July 12, 2018
Illicit Behaviour
By David Manheim
Research Affiliate, Open Philanthropy

The rise of cryptocurrencies could open doors for illegal activity, so intelligence and law enforcement agencies must cooperate and adapt to fight it.

It’s no secret cryptocurrencies have received a surge of attention from investors, governments and the public at large. Naturally, with its increased cachet, this interest is not limited to those with positive intentions: criminals and terrorist groups are also able to take advantage of technological developments and use such technologies routinely.

Cryptocurrencies are likely to gain wider use as they become more stable and trusted, perhaps not today, but tomorrow. So, what capabilities will terrorist and criminal networks gain from cryptocurrency, and more importantly, how can law enforcement stop them in their tracks?

It’s almost certain that cryptocurrencies will pose a significant challenge for authorities and regulatory agencies.

However, it may prove to be a boon for them as well. Cryptocurrency relies on a public record of all transactions, called the “blockchain,” which replaces the need for trusted intermediaries. Banks keep records privately, but cryptocurrency blockchains are public — anyone can look at publicly available “blockchain explorers” and look up any transaction ever made.

But in place of transaction privacy, Bitcoin provides pseudonymity, so that the transactions are not linked to the owner’s identity. Because blockchain records are public, the ledgers are more accessible to law enforcement than traditional money-transfer methods. In theory, this makes cryptocurrencies easier to track than suitcases full of cash, which have no associated paper trail at all.

Just as criminal and terrorist organizations have varied aims and goals, so too are the applications of cryptocurrency. Terrorists need to raise and spend money differently than criminal cartels that focus just on transactional uses — paying for drugs, bribing officials or buying supplies. What both groups have in common is that any illicit use is unlikely to be secure with the level of anonymity than can be provided by Bitcoin — but alternative cryptocurrencies exist that provide increased privacy. All this to say, it is unsurprising that criminal use has begun in earnest.

Illegal, hidden online “darknet” marketplaces for drugs and other illicit goods such as the now-defunct Silk Road have also started embracing private cryptocurrencies such as Monero. And while law enforcement has been able to find and prosecute many of those markets, it is still unclear how much is getting through. One comprehensive data collection project shows that these markets have limited longevity and are routinely shut down, though more often this is due to scams and hacks than to law enforcement.

Still, only a small portion of international illicit money is moved via cryptocurrency, and given the track record for cryptocurrency money laundering investigations, it is far from clear that these methods are safer than simpler alternatives. Despite this, the international drug trade has started to embrace dark-web markets and cryptocurrency.

While the criminal threat is clear, the threat from terrorists is more opaque.

Specific data about terrorists’ use of cryptocurrencies is still rare, partly because most law-enforcement data on the topic is not publicly available. Nonetheless, most terrorist organizations appear to have limited use for cryptocurrencies due to a combination of challenges; risks associated with using and holding cryptocurrencies; limited accessibility and purchasing power; and these currencies’ limited usability in hyper-localized environments. For example, the largest expense for many terrorist groups — including ISIS — is payroll; you can’t pay individual fighters with a digital currency they can’t readily exchange for food, shelter or clothing.

Cryptocurrencies are also far from ideal for the other financial tasks terrorist groups undertake, namely because they   are insufficiently secure. Terrorist groups are vulnerable to the same types of hacks as everyone else, and cryptocurrency hacks are a common occurrence. Terrorist groups cannot be sure that cryptocurrencies can be used securely against determined and sophisticated nation-state adversaries, taking away the feature that is the most attractive for terrorist financiers: secrecy.

Governments that already intercept and decrypt sophisticated messages from foreign governments and intelligence services are likely to possess the ability to track or even hack much less technically sophisticated terrorist groups. Couple this with the fact that terrorist groups already receive intense scrutiny thanks to existing financing and anti-money laundering regimes, and it would seem that using cryptocurrencies would be a risky decision.

Intelligence and law enforcement agencies will need to adopt new tools, invest in non-traditional types of cyber expertise and become even more adaptive.

For example, cryptanalytic skills that have long been critical to signals intelligence could be successfully repurposed for tracking and disrupting terrorists’ financial activities. Perhaps we can even imagine that tracing blockchain transactions and finding the owners (“deanonymization”) could eventually be as important as U.S. treasury sanctions are now for countering terrorist financing. On the other hand, old-fashioned human intelligence will still be useful, and old-fashioned methods such as double agents and sting operations will still be a threat, or an opportunity.

The current needs of terrorist groups will undoubtedly continue to change, as will the technological landscape. International cooperation is already important for countering terrorist financing and will only become more critical as cryptocurrency use becomes increasingly mainstream worldwide. Countries will need to better collaborate to confront the shared challenges associated with cryptocurrency, which are likely to be formidable as money becomes increasingly location-less.

Despite a few uncooperative states, the current level of international cooperation to counter terrorist financing is robust. National and international bodies are well-aware of the challenge posed by cryptocurrency, yet without forceful and concerted action, and the lack of a well-established international regulatory regime, terrorists will increasingly exploit this opening –  even as other avenues of financing are cut off.  Cryptocurrency is not yet ideal for terrorists; but this too will change. The future of money is bright, but inaction now may open the door for nefarious actors to cast shadows over the dawn of a new age in banking.

David Manheim works with modeling and mitigating risk in a variety of domains, and recently completed his PhD in Public Policy and Decision Theory at the RAND Corporation. He also has worked on development and validation of terrorism risk models in insurance, and pricing financial derivatives. He is currently working with international collaborators on several bio-security projects. He also works as a research affiliate at Open Philanthropy.