Explained | Cryptocurrency's role in terror financing comes into focus after Hamas attack on Israel

Israel recently announced that it has seized cryptocurrency accounts linked to the Hamas terrorgroup.The confiscation of these accounts, amid the ongoing Israel-Hamas war, has once again brought cryptocurrency's role in terror financing into the spotlight.

It has raised questions about how violent groups and designated terrorist organisations access money for their nefarious motives and actions, and how big a role crypto plays in it. Here's all you need to know about crypto's role in terror financing.

Cryptocurrency and illicit finance

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The Financial Action Task Force (FATF), which is the global body responsible for tackling issues like money laundering and terror financing, has warned that crypto assets "risk becoming a safe haven for the financial transactions of criminals and terrorists".

One reason for this is the relatively low number of regulations cryptocurrency has compared to traditional finance. While some regions are in the process of introducing new rules for regulation, at the moment, digital currency enjoys more autonomy.

What makes cryptocurrency an attractive finance option for illicit activities?

To send and receive cryptocurrency, a user just needs a crypto wallet, which can easily be set up without the many checks and balances one has to undergo for a regular bank account.

Furthermore, addresses, as per Reuters, are pseudonyms which are labelled only by a string of letters and numbers. This means that people can send and receive cryptocurrency without having to disclose their identity.

What's more is that the process of sending and receiving digital money is instantaneous, even across borders.

Is cryptocurrency untraceable?

Yes, to some extent, cryptocurrency is untraceable. As per Reuters, blockchains like Bitcoin and Ethereum maintain a permanent record of transactions.

So, it is possible to see the funds that were sent or received from a wallet. It is also possible to access information about the other wallets it has interacted with.

According to Cloudwards, pseudonyms can hide a person's identity, but they are not foolproof. It says that a smart search of a cryptocurrency's blockchain can uncover the real-world identities of the people behind the wallets.

Talking to CNET, Feng Hou, Maryville University's digital transformation chief, who works on implementing blockchain tech explained: "While there are certain ways that cryptocurrency does provide a level of anonymity, be aware that nobody today can claim a 100 per cent anonymity at this point."

Crypto wallets have started asking customers for KYC (Know Your Customer) information, and they often record users' addresses etc.which can be tracked by the police.

However, crafty users can still use tools like crypto "mixers" or tumblers, which pool user cryptocurrencies and then send them to the recipient from that common pool. Some move funds to exchanges or other firms, which makes it difficult to distinguish between different funds.

Is cryptocurrency used for terror financing?

Yes, there have been multiple instances of crypto allegedly being used to finance terror activities.

Terror groups use many different methods to move money. This includes crypto, banks, shell companies, charities, informal financial networks and even plain hard cash.

However, as per experts, cryptocurrency is only a small part of terror financing.

As per a Bloomberg report from 2022, a couple of years ago, only about five per cent of terrorist attacks were believed to have cryptocurrency finance backing.However, as per a report citing a UN official, this number may have now increased to 20 per cent.

Illicit financing

Chainanalyis, an American blockchain analysis firm, says terror financingonly accounts for a "small fraction of the less than one per cent of the entire crypto market occupied by illicit activity".

Other types of illicit finance activities include scams, ransomware, and theft.

In 2022, cryptocurrency-related crime hit a record $20.1 billion, which as per Chainanalysis is a lower-bound estimate. This, as per the analytic firm, excludes their use for other things like the payment of drugs, etc.

Another emerging cybercrime is cryptocurrency theft in online attacks. As per the United Nations, these are a significant source of funding for North Korea.

Cryptocurrency, as per John Moss, the head of the Australian Transaction Reports and Analysis Centre (Austrac), is also an easy-to-use fundraiser, especially when used in combination with social media.

According to Austrac, there have been reports of Australians sending digital money to organised terror groups like al-Qaeda and ISIL (Islamic State of Iraq and The Levant).

In August, a UN report noted that the Islamic State (IS) terrorist group has been using regional versions of cryptocurrency — like stablecoins. The 17th report of the Secretary-General on the threat posed by ISIL (Da'esh) to international peace and security also stated that the group is also relying on virtual assets for international funds transfers.

(With inputs from agencies)

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