Crypto’s role in terrorist financing under renewed scrutiny

London — Cryptocurrency’s role in terrorist financing and funding militant groups has come under renewed scrutiny after a deadly attack in Israel by Palestinian militant group Hamas.

Israel has seized crypto accounts it says are linked to Hamas. US lawmakers have urged the government to crack down on the use of cryptocurrencies by Hamas and its affiliates.

But cryptocurrencies are just one way that violent militant groups and groups designated as terrorist organisations get and use money. Here’s what we know about crypto’s role.

Why is crypto used in illicit finance? 

Anyone can set up a cryptocurrency wallet address, without always having to undergo checks such as those by a bank.

The addresses are pseudonymous — labelled only by a string of letters and numbers — which means people can send and receive cryptocurrency without revealing their identity.

The blockchain technology that underpins cryptocurrency operates digitally, across borders, meaning that it can act as an instant payments system.

Crypto is subject globally to less specific regulation than traditional finance, though new rules are being introduced in some regions.

The Financial Action Task Force (FATF), the global body responsible for tackling money laundering and terrorist financing, has warned that crypto assets “risk becoming a safe haven for the financial transactions of criminals and terrorists”.

Can crypto not be tracked? 

Yes. But not always.

Blockchains such as Bitcoin and Ethereum create a permanent public record of transactions. This means it is possible to see what funds have flowed in and out of a wallet address, and which wallets it interacted with.

It is hard for an outsider to identify transactions on the blockchain but blockchain analytics firms have tools to track funds.

Still, to link these flows to a person or group, researchers rely on information not recorded by the blockchain.

Crypto exchanges can record which addresses belong to which customer and police can unmask those behind wallets.

Cryptocurrency users can further obscure their tracks by the use of crypto “mixers”, or move funds to exchanges or other firms where they can become difficult to distinguish from other customers' assets.

How much crypto is used in terrorist financing?

No-one knows for sure.

Militant groups use different methods to move money, including cash, banks, shell companies and charities, and informal financial networks. Crypto is a small part, experts say.

A UN official said in 2022 that a couple of years ago 5% of terrorist attacks were considered to be financed by crypto, but that this may go up to 20%, Bloomberg reported.

The FATF said this year that crypto presents “increasing terrorist financing risks”, but that the “vast majority” of terrorist financing still uses regular money.

When illicit finance flows are identified at a crypto firm, that doesn’t necessarily mean all of that firm’s flows are tainted, crypto researchers Chainalysis said in a blog.

Chainalysis said that terrorist financing “represents a small fraction of the less than 1% of the entire crypto market occupied by illicit activity”.

What about other forms of illicit financing?

Terrorist financing is a small part of the illicit uses of crypto, which include scams, ransomware and theft.

Crypto crime hit a record $20.1bn in 2022, Chainalysis said, calling this a lower bound estimate. That figure excludes when cryptocurrencies are the proceeds of non-crypto crimes such as payment for drugs.

Cryptocurrency theft via cyber attacks is also a significant source of funding for North Korea, according to UN reports.

Some banks in the UK have curbed customers’ access to crypto because of a rise in crypto scams.

Reuters