Is Crypto the Future of Terrorist Financing?

Possibilities and Challenges

Photo by Jievani Weerasinghe on Unsplash

After the October 7, 2023 HAMAS terrorist attacks in Israel, the crypto world was abuzz with reports that the terrorist organization was getting resources to fund its operations via cryptocurrencies. In November, the Congressional Research Office reported that policymakers were examining the role that cryptocurrency plays in the funding of terrorism.

Reuters in November reported that terrorist groups such as HAMAS and Hizballah have been using the Tron network—a competitor to Bitcoin—to raise money. The Wall Street Journal that month also detailed the role of digital currencies in helping the terrorist groups attack Israel. Palestinian businessman Zuhair Shamlakh reportedly helped the terrorist organizations use digital currencies to evade Israeli detection when they raised funds.

Shamlakh’s money exchanges increasingly sent digital tokens to operators abroad to settle hawala balances, according to current and former Israeli law-enforcement officials along with former U.S. officials. Crypto sent to the digital wallets controlled by the Hamas-affiliated money exchanges could also be swapped for cash at their offices in the Gaza Strip.

This pivot helped Hamas and affiliates such as Palestinian Islamic Jihad to receive large sums from Iran during the two years that preceded the attacks on Israel in October, the officials said. It was an attempt to use a new financial technology to lessen the risks of moving physical money and goods. 

The Journal after the terrorist attacks also reported that during the year leading up to the October 7th attacks, HAMAS, Palestinian Islamic Jihad (PIJ), and Iranian puppet Hizballah received large amounts of funds through crypto, claiming that more than $90 million flowed into the pockets of PIJ.

The full scope of the role virtual currencies play in the funding of terrorism remains unclear, but several reports, but since the October 7th attacks, the US Treasury took actions against HAMAS-linked cryptocurrency accounts.

• OFAC in mid-October sanctioned a Gaza-based virtual currency exchange (Buy Cash Money and Money Transfer Company) and its operator.

• FinCEN in October issued an alert to financial institutions to help them counter HAMAS-related terrorist financing, highlighting the variety of ways in which Hamas raises funds, including “fundraising campaigns involving virtual currency and fictitious charities raising both fiat and virtual currency,” and encouraging banks to remain extra vigilant and report suspicious activities to Treasury.

• FinCEN in mid-October also published a notice of proposed rulemaking (NPRM) that suggested that transactions involving convertible virtual currency (CVC) mixing or tumbling are “of primary money laundering concern.” OFAC in 2022 sanctioned virtual currency mixer Tornado Cash and its co-founder Roman Semenov for facilitating financial transactions on behalf of illicit actors, including North Korea’s Lazarus Group.

So needless to say, virtual assets are in the forefront of regulators’ minds. Concern about HAMAS having benefited from cryptocurrency donations has prompted some Members of Congress to write several letters to the Biden Administration, urging the White House to “swiftly and categorically act to meaningfully curtail illicit crypto activity and protect our national security and that of our allies.” In several congressional committee hearings since the October 7th attacks, according to the Congressional Research Service, congressional representatives have raised questions regarding the role of terrorist fundraising through cryptocurrencies.

TRM Labs, a blockchain intelligence company that works with government, financial institutions, and crypto businesses to track and monitor transactions to mitigate illicit finance risks, in October wrote that it identified a number of fundraising efforts since the HAMAS attacks that month.

For example, Gaza-based group GazaNow, which is actively supporting Hamas, is soliciting donations using a cryptocurrency address. The address, which was first active in August 2021, has received nearly $800,000 in total and less than $5000 since [the October 7] attacks. 

The Wall Street Journal reported that initially HAMAS’s use of cryptocurrencies was limited to small donations from supporters as part of a larger crowdfunding effort. However, crypto during the past three years became a method of large-scale transfers between Iran and HAMAS within the hawala networks, facilitated by individuals such as Zuhair Shamlakh and his network. In addition, Iran and its proxies often own and control exchange houses to help Tehran access the global financial system and funnel money to its terrorist proxies.

So are cryptocurrencies the next frontier for terrorists? Not so fast.

Yes, fundraising campaigns are becoming more sophisticated, new technologies are helping terrorist groups gain access to operational resources, and HAMAS was an early adopter of these fundraising techniques.

But… cryptocurrencies and blockchains are not an easy way to hide money. They’re convenient, but transparent. Law enforcement agencies globally are using Blockchain intelligence tools to track the flow of funds related to terrorism. HAMAS’s armed military groups last year announced that they were suspending fundraising via public-facing crypto activity, because of an increase in “hostile” activity against its donors. Blockchain tools provide insights into money movements and the activities of digital wallets. More and more virtual asset service providers screen for sanctioned entities and suspicious activities and file suspicious activity reports. Blockchains are notoriously transparent and have allowed law enforcement to seize digital wallets linked to terrorist activities, identify donors, and shut down fundraising operations.

That roughly $90 million that allegedly went to PIJ? The Wall Street Journal also quoted blockchain analytics firm, Elliptic, as saying whether all the transactions it identified directly involved PIJ is not clear because some of the wallets belonged to crypto brokers that may have also served non-PIJ clients.

In addition, terrorists tend to be traditional. They prefer cash. They prefer using hawalas to transfer funds. And with the attention from regulators and law enforcement agencies that cryptocurrencies have received, terrorist groups are more likely to treat cash as king. Exhaustive research by the RAND Corporation in 2019 revealed that cash is preferable for terrorist groups, in part because large sums of crypto still have to be converted to fiat in order to be spent on operations, and those large sums are sure to be noticed, especially with the increasingly advanced tools we have today. RAND noted in 2019 that there was “little current evidence of the adoption of cryptocurrencies by terrorist organizations or the motivation to do so, but that very well might change as countermeasures shut off funding and as the cryptocurrency technology changes.”

Yes, cryptocurrencies may be pretty attractive to terrorists, but the continued attention is not. Yes, crypto wallets or addresses are pseudonymous, and anyone can set one up without always having to undergo Know-Your-Customer (KYC) checks. But crypto regulations around the world are changing, and KYC checks and other customer due diligence efforts will almost certainly become more ubiquitous in the crypto world.

Right now, only a small percentage of crypto is being used to finance terrorist attacks, although international organizations are sounding alarms about the possibilities in the near future. A UN official in 2022 said that a few years ago only 5 percent of terrorist attacks were considered to be financed by crypto, but the number is increasing and could hit 20 percent. FATF that year also said that crypto presents "increasing terrorist financing risks,” but that the "vast majority" of terrorist financing still uses regular money.

Crypto research firm, Chainalysis last year cited flawed methodologies and overstated metrics in reports as a significant cause of misconceptions about terrorist use of crypto. Chainalysis says that understanding the role of service providers that facilitate the movement of funds tied to terror financing is critical to quantifying the role cryptocurrencies play in terrorist funding.

When looking at known instances of terrorism financing, service providers such as money services businesses are often involved. One such service is the recently sanctioned Buy Cash, a Gaza-based business that provides money transfer and virtual currency exchange services. These service providers process volumes of funds greater than a typical individual and less than a typical exchange. Some may be more akin to over-the-counter (OTC) brokers while others may be more similar to street-level money businesses like hawalas. 

Chainalysis also notes that not all funds received by service providers are terrorist funds, which is critical to ensuring an accurate account of just how significant cryptocurrencies are to terrorist financing.

The information can be unclear, but one thing is patently obvious: there’s potential there. Bad guys always find a way to access the resources they need, and whether it’s shell companies, proxies, trade-based money laundering, or cryptocurrencies, vigilance is in order.