The use of virtual currencies to fund nefarious activities merits attention from investors and entrepreneurs, specifically the potential for currencies to be used for terrorist financing. A June article in The Cipher Brief, a security publication focused on global risk, highlights the potential strategic threat posed to US national security interests by cryptocurrencies. The article suggests to policymakers that they need to take steps to better understand the technological developments and accessibility of currencies such as Bitcoin and Ether, including identifying ways for the financial sector, technology providers, virtual currency exchanges, and law enforcement to work together to collect and share information that could indicate terrorist usage of the currencies.
The threat of cryptocurrencies enabling terrorist financing is minimal at present, but the anonymity afforded by the virtual currencies combined with the ever-improving abilities of the authorities to track traditional funding methods, increases the likelihood that terrorist organizations may turn to alternative markets to manage or raise funds.
There are limited examples of terrorist organizations employing cryptocurrencies as a means of fundraising or for anonymously paying for goods and services for a few reasons. First, Julia Solomon-Strauss notes in her article, these groups have other options that are serving their needs (e.g. cold hard cash and a global trust-based money transfer system known as hawala). Second, the speed and anonymity they often require can be obtained using cash transactions, which any currency requiring conversion back into a fiat currency does not offer (i.e. cryptocurrencies). The ability to rapidly move funds around the world via a decentralized and relatively unregulated method, however, is likely to hold increasing appeal as more coin options appear and illicit organizations incorporate technological advances into their operations.
BLOCKINTEL’S TAKE: The use of cryptocurrencies by terrorist organizations to fund their operations is limited, at present. The reality, however, is that groups adapt and could find a way to incorporate Bitcoin, Ether, and others into their fundraising and payment mechanisms. However, it is a myth that these currencies are anonymous. The blockchain is immutable and publicly visible all the way back to the beginning; every transaction is tracked. A few projects are working on truly anonymous systems, however, such as Monero.
If you are an entrepreneur, creating your own coin, or participating in a cryptocurrency startup, you need to spend some time considering how to make it more difficult for nefarious actors to use your site, platform, or coin to conduct their business. If robust anonymity is your contribution to the sector, consider the third order effects. This is not to say you should not innovate, create, and build upon existing platforms just because someone could use your creation for unsavory activities, but it may serve you down the line to have considered these things, particularly in the face of government regulation or questioning.
If you are an investor chasing the latest ICO or scouting out the latest protocols, keep on doing what you are doing, which likely includes a lot of homework on the companies, individuals involved, and the core technologies or contributions. As part of your risk assessment, asking simple questions about if and how the company plans to address potential security issues (money laundering, hacking, users up to no good, etc.) will help you determine if your investment is going to a company or individual aware of the growing wave of security concerns building around cryptocurrencies. If they are not, you can either help get them there or move on to your next option.
For more on this topic, check out this blog post from RAND about terrorist usage of cryptocurrencies.