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CRYPTOCURRENCIES: A FUEL FOR TERRORISM

By: Theodor Azbej

SP_Nov_3: News

November 2022

The EU has to adapt faster to the terrorism-related threats emerging from cryptocurrencies and

virtual assets.

Introduction

Technological innovation has reshaped finance. New technologies such as online banking and

other solutions shortening the process of financial transactions made financial services more

accessible and practical. These innovations have also led to the emergence of cryptocurrencies –

virtual assets that provide a faster, more accessible, and secure alternative to traditional banking.

In addition to creating new opportunities, these assets are also a tool for criminal and terrorist

organizations to conceal their financing as they are anonymous and unregulated – posing an

urgent threat to the European and the global community (Kfir, 2020). This paper analyses the

potential dangers of the finance of terrorism through cryptocurrency and evaluates the European

Unions’s (EU) actions to combat these dangers.

Cryptocurrencies and terrorism

Cryptocurrencies have long been favored by criminals to facilitate money laundering,

theft, or drug trafficking (Kfir, 2020). An increasing number of cases related to crypto assets

were reported by European authorities to have links to terrorism financing (European

Commission, 2020). First, cryptocurrencies such as Bitcoin can be easily transferred back to

standard currencies with complete anonymity. Therefore, terrorists use these assets as an

anonymous alternative to traditional bank transfers and transactions (Teichmann, 2018). For

instance, terrorists can transfer Bitcoin from a location outside Europe and then transfer the

crypto fund into Euros in the country where they need to access the funds – all without being

scrutinized by a bank. It is suggested that the perpetrators of the 2015 Paris and 2016 Brussels

attack purchased their equipment on the darknet – an encrypted part of the internet, inaccessible

through traditional browsers – using cryptocurrencies for the transaction (Townsend, 2018). In

2017, a terrorist group related to al-Qaida started a bitcoin-fundraising campaign on Telegram –

an encrypted communication platform (Teichmann, 2018). These instances highlight the

potential dangers cryptocurrencies can pose to the security of Europe as a tool for terrorism

financing.

Additionally, cryptocurrencies lack regulations. Since central banks do not issue these

virtual currencies, they are not regulated like traditional currencies. This unregulated sphere and

the anonymity of crypto transactions make it extremely hard for authorities to flag and

investigate illegal financing activities. While larger transfers may be tracked more efficiently by

law enforcers, cryptocurrencies remain the most convenient method to finance terrorism

(Teichmann, 2018). Based on a recent working document from the European Commission, the

threat posed by terrorism financing through virtual currencies is highly significant. This threat is

only predicted to grow over the next few years, which calls for the need for urgent intervention

(European Commission, 2019).

Regulating new EU regulations for cryptocurrencies

Clearly, cryptocurrencies are hard to regulate and monitor. Since central banks do not

issue cryptocurrencies they are not subject to governmental control, and due to the fast-paced

nature of innovation within financial technology, various regulatory challenges arise for

lawmakers (Kfir, 2020). Despite this, the EU is attempting to make progress in addressing the

problem of terrorism by limiting virtual asset availability to terrorist groups. Following the

2015-2016 Paris and Brussels attacks, the European Commission proposed an action plan to the

Council and the Parliament (Keatinge, 2022). With two main objectives, the plan stressed the

importance of preventing terrorist organizations from making financial transactions and

obstructing their revenue stream by limiting how they can gather funds. This plan, however,

quickly failed due to the need for more engagement from both Member States and the EU.

Furthermore, the plan only set minimal recommendations for Member States regarding

transaction monitoring and compliance measures. However, meeting minimum requirements is

not enough to combat terrorism financing. Currently, Member States are left with many

unanswered questions about how these methods work, and understanding the intelligence behind

crypto-financed terrorism remains poor (Keatinge, 2022).

The EU has recently proposed numerous ambitious plans to address the issue. For

instance, new legislation under the Markets in Crypto-assets rules (MiCA) framework – the EU’s

primary set of regulations and recommendations regarding cryptocurrencies – aims to ensure that

crypto transactions are traceable (Scanlon, 2022b). In practice, this means providers of

crypto-assets (such as Bitcoin) will have to provide information on the sources and beneficiaries

of crypto-transactions. Additionally, under this prospective new regime, crypto-providers must

verify the risks of money laundering or terrorism-related transactions (European Commission,

2020). The EU will also establish the Anti-Money Laundering Authority (AMLA) – also set to

supervise, coordinate and support the combat against terrorism financing (European

Commission, 2021). While these proposals are ambitious and promising, they still lack elements

on how Member States can implement these mechanisms. Subsequently, Member States must

receive enough intelligence and practical, security-based advice on enforcement.

Conclusion

The anonymity and unregulated environment of cryptocurrencies present a significant

opportunity for terrorism financing in Europe and worldwide. In the past two years, the EU

devised numerous plans to tackle the issue by introducing guidelines and standards that Member

States can implement to limit these risks. While standards are vital, the need for action and a

security-based approach is pressing. Hence, there is an urgent need to provide tools and

intelligence to the Member States, as local authorities might lack the necessary resources to

combat terrorist financing through virtual assets. While the proposed amendments to the MiCA

and establishing the AMLA can perhaps fill this gap between standards and actual enforcement,

the EU still needs to specify exact details surrounding the operation and scope of the agency, as

well as the implementation of new regulations.

References

Directorate-General for Financial Stability, Financial Services and Capital Markets Union.

(2021). Anti-money laundering and countering the financing of terrorism legislative

package. European Commission.

https://finance.ec.europa.eu/publications/anti-money-laundering-and-countering-financin

g-terrorism-legislative-package_en

European Commission. (2019). Report from the Commission to the European Parliament and the

Council on the assessment of the risk of money laundering and terrorist financing

affecting the internal market and relating to cross-border activities (COM/2019/370).

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52019DC0370

European Commission. (2020). Proposal for a Regulation of the European Parliament and of

the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937

(COM/2020/593 final).

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0593

Keatinge, T. (2022, November 15). The EU’s focus on terrorist financing has faded — the threat

has not. POLITICO.

https://www.politico.eu/article/the-eu-focus-on-terrorist-financing-has-faded-the-threat-h

as-not/

Kfir, I. (2020). Cryptocurrencies, national security, crime and terrorism. Comparative Strategy,

39(2), 113–127. https://doi.org/10.1080/01495933.2020.1718983

Scanlon, L. (2022b, October 28). What EU’s MiCA regulation means for crypto-asset service

providers. Pinsent Masons.

https://www.pinsentmasons.com/out-law/analysis/eu-mica-regulation-crypto-asset-servic

e-providers

Teichmann, F. M. J. (2018). Financing terrorism through cryptocurrencies – a danger for

Europe? Journal of Money Laundering Control, 21(4), 513–519.

https://doi.org/10.1108/jmlc-06-2017-0024

Townsend, M. (2018, April 8). Terrorists ‘plot in shadows of the dark net’, report warns. The

Guardian.

https://www.theguardian.com/uk-news/2018/apr/08/terrorists-plot-shadows-dark-net-repo

rt

Edited by Nuur and the Short Paper management team

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