Chainalysis Downplays Cryptocurrency's Role In Terrorism Financing

American blockchain analysis firm Chainalysis downplayed crypto's role in terrorism financing, noting that it comprises "a very small portion" of "cryptocurrency transaction volume that is illicit."

After reports were released revealing that the Islamist militant movement Hamas and its ally, the Palestinian Islamic Jihad, received around $90 million worth of crypto in funding, Chainalysis released a blog this month titled, "Correcting the Record: Inaccurate Methodologies for Estimating Cryptocurrency's Role in Terrorism Financing," noting that the reports might have overblown metrics and used "flawed analyses."

The blockchain analysis firm confirmed that while "terrorist groups including Hamas, Hezbollah, and the Palestinian Islamic Jihad are leveraging cryptocurrency" and "terrorist organizations have historically used and will likely continue to use traditional, fiat-based methods such as financial institutions, hawalas, and shell companies as their primary financing vehicles," it emphasized that "terrorism financing is a very small portion of the already very small portion of cryptocurrency transaction volume that is illicit, some terrorist organizations raise, store, and transfer funds using cryptocurrency."

However, there are key components in analyzing the volume of funds linked to terrorism, and to the "untrained eye," the amount might look like the funds were raised for terror financing.

There are "two key components to analyzing the volume and flow of terrorism-related funds: quantifying the funds directly in the hands of a terrorist organization, and identifying the service providers that facilitate the movement of funds tied to terror financing," Chainalysis said, explaining that the "recent estimates" include funds not at all related to terrorism financing.

"To the untrained eye, it might appear that $82 million worth of cryptocurrency was raised for terror financing," Chainalysis said in the blog, adding, "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."

As per Chainalysis' estimate, of the $82 million reported by the Wall Street Journal, only "about $450,000 worth of funds" were moved from a "terror-affiliated wallet" and noted that "it would be incorrect to assume all of the transaction activity ... is related to terrorism."

In the aftermath of Hamas' attack on Israel, U.S. Senator Elizabeth Warren, along with other lawmakers, cited a report from the Wall Street Journal, which noted that the Palestinian organization, considered a terrorist group by many Western countries and their allies, got around $41 million worth of crypto donations between August 2021 and June 2023. The Palestinian Islamic Jihad, on the other hand, reportedly received approximately $93 million in crypto at around the same time.

Hamas' supposed use of crypto was a major concern of the U.S. senator, who demanded answers from President Joe Biden and his administration.