If terror groups are using public blockchains to help finance their operations, they are finding ways to cover their tracks, as highlighted by Crystal head of research Nicholas Smart.
Does crypto really help finance Hamas and other terrorists?
In recent weeks, we have heard a lot of discussions and arguments about this issue without getting to a definite conclusion.
Everything started with a report in the Wall Street Journal in early October alleging that Palestinian groups had received nearly $130 million in crypto to finance their war operations in Israel.
A few days later, over 100 U.S. legislators, led by Senator Elizabeth Warren (D-MA), signed a letter to President Joe Biden raising concerns about crypto’s role in financing different forms of terrorism. Warren is leading the efforts to pass a digital assets anti-money laundering act.
After that, blockchain forensics groups, including Elliptic and Chainalysis, said the numbers that were reported by the WSJ were probably ‘overstated.’ Interestingly, the research the Wall Street Journal cited was published by Elliptic. These estimates, Chainalysis wrote, included funds that were “not explicitly related to terrorism financing.”
Experts and analysts at Chainalysis insist that blockchains help reveal most of the illegal funding flows, which is why Hamas disavowed crypto fundraising in April 2023. Its supporters were getting wrapped up mainly because they used public crypto networks, like Crystal, enabling intelligence agencies to track them down.
The cryptocurrency community, led by commentator Nic Carter, has called for the Wall Street Journal to renounce its original report, lest it negatively impacts the wider debate about cryptocurrency regulation. However, the WSJ has refused to do that.
It showed why the issue of crypto financing of terrorism is so complicated. The new report, according to findings from Israel’s National Bureau for Counter-Terror Financing, indicates that Hamas has moved on from using Bitcoin, instead preferring the Tron blockchain and tether stablecoin.
How Terrorists Use Crypto To Fund Their Operations
According to the report, Israeli officials said:
“The use of crypto by the Gaza money exchanges was more sophisticated than Hamas’s earlier fundraising efforts in bitcoin. Digital wallets connected to the companies moved funds overwhelmingly in the form of the stablecoin tether on a blockchain system called Tron, which has heightened user privacy.
To obscure the money trail, the exchanges often changed the wallet addresses they used each day, and sent funds through mixers.”
Intelligence chiefs say hawala networks, the informal remittance systems, have channeled millions of dollars from Iran to Hamas’s military group and that the wallets identified and targeted by Israel might only be a small fraction of the ones in existence. Mixers combine currency transactions, making them quite hard to trace.
All these efforts show the adaptability of terrorists in finding new ways to cover their tracks. As the Wall Street Journal shows, when Hamas discovered that Bitcoin was too public, it switched to a chain and asset that offered more secrecy.
The head of research at Crystal, another blockchain analytics company, Nicholas Smart, stated:
“Terrorists are not stupid. They look at the capabilities of blockchain intelligence companies and they start to understand ‘okay, well, they can track us.’ So we need to be clever.”
Previously, terrorists were believed to have used privacy coins such as Monero. However, due to the relatively low liquidity of these projects in the secondary markets, they have become less popular now. Tether, on the flip side, has a market cap of $87 billion. Smart stated that there are limits to what online researchers like himself can discover.
Blockchain May Help Bust Terrorism Financing Syndicates
Blockchain analysis might be good at revealing the ‘raise,’ ‘store,’ and ‘move’ aspects of cryptocurrency transactions, but does not show how the money was spent. One issue raised about the original WSJ report was that it quoted numbers showing the amounts of crypto raised, but not the amount that eventually reached terrorists or the front lines. Smart added:
“Crypto solves some problems for terrorists but creates others.”
Analytics reveals minimal information about private peer-to-peer transactions, for example. Smart commented recently in an interview:
“It’s a big unknown how crypto is being used in covert channels. If there’s a Signal group between members of a terrorist group and un-hosted wallets, we can’t see that. That’s where intelligence services earn their money and understand what’s going on.”
On that note, the inherent transparency of blockchains might help us discover more about terrorism financing. But, it is a mistake to believe it reveals everything about the transactions and that analytics companies can give us the final word on whether cryptocurrency funds groups like Hamas. Smart believes we need old-fashioned human intelligence working with the blockchain type to get to the bottom of these complicated funding flows.
With the right measures put in place, issues of terrorism financing using crypto can be mitigated, and all culpable suspects brought to book.