On virtual currency and terrorist financing

Cryptocurrencies as a source of terrorist financing is of yet, limited. But to assume that this will remain static is potentially dangerous. If terrorist actors are increasingly turning to digital methods to expand their influence, utilizing brand marketing as a medium of connecting with their target demographics, why should the use of Virtual Currencies be any different? Whether through choice or necessity, VCs can offer terrorist actors another supply conduit, one which regulatory cohesion has yet to mould.

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By Christian Kurzydlowski

Virtual currencies (known hereafter as VCs), acts as an umbrella term encompassing Bitcoin cryptocurrencies, as well as other innovative new technologies. VCs are meant to enable digital transactions, and to facilitate the delivery of financial products and services online. To simplify, digital currencies are created through a process of ‘mining’ to verify each transaction on a blockchain. While information on each transaction is recorded on the blockchain, there is a degree of anonymity, thus amplifying its attractiveness.

As streamlined, and designed to stimulate both competition, and inclusion, as virtual currencies are perhaps intended to be, the reality is more nuanced. Instances of VCs being used for criminal purposes are well documented. However the nexus between terrorist financing and VCs are not as well documented [1]. This can be attributed to the fact that VCs have not been adopted on an institutional level by any terrorist organization or actor.

Given the secretive nature of terrorist transactions, cash is understandably the preferred medium. Also, the transactions themselves are largely undertaken in areas with infrastructural issues. Most of terrorist financing continues to be through conventional banking and money remittance services. Nevertheless, the risk of VCs being used increasingly for terrorist financing should not be overlooked. In fact, because of its seeming efficiency as a source of anonymous financing, it should be more closely scrutinized. This is especially true in the potential overlap of the cybercriminal-terrorist nexus.

As alluded to, there is little clear documentation concerning the overlap of VCs, cyber criminality, and terrorism. Yet despite the sparse data, what exists is not merely anecdotal. Hamas’ military wing, the Izz ad-Din al-Qassam Brigades, attempted to crowdfund through Bitcoin. Ardit Ferizi, a Kosovo-born hacker who identified with the Islamic State, embodies the cybercriminal-terrorist nexus of committing cyber crimes for the purpose of terrorist support.

There are various other ways in which terrorist actors could utilize VCs for their purposes. Despite Bitcoin being touted as anonymous, it might be more helpful to view it as a permeable anonymity. This means that despite one’s personal information being private, actual transactions through blockchain are recorded publicly. While terrorist actors might find the personal anonymity of blockchain useful, the fact that blockchain records chronologically means that it would be possible to deduce patterns through transactional records.

Nevertheless, there are methods by which such transaction traceability can be “scrambled”. Bitcoin “tumbling”, or “mixing”, are the terms used to describe the hiding of where Bitcoin is being procured, and to where the Bitcoins are used. These services aggregate Bitcoin from a variety of users, and redistribute them, thus scrambling the trail of transactions. According to a 2018 report by the European Parliament, the Islamic State was advocating, from 2014, such methods to conceal the movement of funds.

In recent years there has been substantial innovation in the use of more privacy oriented alternative forms of Bitcoin offering greater privacy. P2P (Peer to Peer), is a distributed application, which partitions tasks between peers (users).  Its appeal to terrorist actors lies in the ability of P2P to enable value transfers internationally, avoiding regulated intermediaries.

It must be reiterated that up to now, cryptocurrencies have failed in delivering rapid payments for everyday use. Regardless, P2P is a moderately effective means for international transfers, which may see increased attention from terrorist actors.

Given the nature of VCs, a risk-based approach to regulation would make sense as a baseline template. In 2013, the United States issued a statement saying that it saw VC administrators and exchanges as money transmitters subject to regulation.[2] This early move by the United States has arguably acted as a deterrent. The American approach is contrasted with the Swiss approach, appearing comfortable with creating a framework to a technology seemingly uneasy with regulation. This was evident when the Swiss stock exchange launched a VC platform by Six exchange to facilitate trading, deal settlement, and asset custody.

Given that VCs are largely regulated on national interests and in national contexts, how can policy help streamline regulation? Well, to begin with, the regulatory infrastructure needs to be comprehensive, and offer clarification on the status of VCs. VCs are by design technologies that evolve rapidly. Current regulation therefore, would benefit from a nuanced approach characterising the risks VCs pose, depending on context, and purpose. Is Bitcoin more suspect to illegal activities than other forms of VCs, as an example. Secondly, in conjunction with a cohesive regulation mechanism, law enforcement capacity will require development. Among others, this would include specialized training in Crystal, a software programme designed to track activity on Bitcoin and Bitcoin blockchain.

Cryptocurrencies as a source of terrorist financing is of yet, limited. But to assume that this will remain static is potentially dangerous. With increased activity in Africa by terrorist actors using Islam as a cover, building, and later marketing a brand, is becoming part of a larger strategy. Not dissimilar to al-Qaeda’s tactics in areas under their control in Yemen. If terrorist actors are increasingly turning to digital methods to expand their influence, utilizing brand marketing as a medium of connecting with their target demographics, why should the use of VCs be any different? Whether through choice or necessity, VCs can offer terrorist actors another supply conduit, one which regulatory cohesion has yet to mould.

Christian Kurzydlowski has a PhD in history from Goldsmiths College, University of London. Having previously done a Masters of Arts at the School of Slavonic and East European Studies at University College London. He is passionate about interpreting current affairs through historical knowledge, to create scenarios for potential future trends. After a decade of globetrotting, he is back in his hometown of Toronto, Canada.

Footnotes:

  1. In this article, terrorism may seem to apply to groups claiming Islam as legitimacy. However, it is meant to cover any organization dedicated to achieving its aims through violent coercion.
  2. Money transmission services, according to the report, are defined as ‘the acceptance of currency, funds, or other value that substitutes currency to another location or person by any means’.

The views expressed in this article do not necessarily reflect the views of TransConflict.

 

 

 

 


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