Cryptocurrencies are under heightened scrutiny due to concerns about terrorist financing. Terrorist organizations are drawn to cryptocurrencies such as Bitcoin for their anonymity, cross-border transactions, and evasion of traditional financial regulations.
Although these bad actors managed to pilfer over $1 billion in 2023 using cryptocurrency, Chainalysis refutes common beliefs by stating that crypto is not widely efficient for funding terrorism. This is because of its transparent and traceable nature.
In its latest report on crypto security in 2023, the security firm delves into how terrorist groups secure funds through crypto assets.
How terrorists use crypto in 2023
According to Chainalysis, in 2023, terrorist groups employed cryptocurrency for financing through two primary methods: complex organizational-level financing and small-scale crowdfunding campaigns.
In the former, these illicit organizations depend on service providers and mainstream exchanges to facilitate fund transfers globally. Referring to an instance from 2023, Chainalysis explained that organizations such as Hezbollah frequently employ intermediaries like Al-Law.
These intermediaries may not be explicitly listed on sanctions or have direct affiliations with Hezbollah, although Al-Law is an individual actively engaged in managing Hezbollah’s cryptocurrency infrastructure alongside sanctioned senior Hezbollah members.
“Al-Law used a network of legitimate mainstream exchanges, as well as other service providers, to facilitate the movement of his funds,” Chainalysis said. “Out of 904 total transfers made by the known Al-Law wallet in just under one year, 145 involved mainstream exchanges.”
This makes it challenging for financial institutions and virtual asset service providers (VASPs) to spot risks in both regular finance and cryptocurrency. These groups purposefully avoid detection and sanctions, putting mainstream and regional service providers at risk of unknowingly getting involved with illicit networks.
On the second methodology, the report showed that crowdfunding is a less sustainable method for funding terrorism with crypto as data shows little success achieved by these organizations.
Mostly, these organizations are disguised as charities or crowdfunding efforts, and their campaigns operate with less sophistication compared to established terrorist financial networks.
Despite their less refined approach, the public nature of these campaigns, combined with the transparency and immutability of the blockchain, poses challenges for known terrorist groups.
The report cites the case of Farrukh Furkatovitch Fayzimatov as an example. He is a U.S.-designated recruiter and financier for Hayat Tahrir al-Sham (HTS), according to the Counter Extremism Project.
Although he is barred from receiving crypto donations, the Tajikistan citizen, born on March 2, 1996, continues to accumulate funds through various crypto addresses. These include addresses from mainstream exchanges and Russian platforms without Know Your Customer (KYC) processes, despite the imposed restrictions.
Seizures of crypto assets
Given recent events and the evolution of crypto, along with the ongoing funding of terrorist groups using digital assets, Chainalysis believes that collaborative efforts have been successful. This has led to the seizure of funds from groups like Hamas and Hezbollah.
These instances highlight the potential to disrupt the financial infrastructure supporting terrorism. However, Chainalysis stresses the importance of a collaborative approach between the public and private sectors to effectively identify terrorism financing on the blockchain.
Moreover, it is noted that public-private partnerships play a critical role in recognizing and validating potential risks related to terrorist financing. Without this collaboration, private sector firms may struggle to make well-informed decisions, potentially risking inadvertent support for terrorism or the blocking of legitimate funds.
