May 03, 2017

CNAS Releases New Report “Terrorist Use of Virtual Currencies: Containing the Potential Threat”

By Ellie Maruyama, Elizabeth Rosenberg, and Edoardo Saravalle

Washington, May 3 – As terrorist organizations begin to use virtual currencies to finance their operations, the Center for a New American Security Energy, Economics, and Security Program has released a new report, “Terrorist Use of Virtual Currencies: Containing the Potential Threat.” In the report, the authors examine the scope of the problem, explore how the problem may grow, and make recommendations for containing it. The report’s authors include:

  • Zachary Goldman, Executive Director of the Center on Law and Security at NYU School of Law and a CNAS Adjunct Senior Fellow;
  • Ellie Maruyama, Research Associate with the Energy, Economics, and Security Program at CNAS;
  • Elizabeth Rosenberg, Director of the Energy, Economics, and Security Program at CNAS;
  • Edoardo Saravalle, Joseph S. Nye Jr. Research Intern with the Energy, Economics, and Security Program at CNAS; and
  • Julia Solomon-Strauss, Program Associate at the Center on Law and Security at NYU School of Law.

The full report can be found here:

https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies.

In the report, the authors recommend policy leaders:

  • Prioritize countering terrorist financing over other kinds of financial crimes;
  • Orient the illicit financing policy and regulatory posture toward rewarding and incentivizing innovation; and
  • Emphasize and create a practical basis for strengthening coordination between the public and private sectors on terrorist financing.

Executive Summary

This paper explores the risk that virtual currencies (VCs) may become involved in the financing of terrorism at a significant scale. VCs and associated technologies hold great promise for low cost, high speed, verified transactions that can unite counterparties around the world. For this reason they could appear appealing to terrorist groups (as they are at present to cybercriminals). Currently, however, there is no more than anecdotal evidence that terrorist groups have used virtual currencies to support themselves. Terrorists in the Gaza Strip have used virtual currencies to fund operations, and Islamic State in Iraq and Syria (ISIS) members and supporters have been particularly receptive to the new technology, with recorded uses in Indonesia and the United States.

Most terrorist funding now occurs through traditional methods such as the hawala system, an often informal and cash-based money transfer mechanism, and established financial channels. If VCs become sufficiently liquid and easily convertible, however, and if terrorist groups in places such as sub-Saharan Africa, Yemen, and the Horn of Africa obtain the kinds of technical infrastructure needed to support VC activity, then the threat may become more significant.

The task of the law enforcement, intelligence, regulatory, and financial services communities, therefore, must be to prevent terrorist groups from using VCs at scale. The use of VCs by “lone wolf” terrorists—a much bigger potential threat because of the small scales of funding needed to execute an attack—represents the kind of problem in intelligence and digital forensics that law enforcement agencies are well equipped to handle, even if they tax existing resources.

Attacking terrorists’ use of virtual currency at scale is a challenging task for many stakeholders. New financial technology firms often lack the resources to comply effectively with oversight obligations, while regulators have tended to devote few resources to non-bank institutions. At the same time, different countries have adopted varying approaches to the regulation of virtual currencies, posing an enforcement challenge in a globalized field that requires a unified response. Finally, the privileging of prevention over management of illicit finance risk in the compliance world has created an incentive structure for banks that does not, ironically, push them toward innovative approaches to countering terrorist financing, including via virtual currencies.

The counterterrorist financing community should adopt three guiding principles that will provide the foundation for policies aimed at countering both the new virtual currency threat and the broader illicit finance danger. First, policy leaders should prioritize the countering of terrorist financing over other kinds of financial crime. Second, the policy and regulatory posture should be oriented toward rewarding and incentivizing innovation. Third, policymakers should emphasize and create a practical basis for strengthening coordination between the public and private sectors on terrorist financing. These approaches form the foundation of an effective response to existing and emerging terrorist financing threats and will balance the burden of regulatory compliance with the policy need to support innovative new virtual currency technologies.

The report’s authors are available for interviews. To arrange one, please contact Neal Urwitz at nurwitz@cnas.org or 202-457-9409.

  • Ellie Maruyama

    Former Research Associate, Energy, Economics and Security Program

    Ellie Maruyama was a Research Associate in the Energy, Economics and Security Program at the Center for a New American Security (CNAS). Prior to joining CNAS, Ms. Maruyama wor...

  • Elizabeth Rosenberg

    Senior Fellow and Director, Energy, Economics and Security Program

    Elizabeth Rosenberg is a Senior Fellow and Director of the Energy, Economics and Security Program at the Center for a New American Security. In this capacity, she publishes an...

  • Edoardo Saravalle

    Energy, Economics, & Security

    Edoardo Saravalle is a Joseph S. Nye, Jr. Research Intern for the Energy, Economics, and Security Program at the Center for a New American Security (CNAS). At CNAS his work fo...