A look at the links between crypto and terror

As we mark the 17th anniversary of the day that changed the world, September 11, it is worth pausing to consider the sobering reality of what has transpired since. Though attacks on the scale of al-Qaeda's assault on New York and Washington remain mercifully rare, total terrorist incidents have increased more than sixfold in the years since -- from 1,907 in 2001 to 13,488 in 2016, per the Global Terrorism Database. It is for that reason that governments around the world, including here in the U.S., continue their vigilance and have not stopped seeking ways to prevent this kind of asymmetric warfare.

While there are political arguments to be made about the war on terror, including its costs, methods, and record of success and failure, this post is not about those topics. Rather, it is a look at one portion of the U.S. government and its efforts to disrupt the activities of terrorist groups. The House Committee on Financial Services has a subcommittee tasked with "Terrorism and Illicit Finance" which held a hearing four days ago. You may be asking why you are reading about this on The Block. The answer: a report from a think tank, the Foundation for Defense of Democracies, delivered to Congress at that hearing which looked into how terrorist groups are financing them -- including via the use of cryptocurrencies.

"The good news," Yaya Fanusie, a senior analyst from the foundation testified. "is that most terrorists, particularly those operating on jihadist battlefields, inhabit environments that are not currently conducive to cryptocurrency use." But Fanusie had a sobering conclusion: "Illicit actors adopt new technologies earlier than the broader public. When paper checks, credit cards, and PayPal each emerged, criminals exploited them early on. There are enough case studies of jihadist groups experimenting with cryptocurrencies to suggest that law enforcement and the intelligence community must prepare for terrorists to try to exploit digital tokens as the technology spreads."

Fanusie's testimony (a complete record is here and is worth reading if you're interested in the intersection between crypto and terrorism) highlights some important examples of jihadist groups attempting to exploit new means of fundraising. It's not the first time the question has been asked either. A year ago in Foreign Affairs, the question was posed: "Are Terrorists Using Cryptocurrencies?" The conclusion then? "[T]he use of digital currencies among terrorists is not widespread—yet. Neither terrorist financing methods nor cryptocurrency technology is static, however, and the world could soon see the worst-case scenario unfolding."

That the status quo has not moved much in a year should not be especially surprising. But for many, it might be. Earlier this year, The Next Web reported that as many as 44% of bitcoin transactions might be in support of illegal activity -- mostly related to drugs -- according to the researchers, academics in Australia and Latvia. And indeed, these concerns are hardly new: the Silk Road marketplace was busted back in 2013 over its use in all sorts of nefarious activities.

And the effect of those high-profile examples lingers in the minds of many. Just last month YouGov published a survey of attitudes toward cryptocurrency. When respondents were asked: "Do you think cryptocurrencies are more oftenly used to make legal or illegal purchases, or is it about equal?" a total of 44% answered that crypto was used at least as often for legal or illegal purposes. A third of that 44% felt crypto was used "much more often" in nefarious ways.

With all the coverage of both terrorism and broad concerns around crypto and illegal activities, then, it should be no surprise that the lens gets focused on the crossover. But with that, Fanusie of the foundation found relatively little to be concerned about.

He talked about an early effort, dating back to 2014, where "Virginian teenager Ali Shukri Amin published a blog article explaining how supporters of the Islamic State could help fund the group by sending bitcoins through anonymous software wallets." The canary in that coal mine was the potential for the pseudonymous nature of bitcoin might allow those wishing to support jihadists to do so relatively "safely."

But the record the bitcoin blockchain leaves behind actually helps authorities trace the flow of funds once they identify a crypto wallet associated with a terrorist group. Indeed, Fanusie sees the groups adapting: "I have watched them adapt and grow more sophisticated in their attempts to leverage financial technology," he says. "For example, some groups are moving beyond bitcoin, the most popular cryptocurrency, to alternatives such as Monero that provide greater anonymity. There are only a few publicly verifiable cases of terrorists pursuing cryptocurrency financing, but these instances show that elements within jihadist networks are keenly aware of the technology’s potential for secretive peer-to-peer and cross-border payments."

While that sounds like an alarm bell, the reality is evidence to date shows little success among terrorists raising funds using crypto. In one example, a terrorist-affiliated group, the Mujahideen Shura Council, "continues to receive deposits every month or so, usually in the low hundreds of dollars ... as of early September 2018, it contained over $1,000 in bitcoin."

Still, while the sums today are small, the risks remain salient. With traditional banking, once authorities locate accounts being used by a jihadist group they can typically cut off access or seize funds. With crypto, that task is much harder. Fanusie successfully fingered a group purportedly raising funds for fighters in Syria called Al-Sadaqah. 

Like the council above, it seems to have achieved little beyond a few small contributions, of up to $685 worth of bitcoin. But the group appears to still be in control of its bitcoin wallet and continues to probe other avenues, including anonymous cryptos like Monero and Dash. It has also shown creativity to make tracing funds more challenging, working with a third-party gaming site to effectively launder donations to the organization. (No evidence suggests the game site was even aware of the role it might be playing.)

Fanusie made clear that it is incumbent upon governments to work with crypto exchanges, which are moving to support regulations like "Know Your Customer" laws in the U.S. to pierce the anonymity veil when needed. Still, decentralized exchanges without clear account ownership will propose an ongoing technical challenge to government's "old ways" of dealing with terrorist fund flows.

Which leaves us with perhaps the best and worst news out of the hearings. Today, terrorists are often far from technological infrastructure and need to pay people in familiar currencies, i.e. cash. Paper money remains reasonably portable, fairly anonymous, and very difficult to trace. That makes things like U.S. dollars a preferred currency of global evildoers even as they explore how crypto might make it easier for them to fund nefarious activity in the future.

Still, as crypto adapts and gains acceptance, it will likely be a more workable medium of exchange for terrorist groups. When arms dealers can do a near-the-battlefield transaction for weapons or ordnance and accept whatever token of choice from a portable wallet, perhaps the worst fears for crypto might be realized.

In the meantime, on the day we must never forget, we can remember not only those taken from us but also how little technology was employed by the 9/11 attackers. Their weapons were not encryption and cyber attacks, but rather box cutters, rudimentary flight training, and a willingness to martyr for their cause. That government takes a holistic approach to fighting these groups and their tactics are, directionally, something to be lauded. That so far it has not chosen to demonize cryptocurrency as the tool of terrorists is a small thing to appreciate as well, especially for supporters of the technology.