Blockchain analytics company Chainalysis conducted a recent report that found some terrorist groups, including Hamas, Hezbollah, and the Palestinian Islamic Jihad, have used cryptocurrency for fundraising, storing, and transferring funds.
Despite some groups using cryptocurrency for illicit activities, this represents a small fraction of the total volume of cryptocurrency transactions and overall illicit activities involving digital currencies.
The report cautions against exaggerated metrics and flawed analyses, stating that traditional methods of financing, such as financial institutions, hawala, and shell companies, still serve as the primary means for terrorist organizations to finance their activities.
Chainalysis underlines one of the key features of blockchain technology: its transparency, which enables the tracking of cryptocurrency transactions. The transparency of blockchain technology makes it easier for government agencies and private sector organizations with the right tools to work together to track and disrupt the flow of funds. This is more difficult to do with traditional methods of transferring value.
The report also examined the role of service providers, such as financial institutions and exchanges, in facilitating the movement of funds related to terrorism. Service providers, such as money services businesses, can process significant amounts of funds, making them an important focus for investigations.
Chainalysis reported that these service providers may function like OTC brokers or informal money businesses, such as hawala.
The report provided an example of a wallet used for terrorism-related activity that had 20 suspected service providers as counterparties, receiving different amounts of cryptocurrency ranging from $8.4 million to $1.1 billion.
Additional investigation into one of the service providers revealed over 1,300 deposits and 1,200 withdrawals in 7.5 months. About $450,000 in funds from the wallet associated with terrorism were transferred through this address.
According to the report, the address is likely that of a service provider that is facilitating terrorism financing, whether intentionally or not.
Nevertheless, the report cautions against making assumptions. While large amounts of cryptocurrency may appear to be connected to terrorism, they may be used for unrelated activities.
According to Chainalysis, it’s important to distinguish between cryptocurrency transactions conducted by service providers and those related to terrorism financing. Not all activity conducted by these service providers is associated with terrorism.
The report also highlighted the challenges involved in tracing funds through service providers, where cryptocurrencies can be pooled with funds from other users. Tracing funds can become increasingly difficult once they are deposited with a service provider since only the service provider has the necessary information to track specific transactions.
Chainalysis noted that it can be difficult to provide precise estimates of funds going directly to terrorist organizations, as there is often a lack of verified information from law enforcement agencies.
Coinbase echoes sentiment
Coinbase has similarly stated that most terrorist financing still takes place with traditional cash, rather than cryptocurrencies.
However, the exchange responded to concerns about cryptocurrencies being used for illicit activities by pointing out that blockchain technology’s transparency makes it easier to track crypto transactions than cash payments. This statement was made in response to reports about Hamas using crypto for financing.
Coinbase called for a clear regulatory framework to ensure the crypto industry’s compliance with the U.S. and other regulated jurisdictions. The exchange stated that many reports of terrorist financing using digital assets involve offshore entities that are not subject to U.S. laws.