Does Crypto Finance Hamas and Other Terrorists?

Does crypto finance Hamas and other terrorists?

In the last few weeks, we’ve heard a lot of back-and-forth on this question without ever really getting a definite conclusion.

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It all started with a report in the Wall Street Journal in early October claiming that Palestinian groups had received about $130 million in crypto to finance their war in Israel.

Shortly after, 100-plus U.S. lawmakers, led by Sen. Elizabeth Warren (D-MA), signed a letter to President Biden raising concerns about crypto’s role in financing terrorism. (Warren is leading efforts to pass a digital assets anti-money laundering act.)

After that, blockchain forensics groups, such as Chainalysis and Elliptic, said the numbers reported by the WSJ were likely “overstated.” (The research the WSJ initially cited was provided by Elliptic.) The estimates, Chainalysis wrote, included funds “not explicitly related to terrorism financing.”

Experts like Chainalysis argue that blockchains help reveal illicit funding flows, which is why Hamas actually disavowed crypto fundraising back in April. Its supporters were getting wrapped up precisely because they used public cryptocurrency networks, like Crystal, allowing intelligence agencies to track them.

The crypto community, led by commentator Nic Carter, has called for the WSJ to disavow its original report, lest it poison the wider debate about crypto regulation. But the WSJ has refused to do so.

And, in fact, this weekend it showed why the question of crypto financing of terrorism is so complicated.

The new report, based on findings from Israel’s National Bureau for Counter-Terror Financing, shows that Hamas has moved on from using bitcoin, instead preferring the tether stablecoin and the Tron blockchain.

Per the report:“The use of crypto by the Gaza money exchanges was more sophisticated than Hamas’s earlier fundraising efforts in bitcoin. Digital wallets connected to the companies moved funds overwhelmingly in the form of the stablecoin tether on a blockchain system called Tron, which has heightened user privacy.

To obscure the money trail, the exchanges often changed the wallet addresses they used each day, and sent funds through mixers, Israeli officials said.”Intelligence chiefs say hawala networks – informal remittance systems – have funneled millions of dollars from Iran to Hamas’s military wing and that the wallets identified and targeted by Israel are probably just a fraction of those in existence. (Mixers combine currency transactions, making them harder to trace.)

All of which shows the adaptability of terrorists to find new ways to cover their tracks. As the WSJ shows, when Hamas found bitcoin was too public, it switched to an asset and chain that offered better secrecy.

“Terrorists are not stupid. They look at the capabilities of blockchain intelligence companies and they start to understand ‘okay, well, they can track us.’ So we need to be clever,” said Nicholas Smart, head of research at Crystal, another blockchain analytics firm.

In the past, terrorists were said to have used privacy coins like monero. But because of the relatively low liquidity of such projects in secondary markets, they are less popular now. Tether, on the other hand, has a market cap of $87 billion. Smart said there are limits to what online researchers like himself can unearth.

Blockchain analysis might be good at showing the “raise,” “store” and “move” aspects of crypto transactions, but not necessarily how the money was spent. One issue with the original WSJ reporting was it quoted numbers showing the amounts of crypto raised, but not the amount that actually reached terrorists or the front lines. “Crypto solves some problems for terrorists but creates others,” said Smart.

Analytics reveals little about private peer-to-peer transactions, for instance. “It’s a big unknown how [crypto] is being used in covert channels. If there’s a Signal group between members of a terrorist group and un-hosted wallets, we can’t see that. That’s where intelligence services earn their money and understand what’s going on,” Smart said in an interview.

In other words, the inherent transparency of blockchains might help us to discover more about terrorism financing. But it’s a mistake to think it reveals everything and that analytics firms can give us the final word on whether crypto funds groups like Hamas. Smart said we need old-fashioned human intelligence allied with the blockchain type to get at the truth of these complicated funding flows.

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