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.”

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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Ksenia Buksha