The Mount Washington Hotel in Bretton Woods, New Hampshire, was the site of the 1944 United Nations Monetary and Financial Conference, which pegged the U.S. dollar to gold and other currencies to the U.S. dollar. The abandonment of the gold standard in 1971 marked the rise of fiat currency in the United States and some argue the conditions under which cryptocurrencies would gain traction decades later. Credit: The New York Public Library
Assertions of cryptocurrency’s role in terrorist financing are significantly overstated. Violent actors still primarily rely on traditional extortion methods, as they face significant hurdles in using cryptocurrencies as a main source of income.
On October 10, 2023, just three days after Hamas’s terrorist attack against Israeli civilians, The Wall Street Journal published an article stating that Hamas militants had “raised millions” in cryptocurrency to fund their war.1
The reporters claimed that Palestinian Islamic Jihad (PIJ) and Hamas had collected over $130 million combined through digital-currency wallets identified by Israeli authorities.2 A week later, on October 17, over one hundred Senators and Members of Congress signed onto a letter written by Senator Elizabeth Warren to Brian Nelson, the Under Secretary for Terrorism and Financial Intelligence (TFI), and Jake Sullivan, National Security Advisor to the White House, calling on the U.S. Treasury to articulate a plan of action to address crypto as a national security threat.3
Shortly thereafter, the U.S. Treasury, through its Financial Crimes Enforcement Network (FinCEN), specifically referenced Hamas and PIJ in a proposal to expand its authority under Section 311 of the USA PATRIOT Act to financial institutions that engage in international Convertible Virtual Currency Mixing (CVC mixing).4
Yet, the article, the letter, and the U.S. Treasury’s subsequent response were based on overstated evidence and hasty analysis. Only a day after Senator Warren’s letter was signed, Chainalysis, a reputable blockchain data platform, published a correction and explained that the source of the $130 million originally identified was the result of conflating the volume and flow of terrorism-related funds through untrained data analysis from Money Service Providers (MSP). The Wall Street Journal later corrected its article, clarifying that “Palestinian Islamic Jihad and Hezbollah may have exchanged up to $12 million in crypto since 2021.”5 A far lower sum than they originally thought, their correction more accurately reflects the difficulty of using cryptocurrency to fund international terrorism.
Dr. Shlomit Wagman, a senior fellow at Harvard University who previously led Israel’s campaign against terrorist financing, challenged Senator Warren’s assertion at the Senate Banking Committee hearing on October 26 that among Hamas’s financial money laundering tools, cryptocurrency was “one big one.”6 In fact, the number one source of funding for terrorist groups is still targeted extortion and kidnapping channeled through bank accounts, money exchanges, and cold hard cash.7
During a House Financial Services Committee hearing held on February 14 of this year, the TFI director Andrea Gacki and undersecretary Brian Nelson both pointed out the overexaggerated rhetoric and inflated financial figures circulating. Nelson clarified that “terrorists still prefer, frankly, to use traditional products and services.”8
Not a Viable Instrument
Cryptocurrency is not a viable, appealing, or sustainable financial pathway for terrorist organizations and no one is more aware of the dangers of impracticality than Hamas. On April 27, 2023, months before its attack, Al-Qassam Brigades (AQB), the military wing of Hamas, ceased its crypto fundraising program citing “concerns for the safety of their donors given the prosecution of those who donate through cryptocurrency.”9
In practice, cryptocurrencies do not fully align with the features that would be most desirable for terrorist groups, such as widespread adoption, better anonymity, and improved security, alongside being subject to lax or inconsistent regulation. Rather, cryptocurrency use by terrorist groups is marred by significant obstacles. While there have been some attempts by PIJ, Hamas, and Al-Qaeda to raise funds with cryptocurrencies, their efforts often unraveled due to the technological, practical, and legal obstacles to funding wide scale terrorist activity.
Technologically, the characteristics of cryptocurrency, particularly its transparency through blockchain technology, compromise the anonymity sought by terrorist groups. Blockchain’s immutable nature and community governance model contribute to creating a transparent and traceable environment. Smart contracts embedded in the blockchain can automatically flag or restrict illicit activity, providing an additional layer of security. Finally, the use of CVC mixers or tumblers by terrorist groups to enhance privacy is often countered by advanced tracking technology.
Practically, the lack of widespread cryptocurrency usage forces terrorist groups to engage in fiat conversion, creating vulnerabilities at on and off ramps. Fiat entry and exit points become access points for monitoring and seizing transactions by law enforcement. Government organizations utilize data analysis to quantify funds in terrorist hands and identify service providers facilitating fund movements. Practical difficulties, including the need for fiat conversion and the tracking of transactions, effectively hinder terrorist financing.
From a legal perspective, stringent regulations, international cooperation, and economic sanctions are key components of the barriers against terrorist crypto usage. The U.S. has enacted regulations since 2013, with agencies like FinCEN and the Office of Foreign Assets Control (OFAC) playing pivotal roles in investigating blockchain transactions. Economic sanctions and comprehensive laws, such as the International Emergency Economic Powers Act (IEEPA), target illicit crypto activity. Recent landmark cases, including actions against Tornado Cash and Binance, underscore the increasing legal ramifications and regulatory measures, signaling a new era of stringent oversight in the crypto market.10 These factors make it progressively more difficult for terrorist organizations to exploit cryptocurrencies effectively.
The statistics speak for themselves; cryptocurrency constitutes a fraction of the overall funds and accounts owned by terrorist groups. And not only does crypto comprise a minimal proportion of terrorist financing, but illicit dealings in general remain a small percentage of the transactions on the blockchain. Chainalysis noted as much in its 2023 Crypto Crime Report where it addressed the intricate relationship between cryptocurrency and illegal activities. Although the share of all cryptocurrency activity associated with illicit transactions rose for the first time in 2022 since 2019, from 0.12% to 0.24%, its proportion relative to the total cryptocurrency economy remains very small.
A Disastrous Scenario
However, even with the ramifications for illicit crypto use, there is an improbable but potentially disastrous scenario that should not be overlooked: privacy coins and possible successors. With traditional financial transactions facing increased surveillance, there is strong demand for coins that offer complete anonymity by both illicit and non-illicit users. Monero, a privacy coin with its own blockchain, stands out in the cryptocurrency community despite resistance from the regulatory sector and currency exchanges. Launched in 2014 as Bitmonero, a fork of Bytecoin, it underwent community-driven development changes to formulate its ultra-private property.
Although jihadist groups operating in Gaza seem to prefer Bitcoin,11 other terrorist groups have increasingly adopted Monero XMR reflecting a growing awareness of the privacy enhancing technology for digital transactions.12 As early as 2018, BBC Monitoring reported terrorist soliciting donations through Monero.13 The Islamic Group (ISIS) in particular has used Monero XMR regularly as a method for raising money. Through encrypted apps such as Telegram or on propaganda websites, ISIS “provide[s] a Monero address made up of a string of numbers and letters and a QR link for making donations.”14 These publications describe Monero as “untraceable” as compared to Bitcoin and thus the “safest way of transferring money and participating in financial and economic jihad.”15
Privacy coins provide access to audiences who could not otherwise contribute due to third-party tracking and thus opens the floodgates to a network of untapped funds. This is an area of terrorist funding that should be watched. Hamas would prove a particularly dangerous user of this technology as the group draws on support from around the world.16 If they were able to easily, and privately, leverage their network to maintain a funding stream, the result would be deeply destructive.
Still, most privacy coins cannot meet the needs of regular, large-scale usage by terrorist groups. Though the technological challenges related to transparency may be solved, the practical and legal ramifications for regular crypto use are still present in privacy coins—namely, fiat currency entry and exit points would still be required.
The Real Issues
The primary concern is perhaps not cryptocurrency itself, but the historical pattern of malicious actors exploiting and developing technology for their goals. Undoubtedly, there are groups currently devising alternatives to privacy coins for untraceable transactions. Yet, technology is intrinsically neutral; it is the usage that merits judgment. While cryptocurrency, with its decentralized nature, may attract fraudulent activities, this is a characteristic of many emerging technologies. As a confidential United Nations source who has spent his life studying and tracking terrorist finance stated: “They will use something else. They will always find something else.”17 The debate over cryptocurrency’s threat to national security is merely the current moment of a long-running challenge to manage new technologies. The outrage over terrorist crypto use, most recently Hamas’s, may distract from the real issues: firstly, the charity bases these entities are aiming to reach through their continuous technological innovations as well as, and perhaps more importantly, the financial and infrastructural resources they attain legally through international aid.
When there is a willing base, terrorists will find a way to access that money. Hamas specifically stands out from other terrorist groups in the way that it has tapped into western institutions. After rising to power in the wake of the First Intifada in 1987, Hamas has since leveraged its origins in the Muslim Brotherhood to gain international support by portraying itself as a peaceful group dedicated to providing social services to Palestinian civilians.18
As a result, Hamas is now better able to successfully rally foreign actors around the idea that it represents political resistance to Israel. In doing so, Hamas aligns itself with western discourses tied to social movements. Relatedly, among their terrorist peers, Hamas most directly benefits from global antisemitism, leveraging the ideology to their favor.19
Regulating, targeting, and tracking the technology that allows Hamas, or any terrorist organization, to access its base is of course vital to an effective anti-terror strategy. As Senator Sherrod Brown stated in the Senate hearing on illicit finance and terrorism, “we need to not only identify the bad actors, but identify their money pipeline so we can shut off their funding.”20 That being said, it is relatively easy to wage war on technology and increasingly hard to wage war on the malevolent organization that wields its power in their favor, especially when that organization benefits from certain aspects of the political and social environment in the West. Regulations targeting terrorists’ main financial avenues are of the utmost importance in stymying their goals, but crypto is simply not a central financial avenue.
The fixation with regulating crypto has largely been predicated on poor statistics and, in some ways, devalues Hamas’s most significant sources of funding: Qatar and Iran, as well as funds it receives legally through international aid.21 For certain members of Congress, it would be politically convenient if Hamas really did raise $130 million from an illicit and complex technological system that champions decentralization, anti-authority, and pseudonymity—characteristics that already make people uneasy. And this is especially true if the alternative is to engage in a precarious examination of the role of the United States in indirectly funding terror.
References
1 Angus Berwick and Ian Talley, “Hamas Militants Behind Israel Attack Raised Millions in Crypto.” The Wall Street Journal, October 10, 2023.
2 Elliptic later walked back its initial reporting regarding how much was raised by PIJ in “Setting the Record Straight on Crypto Crowdfunding by Hamas.” Elliptic, October 25, 2023.
3 “Letter to Treasury and White House re Hamas crypto security.” Letter signed by members of the U.S. Congress, addressed to the Under Secretary of Terrorism and Financial Intelligence at the U.S. Department of the Treasury and the National Security Advisor to the White House, October 17, 2023.
4 “Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern.” Federal Regulations, volume 88 (2023): 72701-72723, Financial Crimes Enforcement Network, explaining that “mixing” is a process by which transactions are blended together in order to “obfuscate the origins and owners of the funds;” see “Crypto Mixers and AML Compliance.” Chainalysis: Crypto Basics, August 2022.
5 Berwick and Talley, “Hamas Militants Behind Israel Attack Raised Millions in Crypto.” The Wall Street Journal, October 10, 2023.
6 Shlomit Wagman, “Written Testimony on Combatting the Networks of Illicit Finance and Terrorism.” Hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, October 26, 2023.
7 “2024 National Terrorist Financing Risk Assessment.” U.S. Department of the Treasury, February 2024; “Examining Terrorist Groups and Their Means of Financing Illicit Activity.” Hearing before the U.S. House of Representatives Subcommittee on Terrorism and Illicit Finance of the Committee on Financial Services, September 7, 2018; U.N. Source.
8 Casey Wagner, “House hearing on FinCEN oversight turns into crypto debate.” Blockworks, February 14, 2024.
9 “Correcting the Record: Inaccurate Methodologies for Estimating Cryptocurrency’s Role in Terrorism Financing.” Chainalysis, October 18, 2023.
10 For information on these prosecutions see both press releases, “Tornado Cash Founders Charged with Money Laundering and Sanctions Violations.” United States Attorney’s Office, Southern District of New York, August 23, 2023; and “Binance and CEO Plead Guilty to Federal Charges in $4B Resolution.” Office of Public Affairs, U.S. Department of Justice, November 21, 2023.
11 For two examples, see “Pro-AQ Unit Publishes Message from Gaza-based Group Leader Observing Signs of Israel’s Fall.” Site Intelligence Group, March 7, 2023; and “AQ Supporters Fundraise for Gaza, Palestinian Fighters.” Site Intelligence Group, November 14, 2023.
12 Examples include “Jihadist media watch: 26 July-1 August 21.” BBC Monitoring, August 2, 2021; “Pro-IS website seeks cryptocurrency donations.” BBC Monitoring, July 26, 2023; “Snapshot: IS global activity – July 2023.” BBC Monitoring, August 4, 2023; “Pro-ISKP outlet urges donations for ‘jihad’.” BBC Monitoring, December 7, 2023; “Pro-IS magazine incites attacks against ‘evil’ Jews.” BBC Monitoring, December 21, 2023.
13 Abdirahim Saeed, “Analysis: How Malhama Tactical Became the ‘Blackwater of the Syrian jihad’.” BBC Monitoring, December 8, 2018.
14 “Pro-IS website asks for cryptocurrency donations.” BBC Monitoring, June 27, 2023.
15 “Pro-IS tech outfit promotes ‘untraceable’ cryptocurrency Monero.” BBC Monitoring, July 27, 2021. “Terrorism Digest: 7-8 Dec 23.” BBC Monitoring, December 8, 2023.
16 “Turmoil Over Student Support for Hamas.” The New York Times: Letters to the Editor, October. 20, 2023. Carl Campanile, “Nearly as many college students back Hamas as Israel: poll.” The New York Post, November 14, 2023.
17 One primary source used in researching this article was a top official at the United Nations whose career has been dedicated to tracking and tracing terrorist finances. Their information is being kept confidential due to safety concerns. (“U.N. Source”).
18 Lorenzo Vidino, “The Hamas Networks in America: A Short History.” George Washington University Program on Extremism, October 2023.
19 See “Support for Hamas Terror at Anti-Israel Rallies Across the U.S.” ADL: Center on Extremism, October 14, 2023; Luke Tress, “Chanting ‘700,’ pro-Palestinian activists in New York fete Hamas attack.” The Times of Israel, October 9, 2023.
20 Senator Sherrod Brown, “Opening Statement on Combating the Networks of Illicit Finance and Terrorism.” Hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, October 26, 2023.
21 Rory Jones, “How the West—and Israel Itself—Inadvertently Funded Hamas.” The Wall Street Journal, October 19, 2023; “Funds can be raised via social media or formal donation crowdfunding platforms by ill-intentioned individuals, such as persons fraudulently soliciting support for humanitarian aid, intending for the ultimate beneficiary to be a terrorist or violent extremist cause. The campaign promoters themselves may also be affiliated with a terrorist group.” Crowdfunding for Terrorism Financing, Financial Action Task Force (FATF), October 21, 2023; Elie Podeh, Yitzhak Gal, “Gaza is poor, Hamas is rich: How does it make money, does Israel help?” Jerusalem Post: Opinion, October 23, 2023.