Cryptocurrency has been making headlines for its potential in reshaping the economy. While regulators and policymakers are still contemplating their future role, early adopters – including terrorists and violent extremists – are exploiting law enforcement loopholes in cryptocurrency transactions, making it a security threat that could have been prevented with bureaucratic action.
The ease of money laundering and terrorism financing using cryptocurrencies, especially the privacy coins that offer wallet encryption, is becoming a major concern for law enforcement agencies. Unfortunately, the few prosecutions of criminals who have used cryptocurrencies for their illegal activities reflect the limitations of law enforcement’s capabilities in the US and the rest of the world.
In the US, a small group of dedicated law enforcement personnel is tasked with investigating all aspects of cryptocurrency misuse, ranging from money laundering and extortion to sanctions evasion and terrorism financing. However, this broad focus on all cryptocurrency-related crimes increases the potential for cryptocurrency misuse to go undetected. Criminals increasingly favor privacy-enhancing coins, such as Monero, which encrypt wallets, making it impossible for law enforcement to determine who owns the coins and what they are used for.
In June 2020, a notorious pro-ISIS website requested Monero cryptocurrency donations because it offered more privacy and safety features than Bitcoin. Months later, a website that supports the National Socialist Order requested donations via Monero. A neo-Nazi chat on Telegram published a guide on how to purchase Monero on the dark web, while the neo-Nazi accelerationist group, The Base, requested Monero cryptocurrency donations to facilitate its training and unspecified equipment.
Regulators have expressed concerns over the use of privacy coins, noting that it’s challenging to differentiate more transparent cryptocurrencies from opaque transactions. While the U.S. has the most advanced capacity to track and seize cryptocurrencies used for criminal purposes, there are still technical challenges that no country has yet adequately overcome.
Lack of regulations for technology industries and inadequate funding for law enforcement agencies are major hurdles in combating cryptocurrency misuse. The intricacies surrounding privacy-enhancing coins such as Monero have left agencies struggling to track and seize them. Annual trends of crypto received via illicit addresses show that the use of privacy-enhancing coins has increased significantly since 2017.
Behavior-based monitoring at exchanges focused on user information has shown success in identifying patterns that do not fit the usual behavior of users. However, the use of service providers such as social media and crowdfunding platforms, which offer anonymity to donors, presents a considerable loophole. Industry standards need to be established to regulate behavior-based transaction monitoring and establish regulatory requirements for tech companies to cooperate with law enforcement.
Platforms that operate for commercial purposes, such as webshops or crowdfunding campaigns, should have stronger regulatory standards for content monitoring and verification procedures. Social media, messenger services, and crowdfunding platforms presently operate on their standards and have very low moderation standards, presenting an uneven safeguard mechanism.
The Financial Action Task Force (FATF) advises that non-custodial wallets and exchanges should be considered high-risk technology. As such, indicators of nefarious activity should be monitored and not processed during transactions involving non-custodial wallets.
Government cooperation with stakeholders in the industry combined with regulatory standards for the tech and fintech industries may mitigate the risk of cryptocurrencies and privacy coins being used to fund extremism and terrorism. Efforts to bridge this gap could mean more significant progress in tracking cryptocurrency-related crimes.
In conclusion, the risks of cryptocurrency misuse are real, and it’s time for stakeholders to come together to mitigate the potential threats.