Terrorism & Israel-Gaza war weaponized to destroy crypto
The Israel-Gaza war has once again thrown the spotlight on crypto, with anti-crypto politicians seizing on exaggerated reports of crypto being used to finance terrorism to introduce harsh new legislation with the potential to crush the industry.
Three days after Hamas carried out its brutal Oct. 7 attack, The Wall Street Journal published an inflammatory article stating that in the past three years, U.S.-designated terrorist organizations such as Hamas, Palestinian Islamic Jihad and Hezbollah had raised $134 million in crypto.
The article — later corrected following an online backlash — became ammunition for the anti-crypto army in Washington, which cited it to push for ever greater restrictions on crypto.
That came to a head over the past week with a bipartisan bill called the Terrorism Financing Prevention Act, introduced on Dec. 8. It obliges the Treasury to identify foreign financial institutions and crypto platforms that have knowingly conducted transactions with U.S.-designated terrorist outfits and enables it to impose sanctions to restrict U.S. bank accounts and block transactions.
Senator Mitt Romney tied the bill specifically to the Israel-Gaza war:
“The Oct. 7 attacks on Israel perpetrated by Hamas have made it more urgent and necessary for the U.S. to counter the role that cryptocurrency plays in the financing of terrorism.”
The war has also given new impetus to Senator Elizabeth Warren’s bipartisan Digital Asset AML Act (DAAMLA), which would extend the Bank Secrecy Act to cryptocurrencies. Five more senators signed up to cosponsor this bill on Dec. 11, and there are now 19 senators in total backing the legislation — or one in five senators — meaning it has gained serious traction. Galaxy’s head of firmwide research, Alex Thorn, argues “Warren’s bill would effectively outlaw crypto in America.”
Thorn believes that despite Warren’s poor record in getting bills passed, this one has a chance, given the “potent terrorism narrative post 10/7” and the “razor-thin R majority in House makes hard to thwart.”
Another earlier bill is also in play, the Crypto Asset National Security Enhancement (CANSEE) Act, which would dramatically increase surveillance over crypto transactions.
Warren appeared on CNBC’s Squawk Box last week to claim that all the major bank CEOs agreed with her on the need for urgent action.
“We have a serious problem in this country,” she said. “And that is a part of the financial system is being used by terrorists, by drug traffickers, by rogue nations, in order to launder money, move money through the system and finance their illegal activities.”
She said Congress needed to update the Bank Secrecy Act to cover crypto “because there’s a new threat out there — it’s crypto, and it is being used for terrorist financing. It is being used for drug trafficking. North Korea is using it to pay for about half of its nuclear weapons program. We can’t allow that to continue.”
Of course, cutting off funding to terrorists and preventing money laundering are laudable aims. But the unintended consequences (some argue they are intentional) pose a serious threat to the industry.
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The Blockchain Association’s Kristin Smith argues that applying the Bank Secrecy Act to crypto defeats “the entire purpose of blockchains” and believes the legislative clampdowns would push the vast majority of the industry overseas.
Referring to CANSEE and DAAMLA bills, Smith says, “Following any crisis — or sensational media report — Washington feels the urge to do something, which is understandable,” But, she warned:
“If enacted, these bills would effectively destroy the American digital asset industry.”
Crypto terrorism links sexed up
The link between terrorism and crypto is invariably hyped up by opponents. For example, Warren’s claim that “half” of North Korea’s nukes are financed by crypto hacks comes from a recent Recorded Future report. However, the report clearly shows the figure is speculative, and the authors admit “it is unclear exactly how much of the stolen cryptocurrency ends up directly financing ballistic missile launches.”
The original WSJ article was also wrong, as demonstrated by a more careful analysis of the methodology of WSJ’s sources from Castle Island Ventures’ Nic Carter, as well as Chainalysis. Most of the terror financing goes through crypto service providers, and the analysis confused the much larger pool of funds on the platform with the amount received by terrorism-linked addresses.
In one instance, it appeared the WSJ had likely confused the total amount in a crypto service provider’s address ($82 million) with the funds probably unwittingly sent to a terror-affiliated wallet ($450,000). According to Chainalysis, the analysis had been conducted by amateurs:
“To the untrained eye, it might appear that $82 million worth of cryptocurrency was raised for terror financing in the example above. But it is much more likely that a small portion of these funds were intended for terrorist activity, and a majority of the funds processed through the suspected service provider were unrelated.”
The actual amount of crypto raised and received by terrorists in total was much smaller than the “as much as” $134 million cited. The WSJ reluctantly corrected its article but remained adamant that its main points were true.
One reason the story is such a beat-up is that U.S. regulators and Israel’s National Bureau for Counter Terror Financing (NBCTF) seized most crypto wallets used to launder the Hamas donations back in 2021.
They successfully identified donors, froze accounts, and shut down fundraising websites, which led Hamas to view cryptocurrency as “inconvenient” for its purposes and to limit itself to more traditional means of fundraising.
“In fact, it’s possible that no one understands the challenges of using cryptocurrency for fundraising better than Hamas,” notes Chainalysis. In April this year, Al-Qassam Brigades, the military wing of Hamas, announced the shutdown of their longstanding cryptocurrency donation program, citing the likelihood of donors being caught and prosecuted.
Mati Greenspan, the Tel Aviv-based founder and CEO of Quantum Economics, explains, “It’s the very nature of the blockchain that allowed the Mossad to crack down on Hamas’ crypto activities in the first place.”
Andrew Fierman, the head of sanctions strategy at Chainalysis, agrees, noting that Hamas would happily raise money via any method it could, but crypto had not proved to be a good choice:
“Hamas has historically used and likely will continue to facilitate financing via traditional methods through the use of money services businesses (MSB), hawala and shell companies. Cryptocurrency is just another attempted method of financing. However, it has been shown time and time again to not be an effective approach.”
Crypto is involved in some terrorism funding
Nevertheless, the problem of crypto-terrorism funding exists, even if the media and its anti-crypto activists overstate it. Not only terrorist organizations but whole countries are involved. Fierman points out that “Iran has a sizable crypto economy, including many regional exchanges, and it has historically used all different kinds of financial mechanisms to fund groups like Hamas and Hezbollah.”
Iran is a major geopolitical player in the region that has been engaged in a proxy war with Israel for almost 40 years with a declared intention of getting rid of the Jewish state. In June 2023, Israel’s National Bureau for Counter Terror Financing (NBCTF) seized about $1.7 million worth of cryptocurrency from Hezbollah, a Lebanon terrorist group, and from their brothers in arms, Iran’s Quds Force.
Rather than use major currencies like Bitcoin and Ether, terrorists prefer smaller chains, and according to the Reuters analysis, NBCTF froze 143 wallets on Justin Sun’s Tron blockchain between July 2021 and October 2023 that it believed were connected to terrorists.
The battle is ongoing regarding donations to Hamas-linked charities, which raised an estimated 70% more than the period before the 7/10 attack (though there is no estimate for how much of that increase was in crypto). Fierman says that “blockchain analysis should be a constant work to get a whole-of-ecosystem understanding of threat actors.”
Regulators’ crypto/terrorism fears
Meanwhile, a raft of anti-crypto politicians in Washington — where crypto is rapidly turning into another front in the culture war — see blockchain itself as dangerous.
Senator Elizabeth Warren has proudly advertised her “anti-crypto army,” and the WSJ’s inaccurate reporting gave the army the ammunition it needs to once again push for greater regulations to crack down on the use of cryptocurrency for money laundering and terrorism financing.
Senator Warren, along with her colleague Roger Marshall, immediately wrote a letter to the president asking for stricter regulation of the crypto market: “As The Wall Street Journal reports, researchers who study Hamas’s financing said crypto remains one of a number of tools the group uses to raise funds […] We urge you to swiftly and categorically act to meaningfully curtail illicit crypto activity and protect our national security and that of our allies.”
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The fact that the article was inaccurate did not give these legislators any pause for thought, and the Department of Justice’s subsequent $4.3-billion money-laundering settlement with Binance added fuel to the fire.
The attacks by Senators Warren, Chris Van Hollen and Lindsey Graham on the crypto market have been relentless, and they use any pretext to accuse the crypto industry of helping “bad countries” evade sanctions, fund weapons programs, support spying and enable cyberattacks. In that sense. the Israel-Gaza war is just the latest pretext, and if not that, it would be something else.
And it seems that regulators are going to press further. In late November, Deputy Treasury Secretary Wally Adeyemo wrote in a letter to Congress:
“As terrorists, transnational criminals, and rogue states turn to digital assets to finance their activities, we need to build an enforcement regime that is capable of preventing this activity.”
He asked for more power to crack down on illicit activity in crypto, such as jurisdiction over USD stablecoins, new crypto financial institution category under BSA and new secondary sanctions.
For some market players, that means an unprecedented level of transparency. For example, the Binance exchange will have to submit to a “crazy” regulation for the sake of preserving its business. “What was once a haven for anarchic crypto commerce is about to be transformed into the opposite: perhaps the most fed-friendly business in the cryptocurrency industry, retroactively offering more than a half-decade of users’ transaction records to U.S. regulators and law enforcement,” writes Andy Greenspan in Wired.
Proponents argue that the example of Hamas, which was forced to drop crypto donations due to the danger of prosecution, shows that the transparency of blockchain is itself a weapon against terrorism financing. Government agencies and private sector organizations should use blockchain analysis to trace terrorism financing and focus on safety and compliance on the part of all market participants.
There is a certain irony in freedom-hating terrorists embracing crypto, which was created by libertarians, says Quantum Economics’ Greenspan.
“Ultimately, Hamas hates freedom. In Hamas-controlled Gaza, there is no freedom of religion or women’s rights. Gays are executed publicly on a regular basis, and there have not been any elections or even opinion polls since they took control of the strip since they defeated Fatah in 2007.”
“The notion that they are using Bitcoin, which is a monetary system based on freedom, is a bit ironic. It’s as Milton Friedman famously said when predicting Bitcoin in 1999: ‘Of course it has its negative side, the gangsters, people engaged in illegal transactions will have an easier way to carry out their business,’ but ultimately, good always triumphs over evil.”
Community building and cybersecurity
While the terrorist attack and the fears of regulators have a negative impact on the industry, there is also a positive side to crypto, which has made it easier to get aid to victims of the Oct. 7 atrocities.
Immediately after Hamas’ attack, the crypto and Web3 communities created the humanitarian decentralized initiative Crypto Aid Israel. Itai Elizur, the chief operating officer and partner at MarketAcross/InboundJunction and a contributor to Crypto Aid, explains, “It has not only collected money but also increased awareness and made the local system excited by working together.”
While there are other numerous Jewish funds raising money in crypto, they were established prior to the conflict, unlike Crypto Aid Israel. The platform is organized as a multisignature wallet, and it collects donations in Bitcoin, Ether and stablecoins.
Funds are used to rebuild settlements in southern Israel and help the families of those killed and kidnapped, of soldiers, and of those who repelled terrorist attacks in the early days of the conflict. Over $240,000 was collected in less than a month.
Non-institutional cryptocurrency fundraising first came to prominence to raise donations for Ukraine. As of July, $227 million in cryptocurrency has been raised for Ukraine, including $134 million for humanitarian needs and $91 million for military-oriented campaigns.
Elizur says, “The first issue for us was to create trust because there are bad actors doing the same, but there are a lot of mechanisms now with which people are trying to stop them.” Banks and regulators in Israel act as intermediaries between the platform and the recipients’ bank accounts, though Elizur says it was not easy to get permission to transfer the money into Israeli banks.
The furor over Hamas raising funds in crypto has stymied any chance of a similar fund being set up to aid civilians in Gaza affected by the war. Very few charity funds helping people in Gaza (Islamic Aid, Medical Aid for Palestinians, etc.) suggest donating in crypto, except Save The Children, which gathers not only for Gaza but also for Somalia and other countries at risk.
Other ramifications of the war… on crypto
Just like the aftermath of the Russia-Ukraine invasion in 2022, which saw the global cybersecurity market grow 11.6% in the second quarter of 2023, the latest Israel-Hamas conflict could boost the cybersecurity industry. Intelligence agencies are closely watching the blockchain for suspicious transfers, bad actors and illicit funds.
Global tensions ramping up due to the conflict have the potential to stimulate demand for Bitcoin as a safe-haven asset, a hedge against economic downturns. While the price has certainly skyrocketed 55% since the start of the conflict, most observers believe the main factor is speculation over the imminent approval of a Bitcoin ETF in the United States.
But as Greenspan points out, it’s not a bad use case: “The longer the war goes on and the more it spreads, the more this dynamic is likely to play out. I can emphatically say that the correlation between Bitcoin and the stock market that developed during COVID and the 2021 bull run has now broken down completely.”
As for Israel, the conflict is not long and widespread enough yet to raise the need for BTC as a decentralized payment tool beyond governments, although Iran has already been using BTC as a tool for evading sanctions while making oil transactions during the U.S.-Iran conflict in 2021.
The country is so far spared from the scale of inflation that would incentivize people to switch to BTC from the national currency, like in Turkey, where the national currency crashed in 2021 and has not recovered since. And the Middle East conflict so far has not seen a stream of migrants with a need for substitute banking instruments, as we saw in the Russian-Ukrainian conflict. Nevertheless, if the conflict becomes more intense, with multiple parties involved, it may have a bigger impact on BTC demand.
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Stablecoin adoption among institutions could surge as the United States Senate prepares to debate a key piece of legislation aimed at regulating the sector.
After failing to gain support from key Democrats on May 8, the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act passed the US Senate in a 66–32 procedural vote on May 20 and is now heading to a debate on the Senate floor.
The bill seeks to set clear rules for stablecoin collateralization and mandate compliance with Anti-Money Laundering laws.
Related: German gov’t missed out on $2.3B profit after selling Bitcoin at $57K
“This act doesn’t just regulate stablecoins, it legitimizes them,” said Andrei Grachev, managing partner at DWF Labs and Falcon Finance.
“It sets clear rules, and with clarity comes confidence. That’s what institutions have been waiting for,” Grachev told Cointelegraph during the Chain Reaction daily X spaces show on May 20, adding:
“Stablecoins aren’t a crypto experiment anymore. They’re a better form of money. Faster, simpler, and more transparent than fiat. It’s only a matter of time before they become the default.”
Senate bill seen as path to unified digital system
The GENIUS Act may be the “first step” toward establishing a “unified digital financial system which is borderless, programmable and efficient,” Grachev said, adding:
“When the US moves on stablecoin policy, the world watches.”
Republican Senator Cynthia Lummis, a co-sponsor of the bill, also pointed to Memorial Day as a “fair target” for its potential passage.
Grachev said regulatory clarity alone will not drive institutional adoption. Products offering stable and predictable yield will also be necessary. Falcon Finance is currently developing a synthetic yield-bearing dollar product designed for this market, he noted.
Yield-bearing stablecoins now represent 4.5% of the total stablecoin market after rising to $11 billion in total circulation, Cointelegraph reported on May 21.
Related: Stablecoins seen as ideal fit for real-time collateral management
GENIUS Act regulatory gaps don’t address offshore stablecoin issuers
Despite broad support for the GENIUS Act, some critics say the legislation does not go far enough. Vugar Usi Zade, the chief operating officer at Bitget exchange, told Cointelegraph that “the bill doesn’t fully address offshore stablecoin issuers like Tether, which continue to play an outsized role in global liquidity.”
He added that US-based issuers will now face “steeper costs,” likely accelerating consolidation across the market and favoring well-resourced players that can meet the new thresholds.
Still, Zade acknowledged that the legislation could bring greater “stability” to regulated offerings, depending on how it is ultimately worded and enforced.
Magazine: Crypto wanted to overthrow banks, now it’s becoming them in stablecoin fight
Hong Kong’s Legislative Council passed the Stablecoin Bill, paving the way for a regulated framework that could position the region as a global leader in digital assets and Web3 development.
In a May 21 post on X, Legislative Council member Johnny Ng Kit-Chong said the bill had passed its third reading, clearing the final hurdle for adoption.
“It is expected that by the end of this year, major institutions will be able to apply to the Hong Kong Monetary Authority to become licensed stablecoin issuers,” Ng said.
According to the new Hong Kong legislation, stablecoins must be backed by fiat currency as underlying assets. Ng said Hong Kong is welcoming “global enterprises and institutions interested in issuing stablecoins to apply in Hong Kong,” offering to personally assist with introductions and collaboration:
“I am also happy to facilitate connections and collaborate with all stakeholders to advance the development of Web3 in Asia and globally, with Hong Kong at the center.“
Related: Hong Kong introduces crypto staking rules, reaffirms Web3 commitment
Hong Kong aims to become a Web3 powerhouse
Ng said the legislation marks the first step on the road toward building Web3 infrastructure in Hong Kong. “The most crucial step is to develop more real-world applications.”
Ng said stablecoin adoption has the potential to drive innovation in retail payments, cross-border trade and peer-to-peer transactions.
He added that he encourages the development and adoption of stablecoins, since “they represent a major financial innovation.” Regarding enhancing market stability, Ng suggested distributing interest earnings to stablecoin holders.
Related: HashKey receives Hong Kong approval to offer crypto staking services
Interest for stablecoin holders
According to Ng, “providing interest will strengthen the competitiveness of stablecoins.” This increased competitiveness, he explained, incentivizes broader participation and expands stablecoin market share, which supports what he views as sustainable growth.
Ng’s remarks that yield-bearing stablecoins are more competitive follow recent positive data. Research indicates that yield-bearing stablecoins have soared to $11 billion in circulation, representing 4.5% of the total stablecoin market, a steep climb from just $1.5 billion and a 1% market share at the start of 2024.
Magazine: Crypto wanted to overthrow banks, now it’s becoming them in stablecoin fight
Bitcoin Suisse secured an in-principle approval (IPA) from the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM), marking a major step in the Swiss crypto firm’s expansion beyond the European Union.
The Swiss crypto financial service provider received the in-principle approval through its subsidiary BTCS (Middle East), according to a May 21 news release.
The IPA is a precursor to a full financial services license, which would allow Bitcoin Suisse to provide regulated crypto financial services such as digital asset trading, crypto securities and derivatives offerings, as well as custody solutions.
The approval reflects the firm’s “strong commitment to maintaining the highest standards of transparency, security, and regulatory compliance,” according to Ceyda Majcen, head of global expansion and designated senior executive officer of BTCS (Middle East).
“Abu Dhabi, one of the Middle East’s fastest-growing financial centers, presents a compelling opportunity for growth. We look forward to working closely with the FSRA to obtain our full license,” Majcen wrote in a May 21 X announcement.
Related: German gov’t missed out on $2.3B profit after selling Bitcoin at $57K
This marks Bitcoin Suisse’s first expansion outside of the European Union.
Founded in 2013, Bitcoin Suisse played a significant role in developing the country’s crypto ecosystem and has been a key contributor to Switzerland’s Crypto Valley, a Switzerland-based blockchain ecosystem valued at more than $500 billion.
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Crypto firms bet on Middle East as next global crypto hub
Increasingly more crypto firms are expanding into the Middle East, seeing the region as the next potential global crypto hub due to its business-friendly regulatory licensing environment.
On April 29, Circle, the issuer of the world’s second-largest stablecoin, USDC (USDC), received an in-principle approval from the FSRA, moving one step closer to the full license to become a regulated money service provider in the United Arab Emirates.
A day earlier, the Stacks Asia DLT Foundation partnered with ADGM, becoming the first Bitcoin-based organization to establish an official presence in the Middle East, Cointelegraph reported on April 28.
As part of the partnership, the Stacks Foundation aims to advance progressive regulatory frameworks in the Middle East.
“We’re not just focused locally — our team is engaged in global conversations, advocating for frameworks that balance decentralization, security, innovation, and compliance surrounding the unlocking of Bitcoin capital,” Kyle Ellicott, executive director at Stacks Asia DLT Foundation, told Cointelegraph.
The foundation is also developing the Bitcoin Capital Activation Framework, described as a comprehensive policy blueprint to help regulators enable Bitcoin utility in their jurisdictions.
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