Is Crypto Financing Terrorism? The Raging Debate

The United States is cracking down on cryptocurrency firms that fail to prevent terrorist groups from using digital money, according to U.S. Deputy Treasury Secretary Wally Adeyemo. In a speech in London, Adeyemo warned that if these firms do not take action against illicit financial flows, the United States and its partners will intervene. This comes after a letter from Senator Elizabeth Warren and other members of Congress called for the Biden administration to address the use of cryptocurrency by terrorists. The letter cited a report stating that terror groups Hamas and Palestinian Islamic Jihad have raised over $130 million in crypto in recent years.

The debate over the role of cryptocurrency in terrorism has sparked controversy in Washington and the world of crypto and finance. However, Elliptic, the firm that provided data for the report, argued that there is no evidence to support the cited figure and suggested that some of the funds may have gone to small crypto brokers mistakenly designated as terrorist organizations. Chainalysis, another analytics firm, also stated that including all funds to these service providers in terror funding estimates inaccurately assumes that everything flowing through them is associated with terrorism.

Despite the pushback from crypto lobbyists, Senator Warren remains firm in her stance. She dismisses the attempts to downplay the role of crypto-financed terrorism. The anonymous and borderless nature of cryptocurrency, combined with the regulatory gray areas of intermediaries, has raised concerns about its potential use for terrorist fundraising. However, the extent of this threat remains uncertain.

According to Tom Alexandrovich, an executive director at the Israel National Cyber Directorate, the war in the Gaza Strip may be driving an increase in crypto fundraising by terror groups. As traditional sources like banks cut off their funding, these groups turn to cryptocurrency. Nevertheless, Shlomit Wagman, a Harvard scholar and former chair of the Israeli Money Laundering and Terrorism Financing Prohibition Authority, argues that while crypto is a problem, it is not the primary source of funding for Hamas. State actors like Iran and Turkey, along with business portfolios, humanitarian aid, and fundraising, including crypto, play a more significant role.

Certain aspects of cryptocurrency may actually limit its use by terrorists. The transparent nature of digital ledgers allows for tracing and identifying illicit activities. In fact, Hamas’ armed wing announced in April that it would cease Bitcoin fundraising due to the traceability of the transactions. Yaya Fanusie, a former CIA counterterrorism analyst and current head of the anti-money laundering unit at the Crypto Council for Innovation, compares a terrorist crypto crowdfunding campaign to publicly sharing a bank account number and asking for donations.

In response to these concerns, members of Congress are calling for increased enforcement and legislation. Senator Warren and other lawmakers have proposed various bills to address crypto terror financing, including providing authorities with more financial resources to combat the threat. While the Financial Action Task Force has established a regulatory framework for crypto, its full implementation and oversight remain weak in many countries.

Experts argue that it is time for a reckoning. Regardless of the medium, there should be no exception for terror financing. Digital assets are undeniably part of the funding landscape, as highlighted by Alex Zerden, founder of Capitol Peak Strategies and a former official at the Treasury’s Office of Terrorism and Financial Intelligence. Senator Cynthia Lummis, a crypto advocate, shares the same sentiment, stating that even one dollar of crypto used for terrorism is too much.