Crypto industry races to debunk ‘unfounded fears’ as new terror funding crackdown takes shape

Crypto leaders on both sides of the Atlantic are rushing to rebut the rapidly developing perception that crypto makes it easy for Hamas, the Palestinian militant organisation, to fund its operations.

In the US, the Blockchain Association this week said it plans to convene industry leaders steeped in national security issues to meet with lawmakers on November 28.

And in Europe, crypto lobbyists are urging officials in Brussels to resist adding eleventh-hour measures to a new anti-money laundering bill that would force platforms to execute onerous new due diligence checks on their customers.

Fresh perspective

One proposal in particular has drawn concern — forcing crypto firms to review transactions worth less than €1,000. That would saddle platforms with a burdensome new compliance requirement.

“It is crucial that our institutions do not let unfounded fears influence their work and that rules remain clear, applicable and proportionate,” Tommaso Astazi, head of regulatory affairs at Blockchain for Europe, a Brussels-based trade association.

Kristin Smith, CEO of the Blockchain Association in Washington, said she and her allies are looking for ways to persuade lawmakers to look at the issue with a fresh perspective.

“There is a mismatch between the assumptions about the role that digital assets play in global financial transfers and the facts on the ground,” said Smith.

Funding investigations

Fears are spurring a new rush to clampdown in a sector that is already under intense regulatory pressure.

In the days after Hamas’ assault on Israel on October 7, reports spread of how the group that governs Gaza uses crypto to fund its operations. The US, the UK, and the European Union have designated Hamas a terrorist organisation.

“There is no doubt that funds raised by terrorist organisations – no matter how small – are significant and every method should be investigated,” Caroline Malcolm, Chainalysis’ global public policy vice president, told DL News.

Yet crypto advocates say blockchain-based technology’s role in illegal finance is overstated. Illicit activity in crypto accounted for 0.24% of the total digital assets volume in 2022, according to a Chainalysis report on crypto used in crime.

The immutable and transparent nature of the public blockchains that underlie Bitcoin and DeFi means there are records of every transaction on the networks.

‘Our main objective remains to ensure that such important legislative debates remain anchored in facts and reality.’

—  Tommaso Astazi, Blockchain for Europe

Blockchain analytics tools help government agencies identify and cut off funding flows, Malcolm said — “a feat not easily achievable with traditional forms of value transfer.”

Since October 7, around $21,000 in crypto donations reached a Hamas linked group, but the assets were frozen, according to Elliptic, another blockchain analytics firm.

Matthew Levitt, a former US Treasury and FBI official specialised in counterterrorism, estimated that $300 million of funding for Hamas came from Iranian and Qatari businesses and taxes.

A small fraction

In a letter campaign organised by the Blockchain Association, industry leaders urged members of Congress this week to put the use of crypto in illicit finance in perspective.

“Transactions involving illicit digital asset addresses represent a very small fraction of total transaction volume, relative to traditional financial methods,” they wrote in a letter.

Among the signatories was Michele Korver, a partner at Andreessen Horowitz. She previously worked at the US Treasury Department’s Financial Crimes Enforcement Network, known as FinCen.

Faryar Shirzad, a Goldman Sachs executive and former deputy national security adviser in the George W. Bush Administration, also signed the letter. He is now the chief policy officer at Coinbase.

The industry group is rebutting a bipartisan group of dozens of lawmakers on Capitol Hill who asked the Biden Administration on Wednesday to report how Hamas might be using digital assets.

The request comes after over 100 lawmakers wrote to the Biden Administration in October expressing “grave concerns” about crypto used for Hamas funding and asking it to “provide additional details on its plan to prevent the use of crypto for the financing of terrorism.”

Their letter cited an article published by The Wall Street Journal that reported an affiliate of Hamas had raised more than $93 million in crypto between August 2021 and June of this year, attributed to Elliptic data.

Cost of compliance

But Elliptic later disavowed the report. Blockchain experts said the WSJ overstated the value of crypto assets that have gone to Hamas.

In Brussels, advocates rushed to prevent the same mistake.

“Our main objective remains to ensure that such important legislative debates remain anchored in facts and reality,” Astazi said.

In a worst-case scenario, advocates fear the cost of compliance could push smaller crypto firms out of Europe.

Inbar Preiss is a Brussels-based correspondent who covers crypto regulatory policy in the European Union. Have a tip? Contact the author at inbar@dlnews.com.