“The use of cryptocurrency in financing and supporting militant groups has been brought back into focus, particularly in the wake of a tragic attack in Israel carried out by the Palestinian militant organization, Hamas.”
Cryptocurrency’s role in terrorist financing and funding militant groups has received increased attention, especially following a deadly attack in Israel by Palestinian militant group Hamas. Israel has taken action to seize crypto accounts linked to Hamas, and U.S. lawmakers have called for stricter measures against the use of cryptocurrencies by Hamas and its affiliates.
Cryptocurrencies are favored in illicit finance because they offer relative anonymity and can facilitate cross-border transactions. Transactions on blockchain networks like Bitcoin and Ethereum are publicly recorded, but identifying the individuals or groups behind wallet addresses requires additional information not recorded on the blockchain. Cryptocurrency exchanges may link wallet addresses to customers, and blockchain analytics firms have tools to track funds.
It’s challenging to determine the exact extent of cryptocurrency usage in terrorist financing, as these groups use various methods, including traditional finance, cash, shell companies, charities, and informal financial networks. Estimates vary, with some suggesting that a small percentage of terrorist financing may involve cryptocurrencies. The vast majority of terrorist financing still relies on conventional financial channels.
However, cryptocurrencies play a more significant role in various forms of illicit finance, including scams, ransomware, and theft. Crypto-related crime reached approximately $20.1 billion in 2022, according to Chainalysis. Additionally, cryptocurrency theft through cyberattacks is a notable source of funding for certain entities, such as North Korea, as reported by the United Nations.
Cryptocurrencies are often used in illicit finance for several key reasons. Firstly, they offer a level of accessibility that traditional banking systems cannot match. Anyone can set up a cryptocurrency wallet address without undergoing the rigorous identity checks typically imposed by banks. These wallet addresses are pseudonymous, identified only by a string of letters and numbers, enabling users to send and receive funds without revealing their true identities.
Secondly, cryptocurrencies operate on blockchain technology, a digital, borderless system that facilitates near-instantaneous transactions. This feature makes them a practical choice for those seeking a quick and efficient payment method.
Furthermore, the cryptocurrency market faces less comprehensive regulatory oversight compared to traditional financial systems, although regulatory changes are underway in some regions. The decentralized nature of cryptocurrencies allows for increased privacy, making them attractive to individuals seeking to obscure their financial activities.
Despite these advantages, the use of cryptocurrencies in illicit finance raises concerns. The Financial Action Task Force (FATF), a global organization addressing money laundering and terrorist financing, has cautioned that crypto assets could become a haven for criminals and terrorists.
Tracking cryptocurrency transactions is not always straightforward. While blockchain networks like Bitcoin and Ethereum maintain a permanent public record of transactions, identifying individuals or groups behind wallet addresses often requires additional information not stored on the blockchain. Blockchain analytics firms have developed tools to trace funds, but the process is not always foolproof.
Crypto exchanges can connect wallet addresses to specific customers, and law enforcement agencies have the capacity to unmask wallet owners. Some users employ cryptocurrency “mixers” or shift funds to various platforms, making it challenging to distinguish their assets from those of other users.
Determining the precise extent of cryptocurrency use in terrorist financing remains a complex task. Militant groups rely on various methods to move funds, including cash, traditional banks, shell companies, charities, and informal financial networks, with cryptocurrency representing only a small part. Estimates of the proportion of terrorist financing involving cryptocurrencies have varied, with reports suggesting it could range from 5% to potentially 20% of terrorist attacks. Nevertheless, the “vast majority” of terrorist financing still relies on traditional fiat currencies.
While terrorist financing is a concern, cryptocurrencies play a more significant role in other forms of illicit finance, including scams, ransomware, and theft. Crypto crime reached approximately $20.1 billion in 2022, according to Chainalysis. It’s important to note that this figure excludes situations where cryptocurrencies are used as proceeds from non-crypto crimes, such as payments for illegal drugs. Additionally, cryptocurrency theft through cyberattacks serves as a notable source of funding, as evidenced in United Nations reports, particularly concerning North Korea.