Investigations and New Technologies

By Nick Smart, Director of Blockchain Intelligence 

At a recent workshop on countering the financing of terrorism “Investigations and New Technologies” hosted by the UN Counter Terrorism Centre (UNCCT), Nick Smart, Crystal Blockchain’s Director of Blockchain Intelligence, explained the role of blockchain analytics in investigating terrorism financing. 

Drawing on his 20-year career as an intelligence analyst, Nick outlined the methods typically used by terrorist groups to raise funds and the challenges involved in investigating them. 

Here is an overview of the key points from his talk. 

The role of blockchain analytics in investigations 

Nick introduced his talk by outlining how blockchain analytics can be used in investigations which he summarized into five key objectives:

Blockchain analytics can be used to: 

  • confirm or deny an activity  
  • look for the source of the funds 
  • look at where the money goes to 
  • infer connections between separate groups and their common causes 
  • bring a resolution to a dispute with on—chain evidence  

Terrorism financing through crypto assets 

In response to concerns about the use of cryptocurrency to finance terrorism, Nick explained that cryptocurrency is a far easier and more censorship resistant method to solicit donations compared to other platforms, such as JustGiving, GiveSendGo or PayPal, which have measures to prevent their platforms from being abused. For cryptocurrency, the sharing of a wallet address or QR code is all that is needed to raise funds to a self-custodial wallet, which cannot be seized easily. 

It is important to note, though, that the use of crypto assets for terrorism is not confined to one group. Different groups – from neo-Nazi organizations in North America to militants in South Asia – all use crypto assets despite vastly differing political, social, and religious ideologies. 

The challenges of detecting crypto assets for terrorist financing 

While cash continues to be the dominant choice to fund illegal activities, there are several challenges in detecting crypto donations for terrorist financing: 

1. Improved sophistication criminals 

As the skills of criminals improve, they tend to leave behind less sensitive information that can be traced. Their growing understanding of how law enforcement and blockchain analytics work makes it challenging to identify and track cryptocurrency donations. 

 2. Potential shift to privacy coins, though conversion, volatility and liquidity issues remain 

Whilst not completely ubiquitous, some groups that are particularly aware of surveillance have tended to move towards privacy coins. For tracing and enforcement, this may lead to certain challenges due to the privacy features of these coins. 

Widespread adoption is more difficult on closer inspection. To the user, Privacy coins present certain challenges such as conversion, volatility, and liquidity problems. Nick suggests that these issues make it difficult for terrorist organizations to convert large amounts of privacy coins effortlessly into other forms of currency, thus limiting their capacity to utilize the funds effectively. 

3. Overconfidence in blockchain analytics tools 

Some entities may have the misconception that investing in blockchain analytics tools alone is enough to detect and prevent illicit activities. Nick stresses that these tools should be considered as part of a wider approach, and other measures like Know Your Customer (KYC), due diligence, and supervision are equally important. 

4. Use of private channels and closed groups 

Terrorist financiers are increasingly using closed groups and private channels, making it harder for external entities, including blockchain analytics firms, to access information about their fundraising activities. As a result, a more proactive and diligent approach to intelligence collection is necessary. 

5. National boundaries and lack of information sharing:  

Cryptocurrency transactions take place globally, which highlights the necessity for better coordination of regulatory authorities and information-sharing mechanisms. The lack of communication and exchange of information between different jurisdictions and crypto service providers can create blind spots that make it difficult to detect and prevent terrorism financing. 

A typical terrorist financing model 

Nick reflected that much of current media coverage regarding crypto assets and terrorism finance consider the ‘raise’ activity – it is the most visible part of a campaign. This leads to a fairly weak model – though does grab headlines – and does not assist with countering terrorism financing in a meaningful way: 

Collecting crypto assets  

[Something Happens] 

Group now have operational capability or profit.  

He stressed that currently, the predominant focus by analysts appears to be on the collection phase – particularly how groups are targeting charitable donations and fundraising campaigns – but more needs to be done to understand how funds are used in later stages. 

Nick also introduced the concept of a ‘laundering plan,’ and discussed the factors that terrorist financiers will consider when laundering crypto assets through donation programs, including: 

  • Operational security 
  • Currency stability 
  • Conversion capabilities 
  • Internal understanding of crypto assets and technology

At Crystal we have seen some evidence on-chain that there are connections between service providers, illicit marketplaces and terrorist groups, but determining the motive solely from on-chain data is impossible without additional sources of information. 

He pointed out that groups have moved from using visible public campaigns to employing more discreet, vetted approaches within closed groups on social media platforms like Telegram to avoid scrutiny by authorities.

The storage and movement of funds

When it comes to storing or moving any funds collected, Nick weighed up the methods groups would consider – for instance sending funds to or from centralized exchange service providers or choosing self-custody, highlighting the potential risks for terrorist groups of losing private keys or hardware devices which could result in the permanent loss of access to the associated funds.  

Nick also noted the growing popularity of stablecoins, in particular USDT (US dollars into Tether) on the Tron blockchain as means for international remittances to local exchanges based in areas that may be at risk of terrorism financing. The speed, cost-effectiveness, and ease of conversion are considered very advantageous, but this can easily be misappropriated.  

Nick emphasized that supervision is vitally important especially for local exchange service providers that might lack proper oversight; this creates vulnerabilities and is exploited by those involved in terrorist financing activities. Equally, regulatory measures and supervision to ensure the responsible and lawful use of stablecoins within the cryptocurrency ecosystem is also paramount. 

The challenges in detecting terrorism financing 

As criminals become more sophisticated in their methods it becomes more difficult to detect their activity. The use of privacy-focused technologies, the nature of cryptocurrency transactions, and the inadequacies of present detection tools and regulatory frameworks all contribute to the challenge. 

The importance and capabilities of blockchain analytics tools 

Nick pointed to the importance of blockchain analytics tools in confronting terrorism financing, but emphasized that these tools should be part of an integrated approach rather than a standalone solution. 

As a blockchain analytics firm with multi-lingual intelligence and research teams across the globe, Crystal collects information about cryptocurrency exchanges, wallets, transactions, and any potential illicit activity from many public and trusted sources. We’ve gathered information about more than 48,000 entities with millions of addresses identified. 

While blockchain analytics tools contribute valuable insights to support the regulatory aims of maintaining a secure and transparent crypto environment, there are still limitations. Blockchain analytics can show financial relationships but not motives or intent. 

Consequently, active public-private partnerships, lawful intelligence collection, and a shared information-sharing framework are all needed to combat terrorism financing through crypto assets effectively.  

To learn how Crystal can help transform your approach to crypto compliance, book a demo here. 

Watch the whole presentation at the UNCCT: