BY DR SOHA MAAD
Introduction
There are some evidences that digital currency is used in terrorism. Moreover, digital currency was used in Russia-Ukraine war in useful and harmful ways to help both sides in Russia and Ukraine. This article explores the relationship between digital currency and terrorism and war support. The article refers to world research and news from RAND Research for United States Defence and Intelligence, Oxford press, New York Times, and European Commission. The article starts with a background overview covering widespread use and growth of digital currency and the various uses of money in terrorism finance. Case studies of the use of digital currencies are considered. The article also sheds light on the use of digital currency in Russia-Ukraine war. Following this background overview, the article examines the potential of digital currency in financing terrorism and regulations to prevent the use of digital currency in terrorism and wars. The article concludes with recommendations for Arab banks and government authorities to be aware of misuse of digital currencies in terrorism and war and urges them to establish and adopt a regulatory framework that supports sound and beneficial growth of digital currencies whilst preventing potential misuse in terrorism and wars.
Growth of digital currency
Digital currencies including cryptocurrencies such as Bitcoin, have gained considerable popularity over the past several years. Although digital currencies have many potential uses in everyday life, they often carry an association with illicit transactions such as purchasing illegal drug on Dark Web marketplaces or in ransomware attacks such as WannaCry, which affected companies and government agencies including the British National Health Service in 2017.
Many new digital currencies, also known as cryptocurrencies or crypto and Virtual Currencies (VC), emerged in the past few years, besides Bitcoin. These include Omni Layer (MasterCoin), BlackCoin, and Monero, which are more private and secure than Bitcoin. Zcash is another cryptocurrency that offers a higher degree of privacy and provides the potential ability to use and transfer currency offline, which could make it difficult for law enforcement to trace illicit transactions. Other cryptocurrencies including Hawk, allow fully private contracts and transactions on the Ethereum blockchain. The Ethereum blockchain is a distributed computing platform and operating system.
Given the growth and diversity of digital currencies, there is a great need to understand the full potential for terrorist use of cryptocurrencies, including options for identifying and tracking their use. The sophistication and technological capability of terrorist groups, and the potential for such use may increase in the future, given expected technological developments. Currently, digital currencies are being used in innovative ways in terrorism.
TERRORISM FINANCE
According to RAND research, terrorist organizations use money in three ways: receipt, management, and spending. There are several subcategories for terrorist use of money, as shown in Table 1.
Large receipted sums are difficult to manage or spend anonymously, and cryptocurrencies still require infrastructure to manage and spend. There is some current evidence of the adoption of cryptocurrencies by terrorist organizations or the motivation to do so, unless some countermeasures are adopted and cryptocurrency technology evolves.
use of digital currency in terrorism
Concerns about the use of digital currency to enable terrorist activities have yet to manifest, but future improvements in digital currency technologies will likely have a significant long-term effect on terrorism finance. The speed at which these technologies are adopted, and the details of which technologies are used and how they are deployed, are critical in facilitating terrorism. Regulation and oversight of digital currencies, along with international cooperation between law enforcement and the intelligence community, are important steps to prevent terrorist organizations from using digital currencies to support their activities.
Current cryptocurrencies are not well matched with the totality of features that would be needed and desirable to terrorist groups but might be employed for selected financial activities. RAND research shows that, should a single cryptocurrency emerge that provides widespread adoption, better anonymity, improved security, and that is subject to inconsistent regulation, then the potential utility of this cryptocurrency, as well as the potential for its use by terrorist organizations, would increase.
According to RAND findings, factors that will increase cryptocurrency viability for terrorist organizations are:
· A growing market and more-widespread usage.
· Widespread adoption of second-generation cryptocurrencies.
· Increased use of cryptocurrencies in complementary and adjacent markets.
Factors that will decrease cryptocurrency viability for terrorist organizations are:
· Uncertainty of cryptocurrencies.
· Law enforcement cooperation in cybersecurity domains and cryptocurrency markets.
· Incorporation of cryptocurrency systems into the regulatory system.
· Discovery of fraudulent exchanges and theft of improperly secured monies.
RAND Research framed cryptocurrency properties that can facilitate terrorist activities. These properties are anonymity, usability, security, acceptance, reliability, and volume. Anonymity refers to the ability to hide and
protect the identity of the user. Usability refers to the ease with which the user can conduct transactions and manage his or her own currency. Security refers to the degree to which the cryptocurrency infrastructure
secures the confidentiality, integrity, and accuracy of transactions and user accounts. Acceptance is the degree to which the currency is accepted by a user community as well as the size of the community of
users. Reliability refers to the speed and availability of transactions, as viewed by users. Volume refers to the time-averaged aggregate size of transactions in the cryptocurrency infrastructure.
The use of cryptocurrency by terrorist organizations places greater pressure on the international community to fight terrorism financing. The incentive for terrorist organizations to use cryptocurrency is largely due to its anonymity and the lack of strict national financial supervision. The reasons for reducing the use of cryptocurrency by terrorist organizations are the price of cryptocurrency and internal development mode, the strengthening of international organizations and national supervision, and constant attacks. In addition, the traditional means of terrorist financing have not been fatally hit, and still function effectively to raise funds for terrorist organizations. Therefore, the use of cryptocurrencies by terrorist organizations is limited.
the use of BITCOIN and blockchain IN TERRORISM
Bitcoin is both a protocol for securely storing and transmitting tokens (virtual coins) and the name of the unit of value in the system. Bitcoin revolves around a public ledger called the blockchain, which is maintained by an online peer-to-peer network that tracks transactions and maintains a complete history of verified transactions. Media reports have outlined the notion that some, or even many, terrorist organizations have unlimited, untraceable sources of digital money, such as Bitcoin. Policymakers also have raised concerns about terrorist use of Bitcoin.
Cryptocurrency and Terrorist Finance in Asia
According to The Diplomat article by Asif Muztaba Hassan, cryptocurrency, is viewed by many as the future of financial transactions. While the rise and further development of crypto are widely celebrated, speculations about its traceability, and its potential to be used in criminal activities, always loom in the horizon.
A handful of states around the world have already taken measures to regulate crypto transfers, in line with the Financial Action Task Force’s (FATF) 2020 standardized guidelines, securing virtual assets from money laundering and terrorist financing. Yet, many states in Asia, including those with a history of terrorism, are falling behind, increasing crypto’s potential to be a threat multiplier.
Indonesia, for instance, is still an observer in the FATF, and does not face any obligations to implement the guidelines, while the Philippines is on the brink of being included in the FATF grey list owing to “strategic deficiencies” in the country’s anti-money laundering and terrorism financing systems. Most importantly, however, these states still prefer to heavily invest in monitoring conventional financing channels, exposing large gaps in the political will to actively track crypto flows.
USE OF DIGITAL CURRENCY IN RUSSIA-UKRAINE WAR
According to research by Aidan Arasasingham in the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. and New York Times article by Emily Flitter and David Yaffe-Bellany, the Russia-Ukraine war is the first major conflict with a prominent role for cryptocurrencies. Since Russian forces invaded Ukraine on February 24, 2022, the United States and its partners have levied an unprecedented series of sanctions on Russia. Cryptocurrencies can be used by Russian actors to bypass sanctions. More broadly, the Russia-Ukraine crisis comes at a time when policymakers are trying to decide how to regulate digital assets. United States President, Joe Biden, signed an executive order calling for a government strategy on digital assets, including to mitigate national security risks and illicit finance. The European Parliament is debating whether to impose energy-use standards on cryptocurrencies. The prominence of crypto in Russia-Ukraine conflict could influence global perceptions of the technology, including governments considering new regulations.
Decentralized digitized assets are emerging as democratizing force in global finance. In the context of Russia’s invasion of Ukraine, crypto can provide an alternative to the Russian Ruble, facilitating capital flight from Russia. Moreover, crypto can provides average Russians and Ukrainians a store of value and medium of exchange that could reduce the humanitarian costs of the sanctions and war. Crypto is also considered as an important medium for donations to the Ukrainian government that complements Western aid. However, the decentralized and underregulated nature of crypto may be a vehicle for illicit transactions and a mean for Russian individuals and entities to bypass sanctions.
Crypto can be leveraged for illicit purposes such as evading sanctions, but in practice, technological barriers, market structures, and limited liquidity will make it difficult for the sanctioned Russian actors to evade sanctions at scale using crypto as detailed below:
- Technological barriers: Cryptocurrencies rely on blockchain technology, digital public ledgers that are transparent and permanent. Because all transactions are logged on the blockchain, cryptocurrencies are the digital equivalent of “marked bills”. Bitcoin and many other crypto assets are pseudonymous, not anonymous, meaning that their transactions and wallets can be traced. If a wallet can be linked to an entity or person, the actor can be identified.
- Market structure: Most crypto is transacted on centralized exchanges such as Binance and Coinbase because they offer convenient platforms and custodial services for crypto wallets. These exchanges must abide by Know Your Customer, Anti-Money Laundering, and Countering the Financing of Terrorism (KYC/AML/CFT). This means that authorities can identify who holds the crypto assets and can order the accounts of certain entities to be suspended or frozen. Russia’s crypto exchange rules are more relaxed. Consequently, it might not be clear which entities hold crypto assets in Russia.
- Limited liquidity: Crypto trading volumes between Russian Ruble and the two most liquid cryptocurrencies, bitcoin and tether, have more than doubled. However, the value of these transactions remains relatively small.
Since the war began, the Ukrainian government has used crypto to facilitate donations and for military and other purchases. Kyiv was relatively well positioned to take advantage of crypto networks. Ukraine was ranked fourth globally for crypto adoption. In September 2021, Ukraine formally legalized crypto.
The Ukrainian government is publicly soliciting crypto donations online. After initially accepting only bitcoin and tether, the Ukrainian government has expanded its capacity to now accept over 70 forms of crypto. Ukraine’s largest crypto exchange, Kuna, helped organize this effort. Though some institutions have donated to Ukraine using crypto, most donations come from individuals around the world. As of March 9, 2022, the Ukrainian government claimed to have raised nearly $100 million from crypto donations. The crypto donations allow Kyiv to obtain funding instantly and are faster than soliciting donations settled through traditional financial channels.
According to Euronews, digital currency donations have helped fund Ukraine’s army, bolstered relief efforts and will help the country rebuild.
According to Tradingplatforms.com, crypto donations reached over $100 million (€94 million).
According to New York Times, Russia could use cryptocurrency to blunt the force of United States Sanctions. Russian companies have many cryptocurrency tools at their disposal to evade sanctions, including a so-called digital ruble and ransomware.
The Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dollars. Hacking techniques like ransomware could help Russians steal digital currencies and make up revenue lost to sanctions. While cryptocurrency transactions are recorded on the underlying blockchain, making them transparent, new tools developed in Russia can help mask the origin of such transactions. That would allow businesses to trade with Russian entities without detection.
digital currency reulations
Counter Terrorism Finance (CTF) efforts often focus on tracking money and preventing financial transactions that might be used to support attacks and other terrorist activities. However, there are concerns that terrorist organizations might increase their use of digital cryptocurrencies such as Bitcoin to support their activities.
Regulatory oversight in the United States, Europe, and China makes it difficult to obtain bitcoin anonymously on an exchange. However, if trading occurs on a decentralized exchange or in a country without regulatory oversight, the transactions could become much harder to trace.
It is important to note that not all digital currencies are alike and that the technology behind encryption and decryption is also rapidly evolving in a constant race. For example, Bitcoin is usually pseudonymous, not anonymous, meaning that interactions can be tracked and often traced to physical individuals. For law enforcement agents this means that smuggling funds in Bitcoin is more difficult to detect, but once it has been detected, it is sometimes easier to trace because it is recorded on a public blockchain.
The regulatory framework for Anti-Money Laundering and Counter-Terrorist Financing (AML-CTF) is improving. The traditional financial services and banking sector is bound by compliance programmes such as due diligence and Know-Your-Customer KYC regulations. While banks were trying to be away from digital currencies as part of their de-risking practices few years ago, financial institutions are now entering the digital currencies domain. Digital currencies service providers such as companies offering digital wallets and digital currencies exchange platforms have also increasingly become subject to Anti Money Laundering and Counter Terrorism Finance AML-CTF regulations. Moreover, the European Union EU adopted a measure requiring its member states to regulate digital currencies exchanges and custodians operating in Europe. In the United States, companies selling virtual currencies have been fined for failure to protect their products from being used for terrorism financing.
The rise of bitcoin and other virtual currencies poses new challenges in the fight against money laundering and terrorist financing (Money Laundering and Terrorist Finance ML/TF). With virtual currencies, users can make global payments that are beyond the control of financial regulators and security authorities. In addition, there is a growing risk of terrorist financers evading state surveillance and tapping into new sources of funding.
Recent evidence demonstrates that terrorist groups and their supporters have become increasingly familiar with new technologies. Terrorists use innovative technology that lacks regulation to launder money or try to find new sources of finance.
Below is an overview of regulations at global level, in Europe, and in Germany.
Regulation at Global Level
The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
With more than 200 countries and jurisdictions committed to implementing them. The FATF has developed the FATF Recommendations, or FATF Standards, which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism. They help authorities go after the money of criminals dealing in illegal drugs, human trafficking and other crimes. The FATF also works to stop funding for weapons of mass destruction.
The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity. The FATF monitors countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply.
Published in June 2019, FATF’s Interpretive Note to Recommendation 15 on New Technologies (INR.15) clarifies the FATF’s previous amendments to the international standards related to virtual assets. It also describes how countries and obliged entities must comply with the relevant FATF Recommendations to prevent the misuse of virtual assets for ML/TF as well as the financing of proliferation. FATF published the ‘Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers’, to support providers of virtual asset products and services in understanding and complying with their anti-money laundering/counter-terrorist financing (AML/CTF) obligations.
The new FATF Recommendations aim for effective regulation of virtual exchanges, the crucial interface between the sphere of virtual currencies and fiat currencies. Therefore, AML/CTF standards that apply to traditional financial transactions also cover blockchain-based financial services. Ultimately, the plan is to put an end to anonymous virtual transactions. The wire transfer rule, also called the ‘Travel Rule’, requires states to take precautions to ensure that virtual asset service providers (VASPs) monitor and share customer data among themselves and with the relevant government authorities.
Regulation in European Union
In the European Union EU, the adoption of the new FATF Recommendations coincided with the need to implement the latest EU anti-money laundering directive (AMLD), the Fifth AML Directive (5AMLD), which extends AML/CTF rules to virtual currencies, and aims to cover all the potential uses of virtual currencies. The rules will now apply to entities that oversee the holding, storing and transferring of virtual currencies. These new actors will have to identify their customers and report any suspicious activity to their local financial intelligence unit (FIU).
The AMLD recognises that the inclusion of providers engaged in exchange services between virtual currencies and fiat currencies, as well as custodian wallet providers, will not entirely address the issue of anonymity attached to virtual currency transactions. A large part of the virtual currency environment will remain anonymous because users can also transact without such providers. To combat the risks related to anonymity, national financial intelligence units FIUs should be able to obtain information allowing them to link virtual currency addresses to the identity of the owner of a virtual currency.
The EU is also developing the Virtual Assets Due Diligence New Toolbox. To mitigate the risk attached to virtual currencies and Virtual Assets Service Providers VASPs, the EU’s draft ‘Risk Factors Guidelines’ note that simplified due diligence measures are not sufficient. The draft also provides minimum steps that should be part of any Customer Due Diligence CDD procedure:
· Begin the dialogue with the customer to understand the nature of the business and the ML/TF risks it poses.
· Carry out due diligence on senior management to the extent that they are different, including consideration of any adverse information.
· Understand the extent to which these customers apply their own customer due diligence (CDD) measures to their clients either under a legal obligation or on a voluntary basis.
· Establish whether the customer is registered or licensed in a European Economic Area member state or in a third country and evaluate the adequacy of that third country’s AML/CTF regime.
· Find out whether businesses using Initial Coin Offering ICOs in the form of virtual currencies to raise money are legitimate and, where applicable, regulated.
· Where the risk associated with such customers is increased, banks should apply enhanced due diligence measures.
Regulation in Germany
In Germany, new legal rules on virtual assets came into force on 1 January 2020. Virtual currency companies are now obliged to fulfil Know Your Customer (KYC) requirements and report suspicious transactions to the German financial intelligence unit FIU. Germany seem to be on the right track to prevent the practice of anonymous virtual transactions, which pose serious security risks. However, unregulated virtual payment system still exists in Germany. Thus, additional regulation is required, particularly for the use of un-hosted wallets.
In March 2020, Berlin Risk and the Counter Extremism Project (CEP) published an in-depth study on the exposure of virtual currencies to terrorist financing, which encourages German regulators to pay attention to and demand more efforts from virtual companies in terms of regulatory compliance and testing emerging industry practices. The study encourages both sides to cooperate and find an appropriate way to comply with the new FATF rules. Furthermore, the study encourages authorities to form public-private partnerships to develop typologies and indicators for terrorist financing methodologies and potential asset storage operations in the field of virtual transactions.
TOWARDS A NEW DIGITAL CURRENCIES REGULATORY FRAMEWORK FOR ARAB BANKS
While terrorist organisations are not using digital currencies on a significant scale at the moment. However, the potential for such use exists.
Arab banks and policymakers should adapt regulatory frameworks for preventing digital currencies use in terrorism and war.
Below are suggested steps towards a new digital currency regulatory framework for Arab Banks:
Step #1: Understand the threat
Before over-regulating, it is crucial to better understand the threat that digital currencies may or may not pose in terms of terrorist financing.
Step #2: Adapt to technology evolution
The current evidence shows that the dependence of terrorist organizations on digital currencies is not significant, and the use of digital currency for terrorist financing is still in its early stages, as it is not a mature method of terrorist financing. However, the development of digital currency technology is unpredictable. Arab banks and authorities need to be vigilant, improve their own digital currency regulatory systems, and prevent various ways of terrorist financing through multiple channels as digital currency technology evolves.
Step # 3: Build Expertise in virtual products and technology
Arab countries continue to face the difficult task of keeping up the pace with developments in virtual products and technology. Therefore, it is essential to increase the expertise and technical capabilities available to Arab regulatory authorities.
Step #4: Understand Risk posed by digital currencies
When providing services related to digital currencies, Arab banks should consider the Money Laundering and Terrorism Finance ML/TF risk associated with virtual currencies when:
· Operating virtual currency trading platform that exchanges fiat currency and virtual currency
· Operating virtual currency trading platform that exchanges virtual currencies
· Operating a virtual currency trading platform that allows peer-to-peer transactions
· Providing custodian wallet services
· Arranging, advising or benefiting from ‘initial coin offerings’ (ICOs)
Step #5: Explore Regtech solutions
Several regtech solutions are being developed. For example, Facepoint offers a facial recognition-based solution for mitigating the risks of terrorist financing that supports this process as non-face-to-face onboarding of new clients increases. Chainanalysis, a virtual currency transaction monitoring solution, supports the ML/TF monitoring process over time. Although these tools are essential components of any Anti Money Laundering AML program when dealing with virtual currencies, it is important to understand the solutions abilities and limitations in order to apply adequate controls.
Step #6: comply with international standards
Arab banks and authorities should implement an adaptable regulatory framework that complies with FATF’s international standards on Anti Money Laundering and Counter Terrorist Finance AML/CTF.
Step #7: Strengthen the effectiveness of monetary policies
Central banks in Arab countries should strengthen their monetary policies and improve the attractiveness of regulated digital currencies.
Step #8: Establish an appropriate level of regulation
The appropriate level of regulation of virtual assets is crucial within an evolving regulatory framework. Arab banks should find the right mix of expert Customer Due Diligence CDD analysts and investigators as well as technological solutions to comply with new standards and establish appropriate know your customer (KYC), Customer Due Diligence CDD and reporting procedures.
Step #9: Cooperation at various levels
cooperation between regulatory bodies law enforcement agencies and the private sector including both traditional financial services industries and digital currencies companies is crucial. Moreover, Arab countries should actively implement procedures facilitating international cooperation to reduce terrorist financing.
References
RAND Research, ACAMSTODAY.ORG, research by Jennifer Hanley-Giersch at CAMS, Global Risk Affairs, The Diplomat, Center for Strategic and International Studies Research by By Pascale Davies
New York Times article by By Emily Flitter and David Yaffe-Bellany, CNN, Oxford Press, European Commission Regulations.
