As regulators and policymakers waver and try to decide whether cryptocurrencies have a future in the economy, early adopters, including terrorists and violent extremists, are exploiting a law enforcement blind spot. The ease with which money laundering and terrorist financing is carried out with the most dangerous cryptocurrencies and privacy coins is turning into a self-created security threat through bureaucratic inaction.
The recent indictment of a New York woman accused of sending funds to Hay’at Tahrir al-Sham, designated by the United States and the United Nations as a Foreign Terrorist Organization, is newsworthy because it is the exception, not the rule. But this does not necessarily mean that cryptocurrency financing of terrorism is itself a rare event. Rather, the few prosecutions that have been announced reflect the limitations of law enforcement capabilities in the United States and around the world, a problem that can and must be solved.
The US has only a small group of law enforcement personnel dedicated to tracking down and seizing cryptocurrency used for criminal purposes. Responsible agents are also tasked with investigating all aspects of cryptocurrency misuse, from extortion and money laundering to sanctions evasion and terrorist financing. This lack of targeted focus magnifies the potential for cryptocurrency misuse to go undetected, particularly in light of the ongoing migration of criminals to so-called privacy coins that encrypt wallets, such as Monero, and in some cases as well. the transactions themselves.
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In June 2020, my own Counter Extremism Project (CEP) located a notorious pro-ISIS website soliciting Monero (XMR) cryptocurrency donations “because it offers more privacy and security features than Bitcoin.” Months later, a website that supports the National Socialist Order and spreads violent neo-Nazi propaganda solicited donations via Monero, and a neo-Nazi chat group on Telegram published a guide on how to buy Monero on the dark web. Neo-Nazi accelerationist group The Base has also requested Monero cryptocurrency donations to facilitate training and unspecified equipment.
Although the US has the most advanced ability to track and seize cryptocurrencies used for criminal purposes, these and other privacy coins present technical hurdles that no country has fully overcome. Its encryption technology means that law enforcement does not know who has privacy coins and for what purpose they are used, and their users know it. The availability of so-called decentralized wallets, shareware downloadable from the Internet, outside of cryptocurrency exchanges also provides another layer of anonymity by removing a third party who is responsible for fulfilling customer identification obligations and due diligence procedures.
Value of cryptocurrencies received by misdirection, 2017-2022. Source: Chainalysis
In May 2022, the Senate Committee on Homeland Security and Government Affairs reported that “the IRS had to develop new partnerships with private companies to try to develop a tool or solution to track Monero transactions” and that “regulators have raised concerns about the use of privacy coins, noting that there is a ‘substantial difference between a more transparent cryptocurrency and more opaque transactions’.”
Congress, however, has yet to create new regulatory frameworks or fund the development of new technology tools for the technical hurdles facing law enforcement that would ensure that terrorist financing risks emanating from such privacy-enhancing technologies, but that reduce transparency, are appropriately mitigated.
In addition to blockchain analysis, officials should consider standards for behavior-based transaction monitoring and regulatory requirements for the tech industry to cooperate with law enforcement, given the intertwined use of cryptocurrencies, including privacy coins, with social networks, messaging services and crowdfunding platforms. These service providers can and should become part of the first line of defense. Still, the tech industry is unlikely to focus on countering the misuse of its services for terrorist financing unless motivated by regulation and compelled by liability risks.
Behavior-based monitoring of exchanges focuses on the actions of wallet holders and recognizes patterns that do not conform to the usual behavior of users. If such suspicious patterns occur, they are flagged for further inspection to determine if there are risks of money laundering, terrorist financing, or other financial crimes. Exchanges have access to real-time user information that is broader than the information available to traditional financial institutions, which rely heavily on information provided by their clients. For this powerful tool to be used most effectively, appropriate regulatory standards must be developed to guide its use by exchanges while adequately protecting user data.
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Stricter regulatory standards are needed for content monitoring and Know Your Customer procedures for social media, messaging services, and crowdfunding platforms when these platforms are used for commercial purposes, such as through webshops or campaigns crowdfunding. These internet platforms currently operate solely on their own unregulated standards, which presents an uneven defensive mechanism across multiple platforms and generally very low moderation standards.
Non-custodial wallets and exchanges, as advised by the Financial Action Task Force (FATF), should be considered high-risk technology. Therefore, their use outside of exchanges should always be viewed as a strong indication of nefarious activity. If exchanges choose not to require users holding non-custodial wallets to fully disclose their identity during a transaction involving such non-custodial wallets, it would be advisable for these exchanges not to process such transactions.
Ultimately, only through government cooperation with industry stakeholders, combined with effective regulatory standards for the fintech and technology industries, can substantial progress be achieved and substantially reduce the risk that cryptocurrencies and currencies of privacy are used to finance extremism and terrorism.
Hans-Jakob Schindler served as a member and then coordinator of the United Nations Security Council ISIL, Al Qaeda and Taliban Monitoring Team from 2013 to 2018 before becoming Senior Director of the Counter Extremism Project. He has a PhD. in international relations/international terrorism from the University of St. Andrews.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This post The Feds Must Stop Crypto-Funded Terrorism
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