Analytical Report | Examining the Role of Cryptocurrencies in Terrorism Financing

Following the terrorist attack by Hamas on Israel, the role of cryptocurrencies in financing terrorism and militant groups has come under renewed scrutiny. A research report published by Reuters on Monday, October 23, states that Israel has seized cryptocurrency accounts it claims are linked to Hamas, and U.S. lawmakers have urged the U.S. government to prevent Hamas and its affiliates from using cryptocurrencies. But why are cryptocurrencies utilized in illegal financial activities? One reason is that anyone can have a digital wallet address without using checks like bank checks. Another reason is that the name of the wallet holder can be completely anonymous, meaning anyone can send or receive cryptocurrency without revealing their identity. Furthermore, the blockchain technology underlying cryptocurrencies can act as an instant payment system. In addition, cryptocurrencies are subject to less regulation globally compared to traditional financial methods. The Financial Action Task Force (FATF), the global body responsible for combating money laundering and terrorism financing, has warned that "cryptocurrency assets are at risk of becoming a safe haven for financial transactions by criminals and terrorists." Cryptocurrencies are often untraceable, but this is not always the case. Blockchains like Bitcoin and Ethereum leave a public record of transactions, meaning it is possible to see what funds have entered or exited a digital wallet and which other wallets they have interacted with. However, to link these interactions to an individual or group, researchers must rely on information not recorded by the blockchain. Although cryptocurrency exchanges can provide the names of wallet owners to law enforcement, and police can uncover these pseudonyms, cryptocurrency holders can also obscure their paths using "mixers" or transfer funds to companies that make it difficult to distinguish them from the assets of other clients. No one knows exactly how much cryptocurrency is used to finance terrorism, as militant groups use cash, banks, shell companies, charities, and informal financial networks to move money, with cryptocurrency transfers being a small part of that. The FATF stated in 2022 that approximately 5% of terrorist attacks are financed by cryptocurrencies, but Bloomberg reported that this figure could reach 20%. The agency noted that regular money still finances the "vast majority" of terrorist activities. Chainalysis, a cryptocurrency research company, states that identifying illegal activity in a cryptocurrency company does not necessarily mean that all activities of that company are illegal, and terrorism financing occupies "only a small part, less than one percent, of illegal activities involving cryptocurrencies." Cryptocurrency-related crimes, including fraud, ransomware, and theft, exceeded $20 billion in 2022, but Chainalysis considers this estimate to be low. According to United Nations reports, the theft of cryptocurrencies through cyberattacks is a significant source of funding for North Korea. Some banks in the UK have also restricted their customers' access to cryptocurrencies due to the increase in cryptocurrency fraud. Hamas's digital assets are under scrutiny from American lawmakers, expressing serious concerns and demanding preventive action. Yahya Fanousi, a researcher at the New America Foundation: Iran, China, and Russia are seeking a new financial system with cryptocurrencies. Michael Sexton, a cyber policy and Middle East expert: Iran uses cryptocurrencies as a tool to reduce pressures. Adel Nazarian, executive director of the American Blockchain Political Action Committee: Cryptocurrencies transcend all borders. Reports indicate the possibility of illegal Bitcoin mining; electricity consumption in some government offices in Tehran has tripled.