Although Hawala networks, Hundi, and Cash Smuggling are popular ways of terrorist financing, these methods are increasingly risky due to increased police monitoring [source]. Therefore, due to the anonymous nature of transactions, insufficient legislation, and lack of police training in terrorist financing, Cryptocurrency is increasingly popular as a means of terrorism funding.
Traditionally, Hawala financing has been one of the most popular means of terrorist financing. Hawala is an Islamic-compliant system transporting money domestically and internationally [source]. It does so via dedicated Hawaladers, allowing for an undocumented transfer and exchange of cash. Although these systems are excellent as a means of terrorist financing due to regulatory barriers and anonymity, states are increasingly posing laws surrounding Hawala remittance to combat money laundering. Where does this leave terrorism funding?
Cryptocurrency may be a good alternative. Even if states can legislate against this comprehensively, it will still take time to develop the technological means to locate such threat actors. This is unlikely to occur soon.
Cryptocurrency transactions go through the following lifecycle:
- Remitter uses a private key to access cryptocurrency wallet
- Remitter uses receiver’s Bitcoin address to specify how much and where they would like to send their currency
- The transaction is sent within the next available Block
- Block is sent to every node within the network
- Available nodes will validate the transaction
- Once verified, Block is added to the existing blockchain
- The update is distributed to the entire network
- The transaction is complete and documented across the network; the receiver gets confirmation
Therefore, there is a public record of every Cryptocurrency transaction. This seems to be a paradox, as Cryptocurrency is also reportedly anonymous. Due to the decentralised nature of Cryptocurrency, users do not need to provide Know Your Client (KYC) information to open an account or begin trading. Therefore, terrorists and sympathisers can bypass traditional banking institutions and regulations.
Jammu & Kashmir Conflict
Research suggests that supporters use Cryptocurrency terrorist financing for groups in Jammu and Kashmir, ultimately fueling violence within the region. Detained extremists disclosed that such groups have been using Bitcoin, and other cryptocurrencies, since as early as 2014 [source].
Most notably, members of Ansar Al Islam (AAI) and Ansarullah Bangla Team (ABT) have both confessed to sending large quantities of Cryptocurrency to terrorist groups within Kashmir [source].
It is unknown exactly how much Cryptocurrency sympathisers have sent to terrorist groups; however, the US government seized around US$2 million in Cryptocurrency in August 2020. They seized hundreds of cryptocurrency accounts and several websites associated with terrorist organisations [source].
Cryptocurrency at Large
The example of Kashmir is not isolated. There are numerous examples of Cryptocurrency terrorist financing as a means of both financing groups and money laundering. There are multiple dark web websites that facilitate the transfer of Cryptocurrency to terrorist groups [source]. A key example is SadaqaCoin, which allows sympathisers to buy arms or other supplies directly through Cryptocurrency [source].
Currently, research suggests its adoption is still relatively low due to the lack of credit guarantee and difficulty of conversion [source]. However, analysts believe it is likely to increase in usage in future [source]. Terrorists and sympathisers may see Cryptocurrency as a relatively low risk method of remittance due to the difficulty in tracing the transaction back to its origin. The COVID-19 Pandemic limiting travel and conventional forms of money transfer will only increase the use of Cryptocurrency as a form of terrorist financing [source].
The decentralised and anonymous nature of cryptocurrencies makes it challenging for authorities to trace a remittance back to its origin. These transactions move internationally, meaning that many remittances can bypass regional legislation. This creates a unique issue for authorities aiming to stop terrorist funding through this means.
Whilst nations are trying to do more to prohibit such illicit activity, the legal frameworks in place do not go far enough to stop such behaviour. Most countries have anti-terrorism legislation, but few have specific laws surrounding the use of alternative remittance systems. Similarly, most countries do not yet have the technical ability to identify the use of Cryptocurrency for terrorist financing [source]. This, of course, provides such non-state actors with significant fundraising opportunities.
Authorities are likely to strengthen legislation surrounding Cryptocurrency in the future, though it is still early days. The EU Council adopted a mandate in December 2021 for negotiations with the EU Parliament on updating the existing rules surrounding the use of Cryptocurrency for Money Laundering and Terrorist Financing [source]. Should further rules be passed, these will likely oblige Crypto service providers to collect more information on asset holders. However, how this would be done in practice is unclear.
Cryptocurrency is increasingly an attractive means for terrorist financing due to transfer speed and low risk. Whilst many states have already highlighted Crypto as a significant risk in terms of terrorist financing and money laundering, an unprecedented multinational effort would be required to curb this activity.