Bits and pieces: Virtual money and terrorism

Simon Palombi is an intern in the Lowy Institute’s International Security Program. He has previously interned with the UN Counter Terrorism Executive Directorate.

The European Central Bank recently published an official study into digital online currencies, the first by a major financial institution.

Alarmingly, the report tends to play down the suitability of these currencies to terrorist groups. In particular, the report passes off legitimate concerns, such as those raised two years ago by the Financial Action Task Force (FATF), as ‘negative press’. Indeed, the report fails to account for the development and increasing market for the digital online currency known as Bitcoin, and not only its potential for use to launder money (raised by FATF), but the access it provides to weapons available via online black markets.

Bitcoin is an unregulated, stateless and increasingly global currency. It exists only in cyberspace, separate from real world currency exchanges because it is entirely self-backed by an online economy, which enables businesses to transact out of sight of current counter-terrorist financing networks. As a result, illegitimate businesses, such as online black market traders, have been able to establish themselves alongside legitimate online retailers that accept Bitcoin payments for consumer goods such as food and clothing.

The game-changing element of Bitcoin is that users do not have to incorporate the currency into the global financial system, with its regulated, traceable transactions.

It is true that users of Bitcoin can still be linked to the existing financial system by purchasing Bitcoins with conventional money and can use it to buy real world items online. Holders of Bitcoins can also ‘cash out’ by converting them back into a real world currency. But users can also generate Bitcoins themselves – so long as they have access to fast internet and a powerful computer – in a process called ‘mining’. This ‘mining’ is what makes the gateways into and out of the crypto-currency unregulated and so concerning.

For this reason, the FBI considers Bitcoin to be a security concern.

While some may see Bitcoin as a liberating or even democratising currency, its very nature carries the potential for use in money laundering, terrorist financing and terrorist attack facilitation. Already there have been reports in the London Times (paywalled), Gawker and Gizmodo that guns and explosives can be purchased through the online black market.

Since 9/11, counter-terrorist agencies have tracked the flow of money to identify transactions that match the profile for money laundering or involve the account of a person suspected of terrorism or with links to a terrorist network. Agencies are empowered to instantly freeze such accounts. The theory is that, by denying terrorist groups access to their money, authorities can stop them buying munitions and small arms and paying for suicide bombers. This approach has been highly successful in identifying and dismantling terrorist networks.

However, while governments, such the US and Australia are aware of Bitcoin’s potential to circumvent counter-terrorist financing measures, they have not moved fast enough to amend legislation and develop a solution. Australian counter-terrorist legislation is currently ineffective against Bitcoin because it defines electronic money as digitally stored money, either electronically or magnetically, that is backed by precious metals, or gold bullion.

Bitcoin has existed since 2009 and there are now more than 10 million ‘coins’ circulating, each worth about $10.30. Governments must devote more time to understanding alternative digital currencies and develop new ways to track transactions that fall outside traditional financial structures. They also need to amend counter-terrorist legislation to cover digital money if they want to deny committed and resourceful terror cells access to resources.

Photo by Flickr user zcopley.

Source.

About Patrick

I am a Bitcoin consultant. My background is in information technology engineering, manufacturing, sales & marketing, and communications.
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