3 - 6 minute read
The urgent need for regulators to tackle crypto-financed terrorism has become apparent as early adopters, including terrorists and violent extremists, exploit a law enforcement blind spot. Cryptocurrencies, including dangerous privacy coins such as Monero, are becoming a security threat through bureaucratic inaction. The risk of cryptocurrencies and privacy coins being used to fund extremism and terrorism can no longer be ignored, as it is a growing concern not only for the US but also for the rest of the world.
The issue was brought to light by the recent indictment of a New York woman who was accused of sending funds to Hay’at Tahrir al-Sham, a group designated by the United States and United Nations as a Foreign Terrorist Organization. Prosecutions for financing terrorism with cryptocurrencies are rare, but this does not necessarily mean that it is a rare event in itself. Rather, the few announcements of prosecutions reflect the limitations of law enforcement’s capabilities in the United States and around the world.
According to Hans-Jakob Schindler, Senior Director of the Counter Extremism Project, “the US has only a small group of dedicated law enforcement personnel to track and seize cryptocurrencies used for criminal purposes.” The agents responsible are also tasked with money laundering, terrorism financing, extortion, and sanctions evasion. This lack of specific focus on cryptocurrency misuse broadens the potential for misuse of cryptocurrencies to be undetected, particularly in light of the steady migration by criminals to so-called privacy coins. These coins encrypt wallets and in some cases transactions themselves, making it difficult for law enforcement as their encryption technology makes law enforcement largely blind to who holds privacy coins and to what end they are used.
Privacy coins’ anonymity also comes from the availability of decentralized wallets, which are available for download outside of cryptocurrency exchanges. These wallets provide an extra layer of anonymity by removing a third party responsible for identifying customers and due diligence procedures. Regulation and standardization of the tech industry cooperation, especially social media, messenger services, and crowdfunding platforms, are needed. For instance, noncustodial wallets and exchanges should be considered high-risk technology, as advised by the Financial Action Task Force (FATF), and their use outside of exchanges should always be considered a strong indication of illegal activity.
Behavior-based monitoring by specialist exchanges can be an effective tool by focusing on the actions of wallet holders and recognizing patterns that do not fit the usual behavior of users. If suspicious patterns occur, they are flagged for further inspection to determine whether they involve risks such as money laundering or terrorism financing. Appropriate regulatory standards should be developed to guide the use of behavior-based monitoring by exchanges while protecting user data.
The Bottom Line
Stronger regulatory standards for content monitoring and ‘Know Your Customer’ procedures in all aspects of the fintech industry, including internet platforms such as web shops or crowdfunding campaigns, are needed. Only through governmental cooperation with industry stakeholders and effective regulatory standards for the tech and fintech industries can substantial progress be achieved, and the risk of cryptocurrencies and privacy coins being used to fund extremism and terrorism be substantially reduced.
