Cryptocurrency's Limited Role In Terrorism Financing

Chainalysis highlights the limited use of cryptocurrencies in terrorism financing, and crypto's traceability via blockchain.

Is terrorism financed with cryptocurrencies?

In the aftermath of a devastating terrorist attack by Hamas in Israel, there has been a surge in interest about the extent to which terrorist organizations like Hamas, Hezbollah, and the Palestinian Islamic Jihad utilize cryptocurrencies. Chainalysis, committed to supporting its global clientele, has observed exaggerated claims and flawed interpretations concerning these groups' cryptocurrency user, and has published data intended to rectify these misconceptions.

Contrary to popular belief, the funding of terrorism via cryptocurrency constitutes a minuscule fraction of the (already small) illicit segment of cryptocurrency transactions. Historically, terrorist groups have predominantly relied on conventional fiat-based channels, including banks, hawala (informal money transfer networks), and shell corporations, for their financial needs.

Regardless of the volume, the significance of funds amassed by terrorist entities cannot be understated. However, the inherent transparency of blockchain technology renders cryptocurrency a less-attractive option for illicit purposes, including terror financing. The collaborative efforts of governmental bodies and the private sector, armed with blockchain analysis tools, can effectively identify and halt the fund flows, a task challenging with traditional value transfer systems.

The Pivotal Role Of Service Providers

Two core elements are crucial for assessing the magnitude and movement of funds associated with terrorism: Directly quantifying the funds under a terrorist group's control and recognizing the intermediaries aiding the fund transfers. For a holistic understanding of cryptocurrency's involvement in terrorism financing, it's essential to grasp the function of these service providers.

Prominent examples include money service enterprises, with Buy Cash, a recently sanctioned Gaza-based business that offers money transfer and virtual currency exchange services, standing out. An analysis using Chainalysis Reactor revealed at least 20 suspected service providers linked to a wallet associated with terror financing, with each handling between $8.4 million to $1.1 billion in cryptocurrency.

Service providers potentially connected to terror-financing wallets
Service providers potentially connected to terror-financing wallets (Photo: Chainalysis)

Distinguishing Between Service Providers and Terror Funds

It's imperative to discern that not all funds processed by service providers are intended for terrorism. Recent estimates, especially those concerning the Israel attacks, seemingly incorporate all transactions to specific providers who had some connections with terrorism-related funds. Though these intermediaries inadvertently support terrorism, it's a misconception to assume all their transactional activities are terror-linked.

The Complexity Of Tracing Through Service Providers

Tracking fund flows on the blockchain becomes intricate when funds are transferred to an address linked to a service provider. Such funds, when deposited with a service, are often merged with other users' assets, making further tracing unproductive. For instance, eight out of 20 suspected service providers connected to the known terror-linked wallet also transacted with Garantex, a notable Russian exchange sanctioned by OFAC in 2022. Mistakenly considering these addresses as service providers could lead to misconstrued conclusions about the actual flow and purpose of these funds.

8 out of 20 service providers connected to the terror-linked wallet also transacted with Garantex (image: Chainalysis)
8 out of 20 service providers connected to the terror-linked wallet also transacted with Garantex (Image: Chainalysis)

Chainalysis's Approach To Identifying Terrorism Financing

Chainalysis employs a meticulous methodology to label terrorist financing activities in their dataset. With the ongoing conflict in the backdrop, the company is intensively collaborating with its associates to scrutinize any potential funding directed towards Hamas, Hezbollah, the Palestinian Islamic Jihad, and other similar entities.

Combating Terrorism Financing On The Blockchain

Blockchain's intrinsic transparency, combined with the public nature of many terrorism financing campaigns, suggests that cryptocurrency isn't the ideal medium for large-scale terrorism financing. Nevertheless, even trivial fund transfers to terror entities can result in significant harm. Through blockchain analysis, law enforcement and intelligence units can delve deeper into donors, intermediaries, and cash-out points, collaborating with the private sector to curtail such activities. On April 27, 2023, Al-Qassam Brigades, Hamas's military wing, terminated their longstanding cryptocurrency donation program, underscoring the challenges they faced.

In conclusion, private entities play an instrumental role in curbing terrorism financing, with exchanges serving as critical gateways between cryptocurrencies and fiat currencies. Implementing robust Know Your Customer (KYC) protocols and actively monitoring transactions for potential risks are pivotal in deterring terrorists and other malevolent actors from exploiting cryptocurrency.

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