The crypto industry’s long quest for legitimacy and mainstream adoption hit another big hurdle this month, as US politicians and authorities intensified their focus on alleged links to the financing of terrorism.
High-profile lawsuits, including the criminal trial of Sam Bankman-Fried, founder of the failed FTX crypto platform, have already shed a harsh light on how the industry protects retail investors.
Last week 105 senators from both main US political parties, signed a letter calling on the Biden administration to detail steps it is taking to address the use of cryptocurrency by militant organisations, following Hamas’s attack on Israel earlier this month.
A few days later, the US Treasury said it would fight “acute money laundering and national security risk” by forcing more transparency on the opaque trades that pass through so-called crypto-mixing services. Mixers obscure the trail of crypto ownership and payments.
“Crypto is under massive government assault,” said John Reed Stark, former chief of the Securities and Exchange Commission’s office of internet enforcement.
“The venture capital money has moved on, and people are beginning to understand and realise that crypto’s only proven-use case is financing a devastating array of crimes and terrorism,” he said.
Regulators and politicians have warned for years that proscribed groups could use crypto coins and exchanges to raise and transfer funds. In 2020 the Financial Action Task Force — a global financial crime watchdog — identified red flags that could indicate digital assets’ use in terror financing.
Government efforts have sometimes been piecemeal.
In March the Commodity Futures Trading Commission, the US derivatives regulator, alleged company executives at Binance, the world’s largest cryptocurrency exchange, had received information “regarding Hamas transactions” in 2019. Binance has said it will fight the CFTC lawsuit.
Hamas’s October 7 attack on Israel has given greater urgency to efforts to cut off these channels.
In the week after the attack Israel closed more than 100 accounts on Binance and requested information on up to 200 additional accounts, the majority of which are on Binance. More than 150 crypto donation initiatives affiliated with Hamas and other groups have been identified by the Israeli authorities since the attack.
Binance confirmed it had “blocked” a “small number” of accounts since the summer and added that it “follows internationally recognised sanctions rules”. It declined to provide further comment.
“The international community should find a way to police this threat more effectively because it’s growing,” said Yair Samban, director at software firm Pegasystems who previously served in the Israel Defense Forces.
The US Treasury said this week that “Hamas often relies on small-dollar donations, including through the use of virtual currency” for fundraising.
However, estimates vary over how much money is raised through cryptocurrency gifts. Calculations are based on tracking the movement of money to suspected accounts, made possible by crypto’s use of public ledgers to record trades.
After clashes between Hamas and Israel broke out in May 2021, blockchain analytics company Elliptic estimated that suspected Hamas accounts had received more than $73,000 in bitcoin in just a few days. By July, Israel said accounts it identified as potentially affiliated with Hamas had received more than $7mn in crypto.
Chainalysis, a company used by the US government to combat crime involving digital assets, said such financing was “a very small portion of the already very small portion of cryptocurrency transaction volume that is illicit”.
It added that militant groups were likely to continue to use traditional methods such as financial institutions and shell companies as their main vehicles for financing.
Even so, analysts say crypto’s use in criminal activity leaves it exposed to political pressure.
“The risk the crypto industry faces is vocal, influential policymakers running with legislation that says: ‘look, not only can you not trust them because of FTX, but now we discover they’re even financing terrorism’,” said Tom Keatinge, founding director of the Centre for Financial Crime and Security Studies at UK think-tank Rusi.
That could make it harder for the biggest crypto companies, already fighting a rearguard action after FTX’s failure, to make their voice heard. Coinbase, the US exchange, has spent $2mn this year alone lobbying for specialist crypto rules, according to disclosure documents seen by the FT.
“It’s going to be harder to get legislation passed in the US, and there will now be a colder reception in Congress,” said one lobbyist who represents members of the crypto sector in Washington. “But the industry will argue this is all the more reason we need strong laws to govern crypto,” the person added.
Coinbase said it adhered to all global sanctions and added that it was a “shame that some lawmakers use world events to further an anti-crypto agenda”.
“We believe that government and law enforcement resources would be better spent on addressing the primary means of funding for these groups: fiat-based funding vehicles,” the exchange said.
