Between August 2021 and June 2023, Hamas and Palestinian Islamic Jihad (PIJ) raised more than $130 million in cryptocurrency, according to a Wall Street Journal report cited by Eurasia Review. Reuters reports that almost two-thirds of Tron Wallets are associated with terrorist groups. Crypto donations have many positive effects, but terrorist funding has crept in, masquerading as donations.
Zakat, a pillar of Islam that mandates charity to support "noble" causes, plays a key role. Recently, Islamic State Khorasan (IS-K) appealed for charity through Monero (XMR) cryptocurrency in a publication, going so far as to provide a QR code. Terrorists used crypto to fund the ISIS operation in Karnataka in the Bengaluru Café terror attack.
Terrorist groups exploit anonymity
Traditionally, crypto proponents have claimed the blockchain's transparency makes using it for illegal purposes impossible. However, this has turned out not to be the case, and terrorist groups are increasingly exploiting its anonymity. What's more, it's not just Middle Eastern groups. Cryptocurrency is also being misused in India, specifically Kerala.
The concept of Hawala
Hawala is an informal system of transferring money and goods across borders, primarily used in the Middle East, North Africa, and South Asia. It operates outside of traditional banking systems and is based on trust between brokers, known as hawaladars, who facilitate the transactions.
Someone in one country who wants to send money to someone in another country gives it to a local hawaladar, along with a code or password. The hawaladar then contacts another hawaladar in the recipient's country, who gives the equivalent amount of money to the recipient minus a small commission. The transaction is settled later, often through a network of trust or balances maintained between hawaladars.
Hawala is known for its speed, simplicity, and relatively low cost compared to traditional banking methods. This has made it ripe for exploitation by criminals for money laundering and terrorist financing due to its lack of transparency and regulation.
Cryptocurrency: the modern Hawala
In 2022, an investigation revealed cryptocurrency was being used to purchase synthetic drugs, yielding a significant profit margin. With around 2 million natives living abroad, the Indian state of Kerala maintains strong connections with Gulf countries. A survey showed almost 90% of them live and work in those countries and use Hawala to send money home for all kinds of reasons, often with criminal intent.
The money is sometimes used to fund madrassas and mosques in Kerala. However, the largest amount of the funds is linked to the advent of radical groups like the Popular Front of India (PFI), which has been a persistent threat to home security. Backed by groups like the Party of Islamic Renewal, the PFI operates through crypto Zakat. It collects it to support Hajj pilgrims and fund the Rehab Foundation and other dummy organizations.
A highly complex network
The PFI operates abroad under the guise of the Kuwait India Social Forum, aiding illegal acts in India. The UK company Logically published a report drawing attention to ISIS, KISF, and other terrorist organizations' support of PFI through cryptocurrency donations. Members of these groups urge supporters to help fund the PFI via crypto wallets such as Atomic Monero and Exodus, evading security measures and ensuring anonymity.
According to the Financial Action Task Force (FATF), the networks used by the PFI combine traditional methods with QR codes and other modern fundraising techniques. Allegedly, more than 3,000 bank accounts and informal fund transfer mechanisms are implicated.
The convenience of anonymity
Under Zakat, donors must remain anonymous to protect recipients' dignity. This anonymity is highly convenient. Agents divert funds from charity to terrorism, especially those in privacy coins like Monero, Zcash, and Dash. They use stealth addresses, ring signatures, and zk-SNARKs to conceal the sender's address, their individual identity, and their respective transactions.
From moderate to extreme counterattacks
Possible solutions to the problem involve de-anonymization, systemic attacks, and spending denial. These actions would reveal crypto users' identities and disrupt the blockchain, suspending all cryptocurrency use. Spending denial blocks specific transactions, making it impossible for terrorists to use the funds they have accumulated.
Law enforcement counterattacks can be further categorized as offline, active, passive, and extreme. Offline measures are those without direct system involvement. Active ones involve discreetly interfering to stop transactions from occurring. Passive ones do not involve system disruption. Finally, extreme measures involve DDoS attacks and taking down entire servers.
Law enforcement can also use software to carry out counterattacks, such as software supply chain attacks, cryptographic attacks, and backdoor attacks. Backdoor attacks involve injecting software with delayed response into a target computer system. Cryptographic attacks let the perpetrator eliminate encryption, potentially revealing the entity's identity.
Steps for financial institutions
Financial institutions should use the blockchain to track the use of funds and ensure crypto donations are allocated property. Governments should audit NGOs' bank accounts regularly to track donations from abroad. Converting foreign currency into local currency should be mandatory so all donations are documented and taxed.
Crypto exchanges should be mandated to implement know-your-customer (KYC) checks. If they already are, the rule should be enforced strictly. Crypto platform operators must face high fines or perhaps even jail time for failing to carry out KYC checks.
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