After cryptocurrencies were used to finance Palestinian terror, some institutions and politicians in the USA are insisting on tougher rules and measures. The industry objects and points to traditional finance. Not wrongly.
It is still being discussed how many crypto donations the terrorist organization Hamas has actually received. But it is clear that cryptocurrencies were involved, and it is also clear that there will be certain consequences. This is what this article will be about.
Unfortunately, the EU and European countries are largely passive in the relationship while the discussion in the USA comes to a head. On the positive side, crypto is now seen as a mature industry: companies in the industry are required to integrate themselves into the fight against terrorist financing like traditional financial companies.
FinCEN, the “Financial Crime Enforcement Network,” recognizes that cryptocurrencies are just one of many instruments that Hamas and other terrorist organizations use to finance themselves. Nevertheless, it calls on them and banks to react “as quickly as possible” to suspicious transactions: they should identify, block and report transactions related to Hamas.
For a group of 102 representatives led by the traditionally crypto-skeptical Senator Elizabeth Warren, that doesn’t go far enough. They wrote an open letter to the government.
In their opinion, the attacks by Hamas showed “that crypto is a national security risk for the US and its allies.” Therefore, the lawmakers expect Congress and the administration to take “strong action to address risks posed by illegal crypto transactions before they finance the next tragedy.” While the group is not making any specific demands, it is demanding detailed information from the government about its plans. She probably wants to exert pressure and start a discussion.
Basically, the US institutions initially react as usual. The Office of Foreign Asset Control (OFAC) has sanctioned some addresses and companies for being in contact with Hamas. This includes a crypto exchange that operates in the Gaza Strip, the “Buy Cash Money and Money Transfer Company,” and whose founder is accused of being in contact with Hamas. However, these are rather small sums, and in any case sanctions lists are a sword that becomes blunt due to simple practices, such as the use of new addresses or mixers.
FinCEN now wants to take tougher action against mixers. Presumably, the current debate provides an opportunity to push through a demand that has been under discussion for some time. “Mixing is an essential service for actors in the ransomware ecosystem, rogue states and other criminals. “They help them finance their illegal activities and cover their money’s tracks,” says FinCEN Director Andrea Gacki. Blenders posed a “national security risk” – that term again! –, not only in terms of terrorist financing, but also ransomware attacks on essential infrastructure such as pipelines or hospitals.
FinCEN therefore proposes to assign mixing to a class of transactions that give rise to a high level of suspicion of money laundering. If a crypto company detects that a customer is using Mixer, it must take action, such as filing a report, temporarily freezing the coins, or obtaining further information.
This would ultimately bring the USA to the same level as Europe, where mixing and other methods of anonymization have formally constituted a reportable suspected case since MiCa or TFR. The problem here, however, is the question of defining mixing broadly enough so as not to leave any loopholes, but narrowly enough so as not to impose a general suspicion on the entire DeFi landscape.
In addition to taking measures to prevent future misfortune, some politicians also want to punish those who appear to be to blame for the current problem. The actually crypto-friendly Republican Cynthia Lummis and her party colleague French Hill are demanding decisive action from the Justice Department. The department should “hold bad actors accountable when they are found to be promoting illegal activities.”
Specifically, the MPs are targeting Tether and Binance. Some of the USDT stablecoins issued by Tether were probably donated to Hamas, while Israel froze numerous accounts on the Binance exchange on suspicion of terrorist financing. Both organizations are accused of allowing themselves to be used for terrorist financing through too lax controls and, worse, perhaps even knowingly accepting this for business interests.
Binance, so Lummis in an open letter, is an unregulated crypto exchange that has previously been linked to illegal activity. “The fact that Hamas and other terrorist groups were allowed to open an account and conduct business on Binance, even after it was publicly reported,” shows “that Binance supports organizations that are linked to terrorism” or even “intentionally supports them.” “closed our eyes to it”. Tether also failed to do due diligence, even though the company was aware that its stablecoin USDT was being used for illegal activities and terrorist financing.
While Binance has remained silent so far, Tether is responding to the allegations. The company first makes it clear that $130 million, which according to the Wall Street Journal was donated to terroir organizations in cryptocurrencies, is several orders of magnitude too high.
The stablecoin issuer also denies having broken sanctions laws or violated the requirements of the Bank Secrecy Act. Instead, it proactively worked with 31 police departments in 19 jurisdictions to prevent criminal activity. They confiscated a total of $835 million, usually loot from hacks of exchanges or DeFi platforms. Together with authorities in Israel, Tether froze 32 addresses where terrorist suspects held a total of just over $873,000.
Blockchains, Tether explains, are inherently transparent and therefore less attractive to illicit activity than the often obscure traditional finance. Globally, crypto companies cooperated much more closely with law enforcement than companies in the traditional sector.
This in turn is a point that cannot be said loud enough, even outside the USA: Cryptocurrencies are not the enemy in the fight against money laundering or terrorist financing – but the ally. Tether dollars can be frozen, dollar bills cannot.