
“BTC has always been the most popular and is the most well known,” Stalinsky told Cointelegraph, but others, including Monero and Zcash, are also being used by terror groups. Jevans added:
“Bitcoin and other cryptocurrencies are still easier to trace than cash, but privacy coins [...] certainly make the jobs of law enforcement more challenging.”
Still, privacy coins, even if they are better at obfuscating transactions, “haven’t been adopted to the extent that one may expect,” Spiro told Cointelegraph. This is mainly because they lack liquidity. In 2020, several crypto exchanges, under pressure from regulators, began delisting privacy coins, so accessibility has become an issue for aspiring terrorists. “Cryptocurrency is only useful if you can buy and sell goods and services or cash out into fiat, and that is much more difficult with privacy coins,” explained Spiro.
Upsurge in Western countries
If one accepts that crypto use isn’t exploding among terrorist groups, is it at least growing? “Cryptocurrency adoption is growing everywhere, including among domestic and international terrorist groups,” answered Jevans, while Spiro highlighted: “We have seen evidence of them using cryptocurrency to pay for online infrastructure that facilitates recruitment and propaganda.”
The MEMRI Domestic Terrorism Threat Monitor, which focuses on terrorist groups in the U.S. and other Western countries, has seen an upsurge in the use of and references to cryptocurrencies — “very much like what happened with jihadis a few years ago,” said Stalinsky. He added:
“[U.S.] Domestic terrorist groups follow closely what jihadi groups have done online, whether in migrating to other platforms, using encryption technology, or using and promoting cryptocurrency.”
Stalinsky continued: “After the events of January 6, when the U.S. Capitol building was stormed by extremist groups, there is more pressure to go after these groups’ fundraising online. A year ago it was common to see many of these individuals, groups, and organizations openly using mainstream banking platforms, from major credit card companies to regular banks, Apple Pay, PayPal, and other platforms.”
But they have now been largely forced off these platforms, he added, and need to raise funds — “whether for recruitment, solicitation of support, or sales of merchandise such as books and clothing lines — through cryptocurrency wallets, which they are all using and promoting.” Bitcoin remains the favored cryptocurrency among these groups, though Monero is also popular, he said.
When asked about the particular attraction that cryptocurrencies hold for terrorists, Pieters answered: “It is the ability to move a large value of funds without physical transportation, along with the relative speed and low risk compared to other digital alternatives.”
Should the blockchain industry itself be worried about such nefarious uses of cryptocurrencies? After all, it could further blacken the industry’s image, undoing progress toward bringing blockchain technology and cryptocurrencies into the economic and societal mainstream. According to Spiro:
“Bad actors are often early adopters of new technologies, and cryptocurrency is no exception. The difference with crypto, though, is that it can actually be harnessed by law enforcement to follow the money.”
Cryptocurrencies are widely thought to be anonymous and untraceable, but they actually “operate on public, transparent blockchains,” Spiro continued. “We’ve found that once lawmakers, regulators, and law enforcement agencies understand this, they find that crypto can actually help, not harm, their missions to weed out illicit activity.”
Antonio Fatás, professor of economics at INSEAD, told Cointelegraph that in recent decades, many Western nations have put in place strict regulations to combat money laundering and terrorism financing. “Cryptocurrencies have been left out of these regulations partly because they were small, partly because it is not always easy to implement this regulation to decentralized forms of money.” But it is now clear that this exclusion will not be allowed much longer, said Fatás. Industry players will need to comply.
All in all, any funds that go toward funding terrorism on a blockchain network should be of concern to government and society, as well as the cryptocurrency and blockchain industry, even if the gross amounts still aren’t large.
There is a silver lining in all this, though. “The good news is that cryptocurrency is inherently transparent,” said Spiro, whose firm, Chainalysis, assisted the DoJ in disrupting the previously mentioned Middle Eastern terror-financing operations in August 2020. “With the right tools, law enforcement can trace that activity,” he concluded.