Cryptocurrency, with its anonymity and decentralization, has revolutionized financial transactions. However, it has also opened doors for illicit activities, such as terrorist financing. Below we explore the role of cryptocurrency in terrorist financing, focusing on Hamas, a U.S.-designated terrorist organization.
Per a November 2023 Congressional Research Service (CRS) Report, Hamas has been soliciting cryptocurrency donations since at least 2019, but the scale and effectiveness of these efforts are uncertain. Between 2020 and 2023, about $41 million was reportedly received by cryptocurrency wallets linked to Hamas. Despite these figures, the actual amount Hamas received in cryptocurrency donations is questioned by some observers, who have highlighted the role of other, larger funding sources such as the Iranian government, extortion and de facto taxation in Gaza, foreign investments, and charities.
The U.S. Department of Justice (DOJ) has taken certain enforcement actions in response to Hamas’s cryptocurrency fundraising. These include the seizure of several websites and 150 cryptocurrency accounts linked to Hamas, as well as prosecutions of multiple individuals involved in money laundering crimes related to converting cryptocurrency into other forms of value. The Office of Foreign Assets Control (OFAC) has also taken steps, including sanctioning additional Hamas operatives and financial facilitators, issuing an alert to financial institutions to counter Hamas-related terrorist financing, and proposing enhanced recordkeeping and reporting obligations on covered financial institutions. OFAC also reached a massive settlement with Binance involving over $4 billion in penalties for money laundering and sanctions violations related to Binance’s failure to report transactions associated with Hamas’s Qassam Brigades, among other terrorist groups. Despite these actions, Hamas’s efforts to generate cryptocurrency donations continue to attract law enforcement, regulators, and potential donors’ attention.
As discussed in the CRS report, the growing role of terrorist fundraising through cryptocurrencies has spurred members of Congress to call on the Biden Administration to curtail illicit crypto activity. This attention continues amid debates on virtual asset governance and the need for additional regulation.
Balancing the potential of the virtual asset sector for financial innovation and inclusion with its susceptibility to misuse is challenging. The U.S. regulatory framework for countering the financing of terrorism (CFT) and cryptocurrency regulation is grounded in anti-money laundering (AML) and counterterrorism policies that predate the advent of virtual assets. The challenge lies in adapting existing AML/CFT policies and regulations to reflect the risks and opportunities posed by virtual assets.
The CRS report also describes the differing opinions of critics and supporters of increased virtual asset regulation. Some argue that regulation of the virtual asset ecosystem, especially internationally, is inconsistent. Others caution against overly broad regulations that may stifle innovation. Supporters of stricter cryptocurrency regulation highlight perceived gaps in AML/CFT compliance among Virtual Asset Service Providers (VASPs), including well-known crypto exchanges and mixers. U.S. authorities face challenges enforcing Bank Secrecy Act (BSA) requirements on foreign-headquartered transmitters, even if they conduct business with U.S. persons. Some question whether regulatory changes will significantly affect terrorist financing, given the public visibility of blockchain ledgers and the availability of other funding sources and laundering methods.
Legislation in the 118th Congress, such as the National Defense Authorization Act for Fiscal Year 2024 (NDAA; H.R. 2670 and S. 2226), includes provisions to address some aspects of the virtual asset sector. The NDAA bills would require AML/CFT examination standards for financial institutions dealing with crypto assets and a Treasury report to Congress on anonymity-enhancing services and recommended policy options. Additional legislative proposals have been introduced with a specific focus on curbing illicit financing linked to Hamas (e.g., H.R. 340, H.R. 6322, and S. 1647). H.R. 340 and S. 1647 propose additional sanctions targeting Hamas and oversight over the Biden Administration’s imposition of sanctions. H.R. 6322 requires the Treasury to provide Congress with an analysis of Hamas’s primary funding sources, a summary of U.S. efforts to disrupt the group’s illicit financial flows, and an assessment of actions taken to weaken Hamas’s ability to fund hostilities against Israel. The bill also calls for a multilateral strategy to prevent Hamas from financing global terrorism.
Echoing our earlier points and those emphasized in the CRS report, the use of cryptocurrency for terrorist financing presents a complex challenge for regulators and law enforcement agencies. While the U.S. has taken steps to counter this threat, the evolving uses of cryptocurrency and its global reach necessitate ongoing vigilance and adaptation of regulatory frameworks. The situation with Hamas underscores how cryptocurrencies are being used as a common source for terrorist financing, a development that regulators are grappling to keep pace with.