Bitcoins Kind of Suck at Funding Terrorism

West Point journal doubts crypto-currencies will take off with terrorists

Bitcoins Kind of Suck at Funding Terrorism Bitcoins Kind of Suck at Funding Terrorism

Uncategorized November 16, 2014 0

It’s a recurring narrative in stories about Bitcoin and other digital crypto-currencies. Terrorists are out there waiting, ready to descend on the promise of... Bitcoins Kind of Suck at Funding Terrorism

It’s a recurring narrative in stories about Bitcoin and other digital crypto-currencies. Terrorists are out there waiting, ready to descend on the promise of limitless and untraceable financing for attacks.

In a fit of panic, governments institute strict regulations on the nascent currencies. In other words, it’s a Bitcoin enthusiast’s worst nightmare.

There’s a grain of truth in this story. It’s certainly true that terrorists—like those affiliated with Islamic State—are looking at crypto-currencies as a means to move money without spies and law enforcement agencies tracking them.

But as a widespread way to circumvent currency controls, it’s not really taking off. That’s according to a new report by CTC Sentinel, West Point’s counter-terror journal.

Even as terror groups like Islamic State become more sophisticated—and even as they begin to use crypto-currencies more often—it’s still likely to be a marginal source of financing, at best.

“While these tools have gained in popularity, in recent years their expansion into various terrorist organizations has been slow and deliberate and has not matched pace with transnational criminal uses of these same technologies,” states Aaron Brantly, the report’s author and a professor of cybersecurity at the United States Military Academy at West Point.

The crux of the problem for Islamic State is that these currencies are really not as anonymous as popularly assumed. They’re the opposite of anonymous, in at least one important respect.

Currencies like Bitcoin rely on openly sharing all transaction information across the entire network. Everyone can see the entire history of transactions involving the currency.

This has several advantages. For one, this builds trust by showing that currency flowing from one place to another is in fact doing just that. Also, the history makes it harder to pull off a scam, like simultaneously paying for two different things—from two owners—with the same Bitcoin and stiffing one or both.

What’s anonymous is where the money is coming from and where it’s going, except for an address—tied to one or more private keys—which the sender can reconfigure after every transaction. That’s just enough for sleuths to potentially pinpoint your identity.

Even better is that spies have the entire transaction history at their fingertips.

At top—Bitcoin keychains that are likely not decorating Islamic State fighters any time soon. BTC Keychain/Flickr photo. Above—Bitcoin mining rig. Mirko Tobias Schaefer/Flickr photo

“Novice users could provide a point of origin for intelligence and law enforcement agencies to begin work on deconstructing a terrorist finance network,” Brantly states. “Specifically, the more transactions made to a single or set of public keys, the less likely it is that the parties involved will maintain anonymity in a distributed funding or donation network.”

A terror group would have to be highly disciplined to make this work. There are some tools out there—Dark Wallet and Bitcoin Fog are two of them—that are trying to make it easier to hide one’s identity by further scrambling addresses or burying them behind the Tor private network.

But even one screw-up could expose a whole terror-financing structure to prying eyes.

Another thing is that terrorists happen to really like hard cash. And Bitcoin won’t pay for most of the practical, everyday necessities that come with building an Islamic caliphate and financing a multi-sided war.

“It is possible that as the technical capacity of these organizations increases, their use of digital currencies will also increase,” Brantly writes.

“This increase is likely to be small, however, in relation to overall terror financing through other channels such as hawala, kidnapping, front companies, narcotics sales, oil sales, and many more,” he adds.

To be sure, crypto-currencies have a lot of support among libertarians and anarchists who see it as a means of weakening state controls over how people spend their money.

But Islamic State is in the state-building business.

Islamic State even announced this month it’s creating its own money made out of looted gold, silver and copper. But whether the jihadists have the ability to manufacture and distribute it is another question, let alone whether anyone would be willing to trade with it.

Now can we expect the same group to build an economy on Bitcoins? Not in this world. Let’s also see how they react to some huge market crashes.