Crypto’s role in terrorist financing

LONDON – Cryptocurrency’s role in terrorist financing and funding militant groups has come under renewed scrutiny following

a deadly attack in Israel by Palestinian militant group Hamas.

Israel has seized crypto accounts it says are linked to Hamas. United States 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 and across borders, meaning that it can act as an instant payment system.

Crypto is subject globally to less specific regulation than traditional finance, although 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, in order 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 the funds can become difficult to distinguish from other customers’ assets.

How much crypto has been 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 United Nations official said in 2022 that a couple of years ago, 5 per cent of terrorist attacks were considered to be financed by crypto, but that this may go up to 20 per cent, Bloomberg reported.

The FATF said in 2023 that crypto presents “increasing terrorist financing risks”, but noted that the “vast majority” of terrorist financing still uses regular money.

When illicit finance flows are identified at a crypto firm, that does not necessarily mean all of that firm’s flows are tainted, blockchain research company Chainalysis said in a blog.

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

Crypto crime hit a record US$20.1 billion (S$27.6 billion) in 2022, Chainalysis said, calling this a lower-bound estimate. This figure excludes instances 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 Britain have curbed customers’ access to crypto because of a rise in crypto scams. REUTERS