Cryptocurrency Terror Financing Controversy: Chainalysis Alerts of Exaggeration and Misunderstanding

Following the Israel-Palestine conflict, the debate about using cryptocurrencies to fund terrorists continues. Both Binance and Tether have stated that they have cooperated in freezing multiple accounts and addresses to cut off Hamas's crypto funding. Senator Elizabeth Warren, known for her anti-crypto stance, has seized the opportunity to push the "Digital Asset Anti-Money Laundering Act," demanding a response from the Biden administration by the end of the month. However, blockchain analysis company Chainalysis is not pleased with some exaggerated metrics and flawed analyses. In an effort to correct some misunderstandings, Chainalysis has written a special article.

Israel orders freezing of crypto addresses! Seizes millions of dollars in assets, targeting to cut off Hamas's crypto funding.

Hamas crypto wallets under scrutiny: Propelling the Digital Asset Anti-Money Laundering Act? Hamas is well aware that cryptocurrencies are traceable.

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Accurate Blockchain Analysis Solutions Can Identify and Disrupt Fund Flows

Chainalysis emphasizes their primary mission to support clients in Israel and around the world as they work to disrupt, freeze, and seize assets that may be used to fund terrorist activities. However, they have also observed exaggerated indicators and flawed analysis of terrorist organizations using cryptocurrency, feeling the need to correct some misconceptions.

Terrorist organizations historically have used and may continue to use traditional methods such as financial institutions, hawala, and shell companies as their primary financing tools. While terrorist financing accounts for only a small portion of illegal cryptocurrency transactions, some terrorist organizations indeed use cryptocurrency to raise, store, and transfer funds.

Note: The term "hawala" comes from Arabic, meaning transfer, and is an informal value transfer system that involves brokers transferring money in vast non-traditional banking and financial transaction networks. It is mainly prevalent in Central Asia, North America, Africa, and India.

Of course, any funds raised by terrorist organizations, no matter how small, should be investigated. The inherent transparency of blockchain technology makes cryptocurrencies particularly traceable, making them less suitable for illicit activities, including funding terrorism. In fact, government agencies and private sector organizations with the right blockchain analysis solutions can collaborate to identify and disrupt fund flows, a feat not easily achievable through traditional forms of value transfer. Therefore, Chainalysis has specifically written about common pitfalls in analyzing terrorist flows on the blockchain, particularly related to traps in identifying and tracking through service providers.

Understanding the Role of Service Providers

There are two key components to analyzing the quantity and flow of funds related to terrorism: quantifying funds directly controlled by terrorist organizations and identifying service providers facilitating the flow of funds related to terrorism.

When examining known instances of terrorist financing, currency service firms and other service providers are often involved. These service providers handle volumes of money larger than individuals but smaller than exchanges, some resembling over-the-counter (OTC) brokers, while others may resemble street currency enterprises like hawala.

For example, when looking at transactions involving wallets known to be associated with terrorist financing in Chainalysis Reactor, at least 20 suspicious service providers were identified. These suspicious service providers received between 8.4 million to 1.1 billion USD worth of cryptocurrency from their transaction counterparts.

A closer look at one of the transaction counterparts revealed more evidence suggesting it might be some form of service provider.

Within 7.5 months, this address processed over 1,300 deposits and 1,200 withdrawals. Of the approximately 82 million USD worth of cryptocurrency received by this address, around 450,000 USD in funds were transferred from wallets known to be associated with terrorists. Given the activities of this address, the individuals or group controlling it are likely not the same as those controlling wallets associated with terrorists but are service providers facilitating terrorist financing activities intentionally or unintentionally.

Tracking Through Service Providers Can Lead to Inaccurate Conclusions

To an untrained eye, in the example above, the 82 million USD worth of cryptocurrency could appear to be raised for terrorist financing. However, it is more likely that only a small portion of these funds are used for terrorist activities, with the majority of funds handled by suspicious service providers being unrelated.

Thus, continuing to track funds once they are deposited with these service providers often yields no results. This is because only the service providers know which deposits and withdrawals are associated with specific clients and keep this information in their order books, information not accessible through blockchain or investigations like Reactor.

Collaborating to Combat Terrorism Financing on the Blockchain

Given the inherent transparency of blockchain technology, cryptocurrencies are not an effective solution for large-scale funding of terrorism. However, in investigating small fund flows related to terrorism, law enforcement and intelligence agencies can leverage blockchain analysis to investigate donors, facilitators, and cash-out points, collaborating with private sector organizations to shut down operations. Such efforts have successfully seized funds related to Hamas, Hezbollah, and other terrorist organizations, proving that understanding and disrupting the financial networks supporting terrorism is possible.

In fact, few may understand the challenges of using cryptocurrency to raise funds better than Hamas. On April 27, 2023, Hamas' military wing, AQB, announced the closure of its long-running cryptocurrency donation program. AQB stated that due to individuals being prosecuted for donations through cryptocurrency, they were concerned for the safety of donors.

Private sector organizations also play a significant role in combating terrorism financing activities. Especially exchanges, as they provide the gateway between cryptocurrencies and fiat currencies.

Coinbase Issues Declaration to Prevent Illicit Activities in Cryptocurrency

The U.S. compliance exchange Coinbase recently released a declaration to prevent illicit activities in cryptocurrency. Coinbase emphasizes maintaining a robust compliance program, including KYC due diligence, sanctions screening, suspicious activity reporting, and strong enforcement partnerships to prevent and detect illegal activities on the platform.

Furthermore, blockchain analysis technology enables Coinbase to track, report, and even prevent terrorism financing. This is why preventing the overseas proliferation of cryptocurrencies and ensuring the U.S. continues to be a global leader in combating financial crimes and terrorism is crucial.

Coinbase's report aligns with Chainalysis' findings, indicating that freezing cryptocurrencies ultimately relies on centralized exchanges! Just as Binance assisted in freezing cryptocurrency accounts related to Hamas for Israel, with the seized funds flowing into the Israeli treasury.

Elizabeth Warren Pushes Forward with the "Digital Asset Anti-Money Laundering Act"

According to The Block's report, Democratic Senator Elizabeth Warren and over a hundred lawmakers expressed concerns about how Hamas is raising millions of dollars through cryptocurrency and are expecting answers from the Biden administration by the end of the month.

Elizabeth Warren is a prominent anti-crypto legislator, having introduced the "Digital Asset Anti-Money Laundering Act" with Roger Marshall in December last year. The bill calls for the Financial Crimes Enforcement Network (FinCEN) to issue guidelines related to digital assets, expand KYC (Know Your Customer) rules to wallet providers, miners, validators, and other network participants. It also proposes that the Treasury Department prohibit financial institutions from using coin mixers, privacy coins, and other anonymous technologies for business transactions to strengthen U.S. anti-money laundering rules for digital assets.

In her letter, Warren stated:

Congress and the government must take strong action to thoroughly address the illegal financial risks of cryptocurrencies to prevent them from being used to fund another tragedy. We urge you to take swift and clear action to significantly reduce illegal cryptocurrency activities and protect national security for us and our allies.

Don't Throw Out the Baby with the Bathwater: Taiwan Restricts "Agreed Transfers" to Prevent Fraud?

Indeed, every coin has two sides, just as the inventor of the atomic bomb, Oppenheimer, never imagined his scientific invention would be used as a weapon of destruction.

The progress of technology is meant to bring more convenience to humanity, much like the analysis by Chainalysis, where most cryptocurrency transfers are not used for terrorist financing. Simply banning them will only hinder the progress of human civilization.

According to a report by ETtoday, Taiwan recently proposed measures to prevent internet banking "agreed transfers" from becoming a hotbed for fraud. The Banking Bureau is studying "pre-event, in-event, and post-event" preventive measures; Banking Bureau Director Chuang Hsiu-yuan stated that the banking association has drafted a new version of regulations for internet banking "agreed transfers," including considerations on whether the elderly are suitable for setting up agreed transfers, limits on transfer amounts, etc., which will be discussed in a meeting and details will be announced by the end of November.

However, based on cases prosecuted since 2011, there have been 427 cases of fraud related to agreed accounts, while the total number of fraudulent cases reached 59,728, with agreed accounts accounting for only 0.7%. Will such restrictions be effective? Should the general public be restricted from online transfers just because a few individuals were defrauded through agreed accounts? Should everyone go to the bank counters for transactions over a small amount of money? Or revert to cash transactions? Remember! Fraud rings are extremely cunning; if one avenue is blocked, they will find another. But banning tools commonly used by the public is a serious inconvenience!