Written evidence submitted by the Henry Jackson Society (DGC0057)

About The Henry Jackson Society

The Henry Jackson Society (HJS) is a London-based think-tank founded on the global promotion of the rule of law, liberal democracy, and civil rights. HJS specialises in the study of international terrorism, counter-terrorism, and radicalisation.

About the Centre for the Response to Radicalisation and Terrorism (CRT)

CRT is unique in addressing violent and non-violent extremism. By coupling high-quality, in-depth research with targeted and impactful policy recommendations, we aim to combat the threat of extremism in our society.

About the Author

Nikita Malik is the Director of the Centre for the Response to Radicalisation and Terrorism at The Henry Jackson Society. She holds an MA in Economics and an MSc in South Asian Studies from the University of Oxford, and an MSc in Middle Eastern Politics and Arabic from SOAS, the University of London. Malik’s research focuses on combatting Islamist and Far Right extremism in the UK. She has advised SO15 Counter Terrorism Command, the National Crime Agency, the EU Radicalisation Awareness Network, the Department of State, the United Nations, Google, Facebook, and others on issues related to extremism and terrorism.

Summary of this submission

• Digital currencies provide benefits to individuals, financial organisations, governments, and public sector institutions by facilitating better access to financial products, aiding financial empowerment, and reducing the risks of corruption and fraud.
• One of the significant risks associated with digital currencies is the ability of criminals and terrorists to use these new technologies for their own benefit.
• Current Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) legislation has focused on increasing regulation and requiring those who use digital currencies to disclose their identities, therefore limiting the anonymity of digital currencies and its appeal to criminals.

1. The benefits that digital currencies bring to consumers, businesses, and Governments

1. Individual-level benefits:
1. Digital currencies remove the need for intermediaries like banks and financial institutions, and allow individuals to transact in secure, fast, and cost-effective ways.[1]
2. Digital currencies are inexpensive remittance systems that financially empower poor and unbanked populations across the world by providing them access to financial services.
3. Digital currencies represent an alternative source of value for populations in countries where national fiat currencies are subject to government manipulation, currency over-issuing, and hyperinflation.
4. Dissidents in repressive societies can use digital currencies to fund activities deemed illegal by authoritarian regimes.
2. Benefits to financial institutions:
1. Digital currencies benefit financial institutions by reducing problems associated with banking corruption and fraud. A computerised system that validates transactions prevents double-spending and removes the need for intermediaries and, therefore, any resulting human error.
2. Digital currencies can be used to detect suspicious financial transactions by using records to ‘follow the money’ and trace sources of illicit funds.[2]
3. Digital currencies can benefit businesses by facilitating ‘micro-payments’ and allowing the monetization of ‘low-cost goods or services sold on the internet’.[3]
3. The legitimate use of digital currencies carries additional advantages:
1. Globally, digital currencies are used by governments for a wide-ranging number of purposes, such as verification, ownership, and identification.[4]
2. Digital currencies allow public sector institutions to quickly, efficiently, and securely verify licenses, proofs of records, transactions, and processes; to keep track of the ‘chain of custody’ for physical assets; and to aid in the issuing of ‘e-identities’ that allow citizens access to services and rights.[5]

2. The risks that digital currencies present to consumers, businesses, and Governments

1. Advances in modern technology have created innovative means to transfer money. Many of these financial systems, including digital currencies, offer a degree of anonymity that allow terrorists alternative means to conduct financial transactions.

1. Anecdotal evidence illustrates some terrorists use digital currencies. However, there is no indication that digital currencies have been adopted by any terrorist organisation on an institutional level.[6]
2. Cases where terrorists have used digital currencies highlight the possibility that risks could develop in the future.
2. Digital currencies are created through a process of ‘mining’ to verify each transaction on a blockchain.
1. While information on each transaction is recorded on the blockchain, this data is not directly linked to names, physical addresses, or other identifying information. This makes digital currencies anonymous to a certain degree, and complicates efforts by law enforcement agencies to identify individual transactions and link them to users.[7]
2. According to a 2015 Europol report, bitcoin featured in high-profile investigations involving payments between criminals, and was used in over 40% of illicit transactions in the European Union (EU).[8]
3. Terrorists and criminals use digital currencies for illicit transitions, given they offer similar benefits of trust and credibility as the traditionally used hawala system of finance.
1. Bitcoin provides financial security, as the blockchain acts as an impartial intermediary, ensuring that coins are irrevocable once spent. The blockchain network hampers attempts to recall a verified bitcoin transaction unless the recipient returns coins back to the sender. 
2. In this context, digital currencies such as bitcoin prevent double spending and ensure that money cannot be duplicated within the network. If an attempt at duplication is made, the blockchain rejects the transaction as faulty or forged.
3. Digital currencies can aid both criminals and terrorists purchasing goods and services on the Darknet, who would otherwise be at risk of scamming by rival criminal organisations.

The following examples demonstrate an interest by terrorist organisations in digital currencies.

Islamic State (IS)

4. In 2014, reports emerged of IS fighters in Raqqa, Syria facilitating small or domestic purchases in money transfer offices, and conducting long-distance international transactions using digital currencies like bitcoin.[9]
1. In January 2015 a key IS fundraiser by the name of Abu-Mustafa argued that because the United States (US) law enforcement authorities had begun to crackdown on mainstream financial platforms, the Darknet should be used to raise funds through digital currencies like bitcoin.[10] Abu-Mustafa raised five bitcoins, valued at approximately USD $1,000, before the account was closed.[11]
2. In June 2015, US authorities convicted Shukri Amin, a 17-year-old from Virginia, for material support to IS. Amin was charged with helping IS supporters travel to Syria through the use of social media sites, where they were encouraged to contribute bitcoin to the group.[12]
3. In December 2017, a woman was arrested in New York for obtaining USD$62,000 in bitcoin to send to IS. After a failed attempt to join IS in January 2016, the woman used false information to acquire loans and multiple credit cards, which she transferred into bitcoin and other digital currencies prior to sending it via Pakistan, China, and Turkey to fund IS.[13] Prosecutors accused the woman of fraud and providing material support to a terrorist organisation.
4. In December 2017, an IS-affiliated Darknet site called Isdarat, accessible through The Onion Router (Tor) browser, sought bitcoin contributions from supporters.[14]

Other Terrorist Organisations

5. In 2016, the media division of the Mujahideen Shura (Council in the Environs of Jerusalem), a coalition of Salafi-jihadist groups in Gaza, initiated a public social media campaign to raise bitcoin.[15] The fundraising campaign requested the amount of USD$2,500 for each fighter and received approximately USD$540 by July 2016.[16]
6. In January 2017, Indonesian authorities revealed that Islamist militants in the Middle East used bitcoin to fund domestic terrorist attacks in the country.[17] One of the donors, Bahrun Naim,[18] an Indonesian national with links to IS, played an crucial role in organising terror attacks in Indonesia by sending money via PayPal and bitcoin to his associates in the country.[19]
7. In November 2017, an al-Qaeda linked organisation by the name of al-Sadaqah (voluntary giving)[20] used Facebook and Telegram to campaign for bitcoin funding. On November 30, 2017, a donation of BTC0.075 (USD$685 at the time) was sent by an unknown individual to the organisation’s advertised bitcoin address. The following day, the funds (which rose to USD$803 overnight) were forwarded on to another address.[21] In March 2018, the group was still active on Twitter.[22]

These events, while anecdotal in nature, point to the possibility that digital currencies may be used to fund terrorism if not regulated effectively.

3. The regulatory response to digital currencies

1. Terrorists and criminals use digital currencies because of their anonymity. However, bitcoin is not as anonymous as commonly perceived, given it uses a blockchain system that serves as a virtual record of all transactions on the network.
1. The blockchain is publicly accessible, meaning anyone with a sufficient level of computer-literacy is able to trace digital footprints of anonymous traders.[23]
2. Due to this, bitcoin is often used on the Darknet with the anonymising software Tor for increased security and anonymity. In this context, criminals use cryptocurrency because it provides the same form of anonymity in the financial setting as encryption does for communication systems.[24]
2. The use of digital currencies in this way hampers efforts by law enforcement to unravel encrypted messaging sites and blockchain payments on the internet.
1. The dangers of cryptocurrency have been highlighted by Europol, Interpol, and the Basel Institute on Governance, who identified “a clear consensus that digital currencies pose a money laundering and terrorist financing threat”.[25]
2. In 2017, the US government proposed that the Department of Homeland Security study the link between bitcoin and terrorism, because the anonymity offered by digital currencies provides terrorists with the privacy they seek.[26]
3. HM Treasury has sought to increase regulation by requiring digital currency exchange users to disclose their identities.[27] Further measures are being taken to bring digital currencies in line with existing AML and CTF legislation.[28]

May 2018