The recent conflict between Israel and Hamas has raised intrigue about how terrorist organizations can use crypto assets. Precisely because cryptoassets aim to serve the market and, especially, consumers throughout the world, tense situations such as the current ones invite us to reflect on the freedom of their use. This is what Chainalysis, a New York company dedicated to the analysis of the (use of) Blockchain, recently did.
Although terrorism uses crypto assets for its financing, it is still true that they constitute a very small portion that is used for its illicit transactions. However, there are terrorist organizations that collect, store and transfer funds using cryptocurrencies, although they continue to use traditional means such as financial institutions primarily.
Indeed, it is undeniable that the funds achieved by these types of organizations, regardless of their size, are relevant and deserve to be investigated. In the case of Blockchain, the same technology constitutes a support that makes the tracking of such operations practicable and, in that sense, less reliable to carry out illicit activities, which undoubtedly include those of terrorism. What this suggests is that, for both government agencies and the private sector, the use of Blockchain constitutes a unique tool to identify and dismantle the flow of financing through cryptoassets, which is more difficult with traditional institutions.
The role of the service providers
There are two key elements when analyzing the volume and flow of funds received by terrorism. Firstly, the direct quantification of the funds that the organization has and, secondly, the identification of the provider that facilitates the circulation of such funds.
In order to measure the dimensions of terrorist financing through cryptocurrencies – while detecting opportunities to stop it – investigators and experts must understand, first of all, the role played by service providers. Indeed, in this type of structures, money service companies are usually involved. Recently, the Gaza-based company, Buy Cash, was sanctioned for facilitating the transfer of money and the exchange of digital currencies. This type of provider operates much higher volumes of funds than those of an individual, but lower than those of a regular stock market. Some may be more like stockbrokers operating in the over-the-counter (OTC) market, while others may be more like street money companies, such as hawalas.
In this regard, the Chainalysis Reactor comparison table is illustrative, which you can consult in the link at the end.
Certainly, the funds received by these types of providers are terrorist funds. However, the priority is less on diagnosis than on treatment.
For those who are not versed in the matter, it may seem that terrorism has its main source in this type of financing. However, reality seems to yield a different conclusion: although relevant in itself, only a small portion of the total funds provided by certain suspicious providers are strictly for activities linked to terrorism.
In the case of the attacks in Israel this is evident, since not all the funds received were directly associated with terrorist financing. However, those who provide them are still supporting these types of attacks to the extent that they operate as facilitators. Hence, cutting off access to this type of financing is an intelligent strategy to disrupt the flow of assets for terrorism. It would be unwise, however, to assume that the providers of such services have terrorist financing as their sole activity. It is one thing that this is possible because the structure somehow allows it and another, very different, that the structure has that function.
In the case of Blockchain, tracking the money flow becomes more complex when a person sends cryptocurrencies to an address used by the service provider. When this happens, the service groups it and mixes it with the funds of other users: it becomes part of the chain. Hence, it is not the most efficient to follow the course of the funds once they have been deposited on the server, since there the owner of the funds is no longer the one who puts them into circulation, but rather it is the service provider who knows what Deposits and withdrawals of assets are linked to certain clients, information that is included in the account books: documents that are not visible from the Blockchain.
If this is so, to the extent that terrorist organizations use both traditional means of financing, as well as those made possible by Blockchain, it is difficult to determine precisely the volume of funds that are allocated directly to this type of organizations, given the lack of information validated by security forces through coercive measures.
Working as a team to combat financing through Blockchain
Given Blockchain’s functional transparency, as well as the usual public terrorist financing campaigns, cryptoassets do not seem the most appropriate channel for large-scale financing. However, small inflows can cause serious damage. Hence, the ideal would be to focus investigations on the donors and facilitators of the transmission of these funds, as well as on the outflows of money. This would allow alliances with private agents to put an end to such activities. This type of strategy has been effective in seizing funds from Hamas or Hezbollah, proving that it is feasible to dismantle these types of networks.