New Study Finds Cryptocurrency to be an Ineffective Means of Terrorist Financing

A new study published by the Foundation for Defense of Democracies (FDD) Center has concluded that, for the time being, cryptocurrency appears to be a largely ineffective means for terrorist financing. Amidst growing efforts from central governments in places like Japan and Russia to develop software designed to track cryptocurrency transactions, FDD CSIF director of analysis Yaya Fanusie writes that cryptocurrency is a “poor form of money for jihadists.” Fanusie adds that “cold hard cash is still king.” The report has been linked in a press release from the US House of Representatives Financial Services Committee.

Details of the Study

Reports from the study provide a detailed outline of how terrorist groups like the Islamic State and al-Qaeda have been actively working in the digital money economy. However, evidence indicates that thus far terrorist groups have had limited success in their cryptocurrency fundraising efforts.

“By preparing now for terrorists’ increasing usage of cryptocurrencies, the U.S. can limit the ability to turn digital currency markets into a sanctuary for illicit finance,” writes the study’s author, Yaya J. Fanusie.

It’s no secret to anyone familiar with crypto that stopping terrorist financing through the digital money economy has become a growing point of concern for governments worldwide. In fact, in the last two weeks both Russia and Japan have announced cryptocurrency tracking programs costing hundreds of thousands of dollars to combat illicit activity.

Terrorist groups are always adapting their methods of financing, but the FDD report suggests that most terrorist groups, particularly those headquartered in jihadist battlefields, are not operating under suitable conditions for cryptocurrency use. These groups typically depend on cash (the most anonymous funding method), given that they are working within areas with unreliable technology infrastructure.

“In addition, cryptocurrencies are baaed on Distributed Ledger (blockchain) technology (DLT), where users’ pseudonymous transactions are recorded for public viewing,” the FDD reports explains. “This leaves a trail that unsophisticated users may find difficult to obfuscate. However, as digital currency usage grows, such barriers may fall away.”

While terrorist groups may for now lack the necessary skills to effectively fund their operations through digital currency, Fanusie warns that governments should nevertheless prepare in the event these circumstances may one day change. The FDD report cites numerous blog posts and web publications by tech savvy youngsters offering guidance to the Islamic State and other jihadist groups on how to anonymously use cryptocurrencies like Bitcoin and Monero.

“It is not just fighters that terrorist networks seek to support with cryptocurrencies,” Fanusie writes. The report explains that it’s also jihadist media sites that are attempting to integrate cryptocurrency fundraising campaigns into their platforms.

Recommendations for Crypto Counter-Terrorism

The FDD report concludes that “cryptocurrencies and blockchain technology are not illicit and should not be feared.” However, in order to maintain the safety of cryptocurrency, the US must keep up with this emerging technology and address new risks likely to appear in the future. Fanusie recommends that all counter-threat financing units learn blockchain analysis and that financial authorities engage more with cryptocurrency exchanges to prevent corruption and the developing of underground markets.

Lastly, the cryptocurrency community as a whole should be vigilant when it comes to flagging illicit wallets:

“Law-abiding cryptocurrency exchanges are incentivized to prevent illegal transactions on their platforms, but do not have the capacity to identify all illicit addresses on every blockchain… To address this gap, enthusiasts who care about the integrity of the cryptocurrency industry should flag activity associated with terrorists and other illicit actors… In fact, such a resource could be built as a blockchain-based platform, where registered users who credibly report illicit activity are rewarded with a cryptocurrency token. This could be applied not only to flag terrorist transactions, but also to hinder coins associated with ransomware and cyber criminals from moving throughout the blockchain.”