The danger of cryptocurrency in terrorist financing

Learn more about Albert Torres.
Albert Torres
Albert Torres
Program Manager, Global Policy
George W. Bush Institute

Israeli authorities requisitioned millions of dollars’ worth of crypto coins linked to Hamas’s brutal assault last month and initiated a cooperative investigation with the world’s largest crypto exchange platform. But the very nature of the crypto market means that they may have just scratched the surface.

Addressing terrorist financing via digital currencies is a daunting task because they trade globally without the supervision of a government or central bank. But policymakers are starting to prioritize eliminating the system’s vulnerabilities to bolster international security. The U.S. Treasury’s 2022 National Terrorist Financing Risk Assessment indicated that digital currencies are a primary way terrorist groups fundraise.

Countering the risks associated with virtual currencies requires a global coordinated approach because of the cryptosystem’s decentralized structure. The Financial Stability Board, a standard-setting international organization that recommends policies for the global economy, currently leads the effort to establish a supervisory framework for cryptocurrencies. But the international community needs to do more.

The case of Hamas and the Palestinian Islamic Jihad, which raised over $100 million since 2019, demonstrates the severity of the issue. The Israeli Defense Ministry took decisive action in 2021 against accounts linked to Hamas fundraising efforts. And U.S. regulators found signs of Hamas’s use of crypto as early as 2019, yet little was done in response.

Other organizations like the Islamic StateRussian military, and al-Qaida have also relied on the crypto market to fund their campaigns, taking advantage of the opacity and lack of thorough enforcement around cryptocurrencies.

The real issue is how to cleanse the global economy of clandestine funds. Illicit finance is an international issue that continues to depend on national solutions, and the crypto market model complicates the problem because of its global reach, universal accessibility, and usability.

Terrorist organizations find them attractive because they rely on multiple revenue streams – discrete methods of financing that aren’t significant by themselves, but make up a substantial amount when combined with various other forms of funding.

But the building blocks already exist to counter the threat of cryptocurrencies and their use for terrorist funding: Digital assets aren’t completely unregulated.

Exchange platforms that do business in many countries, the United States included, are required to comply with basic anti-money laundering obligations. Within the United States, regulators such as the Securities and Exchange Commission and the Commodities Futures Trading Commission oversee platforms responsible for facilitating the movement of digital currencies.

But crypto markets are typically subject to far fewer regulations and scrutiny than traditional finance.

Rather than relying on a fragmented law enforcement system, the Financial Stability Board, which has a decision-making body that includes international financial institutions and major economies, excluding Russia, should establish a regulatory body overseeing the crypto market to cooperate on issues relating to illicit finance associated with virtual assets. It should be made up of member countries with each represented by its appropriate regulator. Likewise, the financial intelligence units of each country should collaborate on transborder criminal cases, with a mutual understanding of what constitutes illegal activity under the regulations set by the Financial Stability Board.

Similar bodies already exist within the financial crime community. The Egmont Group is an organization that focuses on exchanging information and cooperating on cases involving money laundering and terrorist financing. The membership consists of countries with functional financial intelligence units and laws. Due to it’s focus on upholding the rule of law through cooperation, most countries that violate international principles or engage in criminal activity are excluded from the group. This could be the model for a similar entity under the Financial Stability Board.

Domestic regulators such as the Securities and Exchange Commission and Commodity Futures Trading Commission should also continue to monitor compliance efforts for registered crypto exchange platforms and report trends related to money laundering and terrorist financing within each country. Information sharing on crime trends seen in crypto platforms can raise awareness of how illicit finance evolves within the crypto market.

Virtual currencies are still a new and constantly evolving field of finance. Typical approaches to address money laundering and terrorist financing aren’t enough to handle the complexity of the virtual market. A global issue requires a global solution. If the international community wants to confront terrorist financing, it needs an innovative answer.