Chainalysis, between myth and reality on crypto financing of terrorism

As tensions escalate in the Middle East, particularly following the Hamas attack on Israel, cryptocurrencies are often discussed as a tool for funding terrorism by the media and policymakers. However, a recent report by Chainalysis offers a different perspective on this issue.

Chainalysis shows that crypto has marginal impact on terrorist financing

Escalating tensions in Israel have put cryptocurrencies in the spotlight, not least following an article in the Wall Street Journal suggesting that the Hamas reportedly accumulated nearly $41 million in cryptocurrencies between August 2021 and June 2023.

However, in his latest report, Chainalysis disputes this view. Cryptocurrencies are little used by terrorist groups, thanks to the high traceability provided by almost all public blockchains to date. This report therefore questions the allegations concerning the financing of Hamas via cryptos.

We see exaggerations and incorrect interpretations regarding the use of cryptocurrencies by these entities, and it is our duty to rectify these misconceptions

Chainalysis

According to Chainalysis, although $82 million in cryptocurrencies might seem destined for terrorist funding only a small part of this amount would actually be associated with illicit activities. For an accurate analysis of funds linked to terrorism, it is necessary to assess the amounts directly managed by terrorist groups and to identify the service providers that facilitate the circulation of these funds.

The majority of the funds in question, managed by the service provider mentioned, would in fact have no connection with terrorist activities. Chainalysis also highlights the difficulty of tracing transactions via service providers. By bringing together funds from different users, these entities make tracing more complex, which can lead to erroneous conclusions. However, Chainalysis of the US$82 million mentioned, only $450,000 would be directly associated with terrorist activities.

Traditional methods are actually more widely used than crypto

Despite common narratives associating cryptocurrencies with the financing of illegal actions, it is essential to rely on hard data. For Chainalysis although some terrorist organizations are exploring the world of cryptocurrencies, their transactions are in the minority compared with conventional financial methods.

Terrorist groups have historically prefered, and continue to favor, traditional methods of financing their operations. For example Al-Qassam Brigades of Hamas announced last May the discontinuation of their collection program of funds via Bitcoin.
The latter, launched in 2019 to evade sanctions, had generated considerable sums. However, Hamas cited the protection of its donors, made vulnerable by the transparency of blockchain to justify this decision.

Thus, bringing Chainalysis to light could reassure some decision-makers, including Senator Elizabeth Warren, who remain convinced of the prominent role of cryptocurrencies in financing terrorism.