
In the shadowy world of conflict financing, a new player has emerged: cryptocurrency. As digital currencies like Bitcoin – once derided by many as useless money pits – increasingly gain mainstream acceptance, they are also becoming a tool for those operating outside the law, including insurgent groups, terrorist organizations, and sanctioned states. This technological shift is reshaping the economics of modern warfare and challenging traditional methods of tracking and interdicting illicit funds. Money makes serious violent conflicts and wars possible, and cryptocurrencies are increasingly the preferred go-to for all non-state actors in conflicts…and major nations are not far behind.
The Rise of Crypto in Conflict Zones
Cryptocurrency’s key features – decentralization, anonymity, and borderless transactions – make it an attractive option for groups operating in conflict zones. Unlike traditional banking systems, which can be easily monitored and controlled by governments, cryptocurrencies offer a degree of financial autonomy that’s unprecedented in the digital age. It also holds the potential to radically expand the democratization of warfare, a subject we touched on last week.
In recent years, there have been several high-profile cases of cryptocurrency being used in conflict zones. In 2019, Hamas – the militant group controlling Gaza, responsible for the October 7, 2023 assault into Israel – turned to Bitcoin to solicit donations, bypassing international restrictions on its financing. Similarly, in the ongoing conflict in Ukraine, both sides have leveraged cryptocurrencies: volunteers supporting Ukrainian forces have raised over $200 million in crypto donations, while some Russian-backed separatist groups have also turned to digital currencies to evade sanctions.
Terrorism Financing Goes Digital
The shift from traditional financing methods to cryptocurrency is particularly evident in terrorism financing. Al-Qaeda, ISIS, and other terrorist groups have increasingly turned to Bitcoin and other cryptocurrencies to fund their operations. These groups often use social media platforms to solicit donations, providing Bitcoin addresses where supporters can send funds anonymously.
The ease of creating online fundraising campaigns with cryptocurrency has led to a new phenomenon: the crowdfunding of terror. In 2019, a website linked to Al-Qaeda-affiliated groups in Syria raised Bitcoin donations for weapons and training. The campaign, which ran on the dark web, promised donors anonymity and the ability to support jihad from anywhere in the world.
This has extended into Asia, as well, as extensive NFT networks have been employed to both raise and transfer cryptocurrencies into fungible cash. Part of this fallout comes in the form of Afghanistan coming to the fore as a clearinghouse for crypto transfers to terror groups, as the lax controls of the ruling Taliban – who returned to power after the bungled and disastrous withdrawal of United States forces from the country in 2021 by the Biden-Harris administration – effectively closing off surveillance and enforcement efforts within the pariah state.
Challenges for Law Enforcement
This new landscape of crypto-enabled conflict financing poses significant challenges for law enforcement and intelligence agencies. Tracking and intercepting cryptocurrency transactions is a complex task, requiring specialized skills and technologies that many agencies are still developing. A major part of this is the reality of the “dark web“, and its associated “darknet markets“. Outside of cryptocurrency transfers, these markets allow all manner of criminal activity, including human trafficking and child pornography, as well as illicit drug trades, all of which terror groups have no issue leveraging such tools.
The catch for law enforcement and intelligence agencies in tracking terrorists and other criminals through the “dark web” lays in the fact that although the core operating principle of the ‘dark web’ – so-called “onion routing” – was developed and patented by the US Navy in 1998, the very nature of the system developed to secure US military and government communications networks means that forcing access remotely is virtually impossible. In fact, the arrest by the FBI of the founder and main operator of the notorious “Silk Road” darknet market in 2013 (which led to his life sentence in 2015) did not involve traditional methods of hacking, but involved an agent infiltrating the “Silk Road” site as an administrator, and using “social engineering” techniques to narrow down Ulbricht’s location, and using his personal security mistakes to finally locate him…”Hacking” really had nothing to do with the takedown of the “Silk Road“, because it cannot be taken down by conventional methods of “hack-attack“.
The pseudonymous nature of most blockchain transactions using the “non-fungible token” protocol that makes cryptocurrencies viable, provides a veneer of anonymity, though it’s not impenetrable. Agencies like the FBI have had some success in tracing Bitcoin transactions related to ransomware attacks and other cybercrimes. However, newer “privacy coins” like Monero offer even greater anonymity, making them increasingly popular among those seeking to avoid detection.
Legal and jurisdictional issues further complicate matters. As cryptocurrency transactions usually cross international borders, questions are raised concerning which agencies have authority to investigate and prosecute any “criminal activity” based on a computer physically located in their countries, not least because a specific instance of criminal activity in one country is not necessarily such in another country, as was demonstrated in 2012, when Hungarian scam artists attempted to run an insurance fraud scheme in the wake of the Costa Concordia disaster. The lack of consistent regulations across countries creates loopholes that bad actors can exploit.
The Humanitarian Dilemma
Interestingly, the same features that make cryptocurrencies attractive for illicit financing also make them valuable for delivering humanitarian aid to conflict zones. In areas where traditional banking systems have broken down, or where governments restrict the flow of funds, cryptocurrencies can provide a lifeline for aid organizations.
For example, during Venezuela’s economic crisis, some aid groups turned to cryptocurrency to deliver assistance, bypassing the country’s dysfunctional financial system and strict currency controls. Similarly, in Afghanistan, some NGOs have explored using cryptocurrencies to continue operations after the Taliban takeover restricted traditional financial channels.
However, this humanitarian use of cryptocurrencies presents its own risks. The same channels used to deliver aid could potentially be exploited by militant groups to divert funds. This creates a complex balancing act for aid organizations and regulators alike, not least as crypto-financing is increasingly being seen as a negative, since it is a “hidden” method of finance.
Looking to the Future
As cryptocurrencies continue to evolve, so too will their impact on conflict financing. The development of central bank digital currencies (CBDCs) and the increasing sophistication of decentralized finance (DeFi) platforms will likely create new opportunities and challenges in this space.
Regulators and international bodies are scrambling to keep up. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, has issued guidelines for regulating virtual assets. However, the effectiveness of these measures remains to be seen, especially given the rapid pace of technological change in the crypto world.
The impact of cryptocurrencies on global power dynamics is also worth considering. As digital currencies potentially weaken the effectiveness of economic sanctions, traditional forms of financial warfare may become less potent. This could lead to a shift in how nations project power and influence on the global stage.
Conclusion
The rise of cryptocurrency in conflict financing represents a significant shift in the landscape of modern warfare. While it offers new opportunities for bad actors to fund their activities, it also presents potential benefits in terms of delivering aid and fostering financial inclusion in unstable regions.
As we move forward, the challenge will be to develop adaptive policies and technologies that can mitigate the risks of crypto-enabled conflict financing while preserving the innovative potential of blockchain technology. This will require unprecedented cooperation between governments, financial institutions, and the tech sector.
The genie of cryptocurrency is out of the bottle, and its impact on conflict financing is here to stay. The responses to this challenge will shape the future of global security in the digital age.
